What Are Disruptive Businesses?

This refers to the business model behind the company that uses disruptive innovation. The term ‘disruptive innovation’ first came from the book ‘The Innovator’s Dilema’ by Clayton Christensen of Harvard Business School, it was used to define innovations that created new categories of customer.

Today we are all fairly comfortable using many of these forerunners, the interesting part is in where the next disruptive business will come from and whether there are lessons that could be applied to UK based SMEs.

Disruptive Businesses

If you read last month’s newsletter then you will recognise the name and why it is interesting as a business, if not then let’s just look at the Netflix story.

Netflix saw over 10 billion hours of watched content in May 2015. That from a company few people had heard of 5 years ago and even fewer who had engaged with it.

Netflix took a radical step in moving away from it’s core business model (DVDs by post) to a purely on-line streaming service. This was a move discarded by competition as Netflix didn’t have the subscriber base deemed of a size to be a threat.

The business model was disruptive in that it had little early traction, sought a new type of consumer, asked the consumer to change their buying habits and was using innovation to grow.

The same issues can be applied to;

• Taxis – Uber
• CDs – iTunes
• Libraries – Google
• Local Stores – Ebay
• Long Distance Phone Calls – Skype

The disruptive business model is fast becoming the new norm with consumers now more willing than ever to adopt new buying habits.

Why Do Disruptive Business Models Succeed?

A fairly common question and one that is often difficult to answer when using the benefit of hindsight. How would music retailers have reacted if they had known how popular downloading would have become?

The big thing is that competitors rarely see the threat from disruptive businesses before it is too late, the argument is that if they did appreciate the threat then they would probably have done it themselves. The second part is that most established markets are dominated by a few individual companies, disruptive businesses are generally one company approaching how that market is run in a completely different way. To properly compete against the new entrant would require a united effort from different competing businesses, which rarely ever happens.

The biggest example of not appreciating the threat of disruptive businesses remains the Netflix/ Blockbuster scenario with Blockbuster turning down the chance to buy Netflix in 2000 having failed to see the significance of what was happening and looking at Netflix’s then subscriber base of circa 300k as being too small to bother with. Roll forward and we have 10bn hours in May from Netflix and Blockbuster… Well the less said…

If you are asking what the next disruptive business is, then the answer is probably that few of us will see it coming until it becomes a core part of our lifestyle and we wonder how we ever did without it.

The Lesson For SMEs

As for the lesson that UK based SMEs can learn here, I guess the answer is to roll with innovation and ask how you can align yourself with changing trends. Remember that M&S only started taking card payments in 2000! SMEs should be more agile and able to move with new innovation, history tells us that larger companies are slower to react and somewhere in this lies a competitive advantage.

If you are reading this post then you are probably already more adoptive of innovation than most large corporates.

By Dave Farmer

Dave Farmer is founder of the award winning business finance specialist Lime Consultancy. Based in Sussex Lime Consultancy provide access to commercial lending for SMEs across the UK.

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