What is this “disruption”?

After "innovation", the next most divisive word you can use in the context of doing new things is "disruptive". I hate this word, and avoid it myself like the plague. My problem is that practically everyone I talk to thinks it means something different.

I borrow my definition from Christensen, who, I think, offers the most cogent definition and explanation of disruptive processes in business generally. Disruptive innovations, in that typology, are ones which address currently over served customers (providing a better value proposition) or which target new customers that incumbents can't reach (for cost or other reasons). I won't go further into the details of that definition here, because I suspect many people who follow here will at least have read "The Innovators Dilemma" and are well versed in the theory.

But let me give you some other examples of the use of the word "disruption".

In one meeting I was at, a consultant in the propositions development area suggested that "disruptive" was really code for doing something brand new, something that competitors weren't yet doing. The key aspect of this kind of disruptive, it seems, would be that competitors would be forced to react. In that definition, of course, you can classify banks doing Twitter as disruptive, since at least the first ones got quite a bit of attention and lots of other rushed in to copy.

The same consultant said, when I asked what he thought of my definition of disruption ("Hey! Yeah, let's double-click on that for a moment, James" – ugh!) that theories of "company killers" were hardly likely to affect a bank. Well, it was a year and a half ago.

More recently, I was in another meeting, this time with a vendor. They were talking about their desire to work with the bank to create "disruptive" new things that would grow our business. All very laudable, of course, but what they were actually talking about was giving us new stuff that would enable us to better serve a particular customer segment we have. Of course that's interesting, but its also extremely replicable by other competitors. In the customer service and experience space, we are, in fact, in an arms race with everyone else in the market. Every little improvement one makes, we all copy. When this particular vendor offers us an improvement of this kind, you know you have a few months, or perhaps a year, before the residual competitive advantage is eroded.

So not much disruption there.

The most challenging use of the word "disruptive", however, comes from the technologists, especially the ones in innovation groups. What typically happens is that someone spots a new gadget – which may have been disruptive in its own market – and assumes it will instantly disrupt our own.

There are few better examples than the iPhone. Depending on your point of view, that device has changed the way mobile phones are designed and used. It is disruptive because it serves a new customer segment (mobile phone users who previously weren't tech-savvy enough to use a Smartphone) and has taken a dominant market position as a result. Everyone wants an iPhone, and people are talking about features which were pure geekery before. Answer this question: who ever knew how to install new applications on a mobile before iPhone?

So perhaps the iPhone is disruptive to current handset manufacturers. That does not mean it is disruptive to banks.

Does anyone really think now that having an iPhone internet banking application first is going to have a major bottom line implication? Or that having such an app is going to do anything significant at all to damage competitors? Of course not, because let's face it, iPhone apps are as replicable as improving customer service. As replicable as starting a Twitter account.

The thing is the technologists clouded the judgement of their colleagues by pointing out how "disruptive" the iPhone was to mobile phone manufacturers. But disruption does not often industry boundaries cross.

These days, when anyone uses the "disruption" word, I instantly ask them what they mean, and the answer is always along the lines of the three examples I've just given. In other words, disruption equals distracting competitors, or it equals beating competitors for a little while, or it means copying real disruption from somewhere else and hoping for a usable translation.

All three are pretty short term from an advantage perspective (and the last offers no advantage at all most of the time).

Wouldn't you expect long term differences in the playing field if something was truly "disruptive"?

4 Responses to“What is this “disruption”?”

  1. May 19, 2009 at 11:08 am #

    @James, you fail to mention an important aspect in Christensen’s theory: disruption comes when there is dissonance between the Values used within a corporation and the new model.
    In this sense, targeting a new customer segment or changing offering for an over-served customer segment is not disruptive in itself; it is so if you can not do that without changing your internal Values.
    Serving poor customers with micro-credit is not disruptive for banks if they do it with the same evaluation process for risk, profitability,… It is disruptive if they have to let people directly lend to borrowers; turning themselves from black boxes into white boxes.
    On the same verge, having a bank using Twitter to broadcast information is certainly not disruptive. But engaging in a conversation with customers, or even more, letting everyone in the bank engage conversation with customers, that would prove disruptive, don’t you think?

  2. May 19, 2009 at 1:20 pm #

    Granted, I didn’t provide a complete description of the theory in my post. Your addition is a valuable one. Thankyou.

  3. May 20, 2009 at 2:30 pm #

    Why is disruptive change in banking and financial services so un common? At least you dont get to hear often something that fundamentally changed the way the business is done. Probably credit card was an example that revolutionized the concept of plastic money, but even cards or internet/mobile banking took years to catch on.

  4. May 20, 2009 at 3:31 pm #

    So many things to weigh in on here.
    Let’s start with speed: there’s no need for disruptive to equal fast. Some of the situations Christensen documented (e.g. steel mini mills) took decades to make their impact. Adoption curves for financial innovations can be fast or slow; a lot depends on the extent of existing infrastructure. Financial innovations in emerging economies (e.g. Turkey) sometimes catch on quite quickly.
    James, I think your point about disruptions crossing industry lines is an excellent one.
    Prashanth, there have been quite a few disruptions inside the financial services industry.
    – ATMs were disruptive to tellers
    – Web banking was disruptive to branches
    In both these instances, disruption came inside the industry.
    – Direct trading — especially where launched by bank-owned brokers — was highly disruptive to traditional brokerage, and resulted in a massive change to that industry.
    – Internet only banks were disruptive to banks with existing bricks and mortar structures. The most successful of these I think has been ING Direct, which continues to have a lower cost structure than it’s competitors. Not all worked (e.g. Egg).
    – Any number of non-bank payments organizations should be considered as a seriously disruptive threat. In North America, I believe the check-cashing and payday loans industry is one such. PayPal surely has to be considered another, as it continues to siphon off payment activities, even while it sits on top of the payments infrastructure built by banks and credit cards.
    – P2P institutions offer the prospect of disruption. It’s still at the messy beginning, but one can see the appeal here once they get the kinks out.
    – In terms of iPhone, the only disruption that I see is that these devices can now be used as merchant terminals. Doubtful that a sophisticated customer would want to use these, but it seems to make a lot of sense for someone like a flea market vendor. (hence, disruptive)
    One of the insidious things for banks is that these trends do tend to move slowly in established markets, and so don’t appear as much of a threat until they get big.
    Interesting discussion.

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