New-Market vs Low-End Disruption
Two distinct paths to disruptive growth: compete against nonconsumption or attack overserved customers at the bottom
The Innovator's Solution identifies two fundamentally different types of disruption, each with distinct strategic requirements, competitive dynamics, and growth trajectories.
New-market disruptions compete against nonconsumption. They make products so much more affordable and simpler to use that entirely new populations of people can begin owning and using something that was previously available only to the wealthy or highly skilled. Canon's desktop photocopiers enabled office workers to make their own copies instead of going to a centralized copy center with a trained technician. Sony's transistor radio let teenagers carry music with them. These disruptions create entirely new value networks along the third axis of the disruption diagram.
New-market disruptions are especially dangerous to incumbents because initially the incumbent feels no pain. The disruptor's customers were not the incumbent's customers. Only when the disruptive product improves enough to pull customers out of the low end of the incumbent's value network does the impact become visible, and by then the incumbent feels relief rather than pain as low-margin customers leave.
Low-end disruptions attack overserved customers at the bottom of existing value networks. They offer good enough performance at a lower price through a fundamentally different business model. Steel minimills, Wal-Mart, and Korean automakers pursued pure low-end disruption. They did not create new markets but rather picked off the least attractive customers of established firms using lower-cost business models.
Many of the most successful disruptions are hybrids. Southwest Airlines initially targeted nonconsumers who would otherwise drive or take the bus, but also pulled customers from the low end of major airlines' value networks. Charles Schwab created new investors while also stealing price-sensitive customers from full-service brokers.
- New-market disruptions compete against nonconsumption by making products affordable and simple enough for new populations to use in new contexts.
- Low-end disruptions compete against the incumbent's least-profitable customers by offering good enough performance through a lower-cost business model.
- New-market disruptions initially cause incumbents no pain because the disruptor's customers were not previously the incumbent's customers.
- Low-end disruptions motivate incumbents to flee up-market rather than defend low-margin segments, because the economics of defending those segments are unattractive.
- Many successful disruptions are hybrids that combine elements of both new-market and low-end approaches.
- Both types create the same vexing dilemma: new-market disruptions induce incumbents to ignore the attackers, and low-end disruptions motivate incumbents to flee.
- Identify Nonconsumption or Overserved CustomersFor new-market disruption, look for large populations who lack the money, equipment, or skill to participate in the market and have gone without. For low-end disruption, look for customers at the bottom of the existing market who are overserved by current offerings and would accept less performance at a lower price.Pro tipNonconsumption is often invisible to incumbents because their market research focuses on existing customers. Look for people who hire awkward, unsatisfactory workarounds or who simply go without.WarningNot every underserved population represents a new-market disruption opportunity. There must be a feasible path to making the product simple and affordable enough for them to use.
- Choose Your Disruption PathDetermine whether the opportunity is primarily a new-market disruption (creating a new value network), a low-end disruption (attacking the bottom of an existing value network), or a hybrid that combines both. Each path has different requirements for product design, business model, and go-to-market strategy.Pro tipHybrid disruptions that combine both paths are often the most powerful because they simultaneously attract nonconsumers and pull overserved customers away from incumbents.WarningIf you cannot clearly articulate which path you are pursuing, you risk building a product that is neither simple enough for nonconsumers nor cheap enough for overserved low-end customers.
- Design the Appropriate Business ModelFor new-market disruptions, build a model that can profitably serve customers at dramatically lower price points with simpler products in more convenient contexts. For low-end disruptions, engineer a cost structure that earns attractive returns at discount prices through faster asset turns, lower overhead, or different channel economics.Pro tipLow-end disruptors do not accept lower profitability. Wal-Mart earned comparable returns on capital invested in inventory as department stores through a different formula: 23 percent margins at five-plus turns versus 40 percent margins at three turns.WarningA business model built for new-market disruption may not work for low-end disruption and vice versa. Be clear about which path drives your model design.
- Plan the Up-Market MigrationFor low-end disruptions, the up-market path is usually visible because you can see the tiers of the existing market above you. For new-market disruptions, you must invent the upward path because nobody has been up that trajectory before. Use jobs-to-be-done thinking to identify which improvements will pull increasingly demanding customers out of the incumbent's value network.Pro tipIn new-market disruptions, the product does not invade the mainstream market. Instead, it pulls customers out of the mainstream value network into the new one because they find it more convenient.WarningFor new-market disruptions, do not assume the up-market path will follow the same performance dimensions valued in the incumbent's market. The new value network may define performance differently.
Before Canon, making photocopies required taking originals to a corporate copy center where a technician operated Xerox's high-speed machines. Canon's desktop copiers were simpler and less capable but enabled office workers to make their own copies around the corner from their offices. This created a new value network based on convenience. When copying became so easy, people made far more copies than before, growing the total market dramatically.
Wal-Mart attacked the bottom of the department store market with nationally branded hard goods that customers already knew how to evaluate. Department stores earned 40 percent margins on three inventory turns; Wal-Mart earned 23 percent margins on five-plus turns, achieving comparable returns through a different formula. Department stores rationally invested in higher-margin cosmetics and fashion rather than defending commodity hard goods.
Southwest initially targeted people who previously drove or took buses rather than flying, which is a new-market approach against nonconsumption. But it also pulled price-sensitive customers from the low end of major airlines' value networks with its no-frills, low-cost model.
The original Innovator's Dilemma presented disruption in only two dimensions. As Christensen and Raynor continued their research, they recognized that disruptions actually operate along a third axis representing new customers and new contexts for consumption. This led to the explicit distinction between new-market disruptions that create new value networks and low-end disruptions that attack the least profitable tiers of existing value networks. The distinction matters because each type has different entry strategies, different competitive dynamics, and different growth trajectories.