Disrupting the Chinese market: is it essential for business success?
It’s become a catch-all phrase for almost any business innovation that shakes
up and challenges the dominance of incumbents in a given market, like China:
disruptive innovation. But what if your business idea is not so revolutionary?
What if it’s just a service or product that fills a gap in the Chinese market? Can
it succeed without setting out to be disruptive? And what can you learn from
those disruptive success stories that could be of benefit to your own business?
The term was coined by Harvard Business School professor Clayton Christensen
in his 1997 book The Innovator’s Dilemma and since then we have seen it applied
to business success stories like Uber, Airbnb and Netflix. I’ll look more closely at
two of these examples further down, but first we need to get one thing straight.
Disruption is an evolutionary process
The term may suggest a revolution, but the process is one of evolution. It’s important for companies to understand this because it helps to make the right strategic decisions along the path to disruptive innovation. It’s tempting to apply the term to every innovation that changes the way a product of service is delivered, but there is a tactical process that goes beyond merely coming up with a bright idea. Understanding this process and how to exploit it can offer companies some insight if you spot a niche that’s ripe for disruption.
Christensen defined two types of disruption. The first is low-end disruption which is providing for less-demanding customers who are being overlooked at the expense of high-end, demanding customers. The second form is new market disruption, which provides for customers who are not being served at all by the established businesses. In both cases, it is a strategic decision to gain a foothold in a market and then expand.
As incumbents concentrate on improving their products for their profitable high-end customers, this opens a back door for disruptive entrants to target those overlooked customers (and potential customers) at the fringes with the offer of something simpler and more convenient, frequently at a lower cost.
So if you can provide a simplified product that satisfies the needs of the low-end and brings new customers into the market by being more affordable, you can establish yourself, often without being noticed by your competitors. Even when they identify the threat, established companies tend to be so entrenched in the processes they’ve established through years of refinement that they freeze, unable to react or adapt to the disruption.
Tips for your Chinese business:
The tactic, then, is to start at the fringes and work your way in. Over time you can move upmarket, developing your services to attract higher-end customers in China. When those customers begin migrating from your
competitors to you in high volumes, disruption occurs. Understanding this process will also help your new Chinese business to develop strategies and innovations to move a product upmarket once you have gained that all-important foothold, whilst being able to capitalize on the advantages of being ignored by established competitors in the early stages.
Netflix vs Blockbuster
Let’s take a look at how a couple of very high-profile companies applied this strategy with devastating effect – and what it can tell you about your business.
In its early days as a DVD-by-mail service, Netflix appealed to a customer base overlooked by video rental shops like Blockbuster. They didn’t care about the latest releases and they weren’t fazed by having to wait a few days to receive their DVDs, instead of driving to a store to satisfy an immediate need. Furthermore, returning DVDs by mail wasn’t wildly different from having to return a Blockbuster rental, except you didn’t get charged any late return fees.
Blockbuster didn’t recognize Netflix’s true disruptive trajectory and ignored the threat – even declining to buy it for USD 50 million in 2000 – and Blockbuster eventually collapsed in 2010. Netflix is now estimated to be worth USD 100 billon.
In a 2015 article in the Harvard Business Review, co-authored by Michael Raynor and Rory McDonald, Christensen argued that if Netflix had not eventually moved into the mainstream, Blockbuster’s decision to ignore it would not have been such a strategic blunder. And had they gone after Blockbuster’s core market from the word go, he believes that Blockbuster could have launched a successful counterattack. ‘But failing to respond effectively to the trajectory that Netflix was on,’ he says, ‘led Blockbuster to collapse.’
Tips for your Chinese business:
Look closely at how your potential competitors in China are ignoring the wants and needs of certain customers and think how you could tailor a simplified, more affordable and customized service in order to build a loyal customer base. Be prepared to see the process through, over a number of years if necessary, and don’t be afraid to pivot your service offering around tech advancements in the delivery of that service.
And in a lesson to all potential market entrants on the importance of long-term strategy in the disruptive process, Netflix continues to innovate in its move upmarket: in 2012 it began co-producing its own original shows and this year expects to spend USD 8 billion in creating its own content for its 100 million subscribers.
Airbnb vs the hotel industry
The accommodation rental platform was born after its founders offered air mattresses in their San Francisco apartment to help pay the rent. And although it hasn’t obliterated its original competitors in the way Netflix did, it’s caused considerable disruption in the accommodation rental market and, according to hospitality industry figures, took USD 450 million in direct revenues away from the US lodging sector in 2015.
From the start, Airbnb offered a place to lay your head in somebody’s spare room at a low cost without all the frills associated with big-chain luxury hotels. The low-value customers it attracted were either priced out of the hotel market or simply wanted somewhere to sleep for the night without having to pay for a premium product they didn’t need. The lesson here is not to over-complicate your proposition by offering features nobody wants.
As Airbnb’s popularity grew, so did its offering: more and more properties were added and as the quality of those properties rose, Airbnb began to appeal to those high-value customers who had traditionally paid big bucks to stay in an expensive four-star chain. Its marketplace platform business model allowed it to compete against asset-heavy brands such as Hilton Hotels and Marriott, because, just like its initial offering to low-end customers, it could retain the advantages it had at the beginning: it had no burden of property ownership. Now active in 65,000 cities across 191 countries, Airbnb boasts more than three million listings and is valued at over USD 30 billion.
Tips for your Chinese business:
What lessons can Airbnb offer Chinese market entrants? In this case, the process of disruption came fast. Having established the business model of matching property owners and guests, its ability to move upmarket so fast was due to the fact that it could scale up quickly and was able to build its brand and presence through social media with no significant marketing budget. So if you’ve spotted a weakness at the low end of an industry, an appreciation of disruptive theory can prepare you to move fast to establish your brand and scale up quickly before others get there first.
Be a Netflix, not a Blockbuster
Not all innovators are disruptive, nor does every truly disruptive path lead to success. Like any business innovation, disruption still requires a good idea and, like any business success, it still needs a well thought-out strategy and a determination to see it through. But understanding the business model behind genuine low-end disruption could help you to identify the opportunities in the Chinese market and put you in a position to exploit any niche or weakness you discover.
To read the PDF version click here
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.