From Forbes a publication I don’t usually read…. This is by Rich Karlgaard who writes a column called Digital Rules

According to Karlgaard, business is expected to continue to be tough for the foreseeable future.  This in spite of the fact that the is expanding again.  The stock market likes growth companies with higher multiples and so do shareholders.  So the pressure in boardrooms once more is for growth.  There are only two ways out of this dilemma: low disruption and high disruption.  (Notice that the middle is gone … or as the author says:  “I see only declining success prospects for those companies unwilling to engage in the risky work of disruption.”

Low disruption is introducing products and services that are stunningly cheap and built to stay that way.  Cases in point:  Dell, Wal*Mart, and Google who all have fundamental cost advantages in their respective markets due to their business models.

High disruption is bringing out high-end products designed to serve atomic markets.  At Firewhite, we talk about atomic markets as a market where there a lot of relatively small segments with distinct needs.  It’s hard to make money in an atomic market except with a high-end product that can act like a magnetic force, attracting the buyers in multiple segments even though the segments themselves appear to have different needs.  Karlgaard calls this process “high disruption” and cites BMW and Lexus, Miele, and NetJets as examples. 

Low Disruption

“Low Disruption means … introduc[ing] products and services that are stunningly cheap yet make money because their cost basis is so low. Think Google. It’s ranked third in the world in Web pages served daily. The search engine’s IT infrastructure is built entirely from Linux software and computers that are so cheap they’re junked instead of fixed. Ravi Aron, a Wharton professor, thinks Google’s cost per Web page served is one-tenth the industry average.

Low Disruption is the path favored—though not always—by entrepreneurs who nimbly figure out before their established competitors do just how to harness cheap tech and global resources. In 2003 such cheap tech includes throwaway servers; open-source software; Wi-Fi; voice-over IP; radio-frequency identification chips; Web services from Salesforce.com, RightNow or the new Siebel/IBM alliance; network applications from One Network Enterprises; utility computing from Mercury Interactive; “on-demand” computing from IBM; programmers working from India; engineers from China; and Web designers from Estonia—to name just some examples.

Mostly it will be entrepreneurs and younger companies that disrupt with cheap technology. Startups are not saddled with legacy systems, nor do they have hidebound procedures to worry about. Also, young companies are often starved for cash and have no choice but to go cheap. Of course, Dell and Wal-Mart are the exceptions to this rule. Both started as cheap disrupters, yet even in middle age they leave little space for newer and cheaper disrupters from below. Here is what Dell and Wal-Mart have in common: headquarters in cheap locations; the best supply chains in the world; and massive sourcing from China. Dell makes half of its computers in China, through Quanta, a Taiwan-headquartered company. Wal-Mart now consumes 10% of China’s exports to the U.S. and 1% of China’s GDP.

Still, the hard truth is, most of us are not equipped to succeed with Low Disruption. If we can count more than 30 years on our tires, or if our firms have passed the torch from founders to managers, then Low Disruption probably is not our path. One can cite exceptions, such as Ray Kroc’s founding the McDonald’s chain at 52. But, generally, Low Disruption belongs to the young. “

High Disruption

“High Disruption is what BMW, Mercedes and Lexus did to Cadillac and Lincoln in premium automobiles. It is what Miele did to Maytag in washers and dryers. It is what Pixar is doing to Disney in animation (even as those two companies remain connected). It is what NetJets is doing to commercial carriers in the battle for first-class business travelers.

High Disruption is the act of directing a premium product or service at today’s affluent customers. Good news: Around the world these customers are growing in number. Bad News: Such customers are more discerning and fickle than ever before. They have no interest in buying their fathers’ Oldsmobiles, and they will not tolerate any premium brand that breaks its promise.

Helmut Panke of BMW articulates the idea of a premium brand promise better than any other large-company CEO I’ve met. He says the ultimate brand test for BMW’s “ultimate driving machine” would be to blindfold a person and have him sit in the driver’s seat. By smell and touch alone that person should know whether he’s aboard a BMW. Panke says if you could design a blindfold test that allowed the driver to see only out the window—nothing inside the car or on the hood—the driver should still know by sound and handling if he’s driving a BMW.

Panke, who holds a Ph.D. in physics, says premium brands will fail if they are only skin-deep. Brands must arise naturally from the product’s or service’s core DNA. A brand must be recognizable by each human sense that interacts with it. And a brand must never fail on its promise. “

Disruption High & Low dated 11.10.03

Relevant Links
  • The Innovator’s Solution
    Creating and Sustaining Successful Growth, by Clayton M. Christensen and Michael E. Raynor
  • Trading Up
    The New American Luxury, by Michael Silverstein and Neil Fiske