Disruption is what happens when someone does something that means your business model no longer works as well as it used to. Let’s unpack that a bit. Your business model is how you make money. You offer a great value proposition to customers in return for cash. The most common forms of disruption mean that you get far less cash or nothing for the value you create. Customers in other words stop valuing what you offer. Sometimes it may be all your customers. Other times it may be key groups of customers. The result is that things don’t work the way they used to. You need to change.
Long Term Economic Growth
It’s been five centuries since we lived in a world that did not expect economic growth. That was what the world was like for millennia until the later middle ages and the renaissance. Any profits that a company made had to be made up from losses incurred by someone else. Around that time businessmen started finding ways to trust each other with larger sums of money and the result was the rise of credit. This led to the foundations of capitalism. Invest money, create value and everyone benefits. This carries on in an ever faster cycle. Madly self-destructive spinning some would say.
Creative Destruction
Money, profit and credit create an impetus for change. This is the driving force of the idea of creative destruction.
Capitalism […] is by nature a form or method of economic change and not only never is but never can be stationary. […] The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
[…] The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.
[… Capitalism requires] the perennial gale of Creative Destruction
Joseph Schumpeter – Capitalism, Socialism & Democracy.
Deep Assumptions About Business
What seems to happen is that the ‘gale of creative destruction’ blows fitfully. Some areas of business see little innovation for decades. They start to imagine that the way that things have been for living, or institutional memory, are the ways that they will always be.
Here are some businesses where we have a deep set of assumptions about the way that things should be
- Oil companies explore for and extract oil. They refine it and sell it through petrol stations
- Governments collect tax using a specialised department
- Banks create money
- Children are best educated in schools and universities
- Power is created and distributed from large power stations
Pressure To Change
In each of these cases, something very different was done a few centuries ago. In some of them, there is some pressure to start doing things differently but not much. A chief executive from 30 years ago could step up into his successor’s role and still understand the key levers needed to make the business a success.
In these cases, we are not looking at monopolies. A monopoly is where a company has market dominance and as a result can extract more cash from consumers that its value proposition ‘entitles’ it to. Because it has no competition that gap between offer and value can get wider and wider – which is one reason why monopolies are so heavily regulated.
Non-monopolies, in an area of low innovation, can have some monopoly characteristics. Competition can become formalised. Corporate structures and offerings become less and less diverse. As a result, there is an increase in the cash (or rents) that the sector can extract from consumers. This doesn’t need oligopolistic structures. It just needs time and peace. A good example could be legal services where tens of thousands of legal practitioners have been shielded from competition by bar exams and requirements. It’s not an oligopoly but it is an industry that is able to extract higher rents than the value that it creates.
Examples of Lack of Competition
This surplus profit creates the opportunity for entrepreneurs to look at ways to disrupt a market. The absence of competition encourages competition.
What is often important is why there is no competition – or restricted competition.
- In Malaysia, where I live, many newspapers were sheltered from disruption because of their usefulness as political tools.
- Lawyers are sheltered because they provide so many lawmakers
- Steel mills and manufacturers are sheltered because they employ so many voters
- Petrol stations are sheltered because everyone has a car
In many of the above cases, there is a secondary value proposition which is not offered to the consumer.
- The government buys adverts in the newspaper
- Lawyers enact laws that protect lawyers
- Governments bail out companies to win marginal seats
