CAUSING DISRUPTION – A VIABLE STRATEGY

31 10 2011

Having recently looked at Blue Ocean Strategy and how, for innovative ideas it presents a great way of creating new, uncrowded markets, I thought it would be useful to look at the Disruption Strategy; a proven, viable way of launching new products into ‘the red ocean’, the already crowded markets.

For some, seeking to launch a new version of an existing product into a crowded market might seem like lunacy yet, over the years many companies have managed to do just that by the intelligent application of Disruption Strategy. And how such disruption strategies work should be a lesson to those already occupying space in the crowded market for if they aren’t paying attention it is they who might end up getting squeezed out!

How does the Disruption Strategy work?

Let’s take as our example the Japanese car industry. When firms such as Toyota, Datsun (the original name of today’s Nissan) and Honda wanted to enter US and European markets in the sixties they were faced with a number of challenges. Primary among these challenges were that they were perceived to be already overcrowded markets and that Japanese build quality was (falsely) thought to be inferior.

In a nutshell, the Japanese manufacturers’ strategy was to attack the ‘discount’ end of the market with cars that had higher spec as standard than the western competition. This disrupted the accepted ‘norm’ and car buyers, liking the added, higher spec option, slowly started buying the new products. Some of those buyers were from the traditional discount end of the market but some were also people seeing a like for like product with the more expensive, higher specification models they had been purchasing. Gradually, this gained the Japanese a foothold, the big US and European manufacturers happy to concede a little ground at that end of the market to a ‘discount’ brand.

But having conceded that ground they opened the whole market to their new competitor. The market was disrupted and the western ‘big boys’ struggled to recognise what was happening. The Japanese companies slowly started competing higher up the quality/price chain, the western manufacturers conceded more ground although now it was not quite so voluntary but the initial damage had been done.

In the UK, it was British Leyland’s build quality that started to be questioned; “not as good as the Japanese” according the buying public. They couldn’t respond and a slow death began.

Meanwhile the Japanese continued to gradually disrupt the previously accepted way of doing things until they reached a point where market share and their own size allowed them to compete not just as equals but in many cases as superior products. The battle for a significant share of the market had been won.

Today, the Japanese are the world’s largest manufacturer of cars. The British automobile industry has been decimated; the US is still struggling to come to terms with the new reality and companies like Saab exist on a very shaky basis. The German auto industry reacted both the fastest and the best and now has a reputation for extremely high build quality which has allowed it to survive and thrive in a market redefined by the Japanese.

Elsewhere, the Korean manufacturers have studied, learned and then employed an almost carbon disruption strategy to that of their Asian neighbours 40+ years ago.

In the last decade or so we have witnessed the ultimate triumph of the disruption strategy which enters at the discount end of a market with its arrival as a luxury brand. Back in the sixties and seventies they would never have believed you had you told them how prestigious Toyota (as Lexus) and Datsun/Nissan (as Infiniti) would be in 2011.

© Jim Cowan, Cowan Global Limited, October 2011

Read more blogs by Jim Cowan

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5 responses

31 10 2011
bee

Is this the strategy being used by india-based service companies (call centres, website writers, etc.) or is that something else?

6 11 2011
cowanglobal

Hi Bee.

That is a difficult question to answer without inside knowledge of the medium to long term aims of those companies concerned. My gut instinct would be that they are simply undercutting on price because they can and that longer term aspirations are less clearly defined. That said, by seizing the discount end of the market they do now have a foot hold and provided they can offer quality are well positioned to attempt to squeeze existing UK suppliers.

Of more concern to me would be the strategy being displayed by China which has seized a significant share of the west’s manufacturing based on price but is now showing signs of growing into quality and technology markets. Allied to a policy of purchasing western debt (eg 35% of US debt is now Chinese owned. The Euro Zone is similar with the Greek bailout likely to increase that share) the effect on established economies could be drastic. This is far closer to the classic disruption strategy.

2 11 2011
Tim GARRATT

Hi Jim, I agree with you to an extent, but this is a recent phenomenon – in the 1970’s the build quality of Datsun was appalling. BL were not much better. The whole of the car industry has had to pull their socks up – and build quality generally now is good. But it is all agrees of good. I would say that my Audi was better built than my current Mercedes, the BMW was worst of the three. Interestingly I wonder if the Lexus brand has come full circle -as they started to mass market my perception is that they are no longer the luxury brand they were 10 years ago? The problem for car manufacturers is like all markets – the buyers are incredibly fickle…

5 11 2011
Yvonne

Tim, my father was a taxi driver in the seventies and like lots of taxi drivers at the time he switched to a Datsun because they were better specked and cheaper to run than anything British or European available at the time. I remember him saying build quality was better but, in his words, “still sh*t!”

Like you I’ve driven a few German cars. Hated BMW and don’t understand how they have the reputation they have – but surely that is what Jim means? I swapped my BMW for a Mercedes which was good but then had a Lexus which was outstanding. I only went for Audi because I love the TT and I’m glad I did it is great but the Lexus is as good and better than Mercedes or BMW (IMHO).

Jim, thanks for another great blog but, while interesting, it would be useful to have some other examples of this type of strategy being successful.

6 11 2011
cowanglobal

Hi Yvonne,

You hit the nail on the head – perception is king.

As for other examples, I give one in my reply to Bee above (China). Another recent one might be the introduction of digital cameras at the discount end of the market before squeezing up on traditional photographic equipment as quality improved. Technology has used disruption strategies well over the years with the Amstrad brand a good example from recent years.

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