Handling new-market disruptions

New-market disruptions follow a remarkably consistent pattern, regardless of the type of industry or the era when the disruption occurred.

This pattern is synthesized from three disruptions: one from the 1950s, one that began in the 1980s and continues in the present, and a third still in its nascent stage. In these and scores of other cases we've studied, it is stunning to see how the sins of the past so regularly visit the later generations of disrupted markets. Today, we watch dozens of companies make the same predictable mistakes--along with disruptors capitalizing on them.

Scientists at AT&T's Bell Laboratories, now Lucent Technologies' Bell Labs, invented the transistor in 1947. It was disruptive relative to the prior technology, vacuum tubes. The early transistors could not handle the power electronic products of the 1950s required--tabletop radios, floor-standing televisions, early digital computers, and products for military and commercial telecommunications.

Vacuum tube makers such as RCA licensed the transistor from Bell Laboratories and brought it into their own laboratories, framing it as a technology problem. As a group, they aggressively invested hundreds of millions of dollars in efforts to make solid-state technology good enough that it could be used in the market.

While vacuum tube makers worked feverishly in their labs on targeting the existing market, the first application emerged in a new value network on the third axis of the disruption diagram: a germanium transistor hearing aid, an application that valued the low power consumption that made transistors worthless in the mainstream market.

Then, in 1955, Sony introduced the world's first battery-powered pocket transistor radio--an application that again valued transistors for attributes that were irrelevant in mainstream markets, such as low power consumption, ruggedness and compactness.

Compared with the tabletop radios RCA made, Sony pocket radio's sound was tinny and laced with static. But Sony thrived, because it chose to compete against nonconsumption in a new value network.

When the crisis became clear, the manufacturers of vacuum tube products couldn't just switch to the new technology.

Rather than marketing its radio to consumers who owned tabletop devices, Sony instead targeted the rebar of humanity--teenagers, few of whom could afford big vacuum tube radios.

The portable transistor radio offered them a rare treat: the chance to listen to rock 'n' roll music with their friends in new places out of the earshot of their parents. The teenagers were thrilled to buy a product that wasn't very good, because their alternative was no radio at all.

The next application emerged in 1959 with the introduction of Sony's 12-inch black-and-white portable television. Again, Sony's strategy was to compete against nonconsumption, as it made televisions available to people who previously couldn't afford them, many of whom lived in small apartments that lacked the space for a floor-standing television. These customers were delighted to own products that weren't nearly as good as the large TVs in the established market, because the alternative was no television at all.

As these major new disruptive markets for transistor-based products emerged, the traditional makers of vacuum tube-based appliances felt no pain, because Sony wasn't competing for their customers. Furthermore, the tube makers' aggressive efforts to develop solid-state electronics in their own labs made them believe that they were doing what they should about the future.

When solid-state electronics finally became good enough to handle the power that large televisions and radios required, Sony and its retailers simply vacuumed the customers out of the original plane. Within a few years, tube-based companies, including the venerable RCA, had vaporized.

Sony thrived because it chose to compete against nonconsumption in a new value network.

Targeting customers who had been nonconsumers worked magic for Sony in two ways. First, because its customers' reference point was having no television or radio at all, they were delighted with simple, crummy products. The performance hurdle Sony had to clear was therefore relatively easy.

This entailed a much lower research and development investment prior to commercialization than the vacuum tube makers had to make in order to commercialize the identical technology. The established market presented a much higher performance barrier to surmount, because customers there would only embrace solid-state electronics when they became superior to vacuum tubes in those applications.

Second, Sony's sales grew to significant levels before RCA and its competitors felt any threat. The painlessness of Sony's attack persisted even after its products improved to become performance-competitive with low-end vacuum tube-based products.

When Sony started to pull the least-attractive customers from the original value network into its new one, losing those who bought their lowest-margin products actually felt good to vacuum tube-based appliance makers. They were immersed in an aggressive up-market foray of their own into color television.

These were large, complicated machines that sold for very attractive margins in their original value network. As a result, the vacuum tube companies' profit margins actually improved as they were disrupted. There simply was no crisis to prompt them to counterattack Sony.

When the crisis became clear, the vacuum tube product makers couldn't just switch to the new technology and pull customers back into their old business model, because the cost structure of that model and of their distribution and sales channels was not competitive.

The only way they could have retained or recaptured their customers would have been to reposition their companies in the new value network. That would have entailed, among other restructurings, shifting to a completely different channel of distribution.

Vacuum tube-based appliances were sold through appliance stores that made most of their profits replacing burned-out vacuum tubes in the products they had sold. Appliance stores couldn't make money selling solid-state televisions and radios, because they didn't have vacuum tubes that would burn out. Sony and the other vendors of transistor-based products therefore had to create a new channel in their new value network.

These were chain stores such as FW Woolworth and discount retailers such as Korvettes and Kmart, which themselves had been "nonvendors"--they hadn't been able to sell radios and televisions, because they had lacked the ability to service burned-out vacuum tubes. When RCA and its vacuum tube cohort finally started making solid-state products and turned to the discount channel for distribution, they found that the shelf space had already been claimed.

The punishing thing about this outcome, of course, is that RCA and its colleagues didn't fail because they didn't invest aggressively in new technology. They failed because they tried to cram the disruption into the largest and most obvious market, which was filled with customers whose business could only be won by selling them a product that was better in performance or less expensive than they already were using.