September 2020
Ken Garrett explains how technological change is rapidly creating a new business landscape.
A disruptive technology is one that displaces an established technology and revolutionises an industry, or creates a completely new industry, usually rapidly. Contrast this to more gradual and predictable change, which well-run businesses will adapt to as they formulate their strategic plans.
For example, record labels kept pace as sound technology moved from vinyl to cassettes to CDs. Fundamentally, the products and their delivery were the same. iTunes, Spotify and other streaming services are usually classed as disruptive technologies: there is no physical product to be distributed, record stores are not needed, customers can buy single tracks rather than a whole album. Bands now make most of their money from touring rather than selling physical products.
There can be arguments about which technologies rank as disruptive rather than merely being a substantial step in the development of an existing product or service. But these arguments are largely academic and do not necessarily help established businesses to survive technological trauma.
In addition to music example above, examples of disruptive innovation typically include the following:
• Netflix – video by the Internet replaced buying or hiring DVDs.
• Skype – telephone calls and video calls over the internet replaced expensive conventional telephone technology.
• Zoom and Microsoft Teams – interactive meetings replace (or will replace) much office space, business travel and business hotels.
• Digital photography – largely replaced conventional film.
• Additive manufacturing (3D printing) – small volume production and prototypes can be made cheaply.
• Electric vehicles – replace petrol and diesel power.
• Challenger banks – companies, such as Revolut and Monzo, challenge traditional clearing banks by being entirely online, greatly reducing their operating costs.
• Blockchain technology – a way to hold information securely so that it can be added to but not changed retrospectively. For example, recording who owns land, securities or gold. The technology also allows the creation of cryptocurrencies such as Bitcoin.
• DNA analysis and gene editing – increasingly used by pharmaceutical companies to design tailored products for individuals or to try to replace defective genes.
You will see that many disruptive technologies arise from digital innovation.
Many disruptive innovations have important consequences for whole business ecosystems (suppliers, customers and related industries) and not just for the industry that is immediately affected. For example, electric vehicle technology will affect:
• Vehicle manufacturers.
• Component manufacturers.
• The petrochemical industry.
• Mining (more metals needed for batteries but less metal needed for catalytic converters).
• Filling stations – recharge points rather than fuel tanks and pumps.
• Garages – different skills needed to repair and service vehicles.
• Renewable energy production to provide pollution-free electricity.
• Car parks – might have to install charging points to attract customers.
• Recycling industries – very different material to recover and recycle.
When a disruptive technology appears, industry incumbents react in a number of ways:
• They try to ignore it and tell themselves that it will have no future. Of course, this might work – not every piece of disruption is going to be successful – but the decision to ignore must be taken after properly reviewing the opportunities and threats presented by the new technology.
• They try to fight it. For example, music companies fought digital streaming until they realised that it would happen illegally anyhow so they might as well embrace it and earn from it.
• They recognise the threat but are slow to act. For example, Kodak did recognise that digital photography threatened their (very good) products but they underestimated the speed that it would take over.
• They try to carve out a distinct niche where the old technology is still preferred. For example, there is still a market for vinyl music recording.
• They accept that the new technology will sweep the board. For example, the Encyclopaedia Britannica stopped publishing sets of printed books after 244 years. The internet and sites such as Wikipedia mean that continuously updated, authoritative information is now freely available online. (Encyclopaedia Britannica is still available online as a subscription service, but many users think that the free Wikipedia is better because of rapid updates – though it can be susceptible to inappropriate editing.)
It is tempting for businesses to ignore, fight or react slowly to disruption. Their current operations allow good profits, good dividends for shareholders and comfortable bonuses for management: then along comes a pesky disrupter who threatens all of that.
This is also why existing businesses are not normally the ones to promote disruptive technology: why kill the goose that lays the golden egg? However, failure is the likely outcome for companies that react to disruptive technologies by attempting to suppress them or by ignoring those promoted by emerging companies.
• Ken Garrett is a tutor at Open Tuition.
