When disruptors don’t disrupt

Source: Pixabay

Often we hear more about how disruptors succeed than how they fail. However, while many new businesses seek to disrupt – i.e. to find ways to do things better than brands already established in the contested space – most new businesses close down within a few years.

The Low Cost Carrier (LCC) airline business is an example of disruptors succeeding. Starting with short-haul flights, the LCCs have taken significant market share from the full-service airlines, with low-cost, no-frills but reliable services – benefits that consumers can relate to easily.

LCCs are now looking at disrupting the long-haul market with a similar proposition, but anyone old enough to remember will recall how a low-cost challenger to the long-haul market tried to disrupt this market and failed. Laker Airways introduced the ‘Sky Train’ service in 1978, offering no-frills transatlantic flights at half the price of the full-service airlines. The appeal of the low-cost proposition was the same as today, but Laker Airways failed. Why?

Established players can use their market dominance to repel any potential disruptor, and this is what happened in the case of Laker Airways. The full-service airlines that dominated the transatlantic routes allegedly ‘conspired with each other’ to put Laker out of business. They achieved this by discounting their own flights and cross-subsidising these with more profitable routes. Customers began deserting Laker in favour of the established rivals that continued to offer a full-service proposition. Unable to service their escalating debts, which reached US $350 million, Laker Airways went out of business in 1982.

LESSON LEARNED

One of the greatest ‘serial disruptors’ in business is Richard Branson. Learning somewhat from the Laker experience, his company, Virgin, succeeded in the transatlantic air passenger market against arch-rival British Airways through slick branding and by offering a better in-flight experience. This was despite British Airways using so-called ‘dirty tricks’ to deter passengers from Virgin, which resulted in a successful lawsuit against British Airways, a settlement, and a major PR success for Virgin.

However, when Branson tried to ‘disrupt’ Coca Cola’s dominance of the soft drinks market by launching Virgin Cola in 1994, he faced the same challenge of trying to take on a large, powerful competitor.

In typical headline-grabbing style, Virgin Cola was launched by driving a tank through New York’s streets before smashing it through a wall of Coca Cola cans. This was a symbolic act that effectively declared war on one of the richest and strongest brands in the world. While Coca Cola and Pepsi had been battling each other for decades, Coca Cola saw Virgin’s entry into the market as a very specific threat and responded by setting up a task force to repel Virgin. This included a sharp increase in Coca Cola’s marketing budget and involved putting pressure on third parties not to co-operate with Virgin.

In the Laker Airways case study, rivals put pressure on the aircraft manufacturers not to restructure Laker’s debt (leading to Laker’s insolvency), and in Coca Cola’s case they put pressure on distributors not to stock Virgin Cola.

The other factor was that Virgin was not following their own rules on disruption. Normally they only seek to break into a new market if they can offer something very different, but in the cola market, people were already getting a product they liked, at the right price, and Virgin Cola just was not different enough.

“Declaring a soft drink war on Coke was madness,” recalls Richard Branson. “I consider our cola venture to be one of the biggest mistakes we ever made – but I still wouldn’t change a thing.”

Based on the Virgin Cola case study, we can conclude that it can be better if disruptors ‘seek to subvert’ rather than to ‘challenge directly’. An example of this is Grab Pay.

Grab Pay is a new technology that allows the consumer to charge up their mobile phone with credits in order to make convenient, cashless payments through their phone. This technology is currently targeting small item purchases (e.g. food and beverage outlets that might not take credit cards) and hence is not taking on the large card brands directly. But over time, and having established their market presence, Grab Pay could easily move up the value chain to take on the mainstream business of Visa, MasterCard, and American Express. This more subtle approach is designed to subvert markets without competitors seeing the threat so directly, and hence not prompting significant counter-action.

GET THE TECHNOLOGY RIGHT

Another interesting case study of ‘disruptors who fail’ comes from personal transportation. Electric scooters are a common sight today as people speed to work on these great inventions, cutting time and effort, and making the commute more fun. Far cheaper, safer, more convenient, and environmentally friendly than motorcycles, electric scooters hit a mass market of those with relatively short commutes.
But this need was identified a long time ago by a successful entrepreneur in the technology sector, Sir Clive Sinclair. Sinclair had been successful in the home computer market but had an interest in electric vehicles. In 1985 he developed an electrically powered tricycle, the C5, which was targeting a market somewhere between car drivers and cyclists.

Similar to Virgin Cola, the C5 had a high-profile launch, but it was seeking to move into a new space where there were no competitors. However, there were two fundamental errors with this disruptor. Firstly, the electrically powered tricycle was not available in shops until several months after launch, meaning they lost momentum on the launch.

Secondly, and most importantly, it was the wrong design. The passenger in the tricycle was seated so low down that other road users could not even see them; this came in for considerable criticism and ridicule from the press for being dangerous and impractical. Furthermore, battery technology at the time severely limited the range of the C5, and as a ‘vehicle’ it was not easy to carry about.

Contrast this with today’s electric scooters – which are safer, have a longer range, and can be easily carried to recharging points – and you have a winner.

So, key lessons in disruption can be summarised as follows:

1. Get the design right: people are very unforgiving and many want disruptors to fail. Unless the design is good, and the technology works and meets a need, consumers will soon drop you.

2. Get your distribution in place: consumers will lose interest if you are not easy to find, and another disruptor will come along and take your place.

3. Don’t declare war on big brands: however tempting it is to take on the big boys directly, they often have considerable power and will protect their markets accordingly. Seek the subtle means to disrupt by moving into a new space, establishing your territory, and then expand out.