Market Disruption
Market disruption is a catchy phrase that describes changes which redefine many elements of competition in markets.
These changes sometime even eliminate markets altogether. One of the examples from the past few decades is when online travel websites displaced travel agents. Another example was the migration of some manufacturing activities to China. Yet another example was the four-color inserts that began appearing in newspapers in the early 1980’s.
One can understand most of these disruptions by examining the immediate drivers. Recognize drivers like declining raw material prices in Asia. In the second example, recognize a decline in utilization of four-color pressed in the Midwestern US. It helps, when considering strategy, to be aware of disruptions. First be aware of where it can come from. Second, know how to see it coming. Finally, understand – in some cases – how to cause it.
First, let’s look at types of market disruption.
At the most basic level, disruption happens when something completely changes a dynamic in a market. Large cost changes or processes and technology which enable a different approach to the market can drive the change. Here are the commonly seen disruption types of the past thirty years.
1. Cost disruption
This type of disruption occurs when the cost of a major input, such as raw materials or labor, changes drastically. First of all, slight changes are more likely to cause a gentler, more predictable change in the market. Second, cost changes over 15-20% in a single year may cause much more severe swings. A good example was when improved extraction technologies opened up large sources of cheap natural gas in North America. Clearly, gas is an important raw material for some types of plastic production. Therefore, we saw a shift where some production moved back into North America from other parts of the world.
This type of large-scale shift usually carries great second and third-order effects. It is usually associated with cost changes in commodities. The ability to substitute one commodity source for another is much higher than that ability in more specialty-oriented markets. Economists would say that these markets exhibit much greater price sensitivity. Then that can cause buyers to make dramatic changes in behavior for a slight cost advantage.
2. Displacement market disruption
This type of disruption occurs when one product or service starts meeting the same needs as another product or service. An excellent example is when online travel websites displaced travel agent offices. The advantages of the newer product drive displacement for reasons other than cost. Cost is sometimes also an advantage of the newer product, too. Another example of this from years ago is when hand held calculators displaced slide rules.
3. Demand disruption
Demand disruption occurs when something changes how customers meet their needs in the marketplace. It may not be a direct displacement, but when customers evaluate their purchases differently, they can disrupt the market. For example, advertising for breakfast cereal which focused on children was highly profitable for some markets in the late 1900’s. First cable networks and then video streaming technology changed both what children watched and when they watched it. Then this advertising shifted from being focused on certain times (Saturday morning cartoons) to being focused around content. A strange result of this change is that there are no longer broadcasters offering youth-driven programming on Saturday mornings.
4. Utility disruption
Utility disruption is similar to displacement disruption, but is usually driven as a second-order effect of displacement. For example, the use of smart phones to navigate displaced older ways of navigation. This displacement of maps and GPS devices created new markets for products like auto mileage apps and traffic aware navigation. These could not exist before that displacement became widespread.
Consequently, as customers become used to using a faster, more convenient, or higher utility substitute, anything that enhanced the usefulness of the older product or service changed the competition. As one example, the shift to smart phones also changed the competition around the design of the phone itself. When the use of the phone was just voice (and maybe limited data), the design was driven by looks, ease of use, size and cost more than other factors.
This led to phones that looked completely different from competitors’ products. As a result, players like Nokia and Motorola sought to define their markets through innovations. By 2015, the great majority of phones were smartphones that were basically indistinguishable in physical design from competing products. This change, in turn, disrupted markets like switches and packaging for the phones. These changes disrupted markets, because producers wrapped more uses up in a single product.
Whatever the disruption we see in our markets, there are both ways to anticipate the changes and to respond strategically. In my next article, we’ll take a look at how to see disruption coming.
Are you facing disruption in your industry? Simplified Strategic Planning offers a powerful approach to assessing disruption and formulating your strategic responses.
If you’re like most people, you’d benefit from having an experienced professional lead you through the strategic planning process, so you can focus on the content of your strategies. If you’d like to explore how you could do this, please contact me at rbradford@cssp.com. Center for Simplified Strategic Planning professionals have successfully conducted thousands of strategic planning meetings, and have a great understanding of how to best use your planning time. Consider holding a one-day workshop on Simplified Strategic Planning in the next few months to improve your results.
Robert Bradford is President & CEO of the Center for Simplified Strategic Planning, Inc. He can be reached at rbradford@cssp.com.
© Copyright 2020 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission
Author Robert Bradford