Disruptive Encounters of the Third Kind

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25 Nov 2020

The 3rd Kind of Disruption

In our discussion of Apple and Disruption, I mention that beyond low-end and new-market Disruptions, there is a third way that firms can disrupt: by means of a different business model type.

There are three general business-model types, first described in Configuring Value for Competitive Advantage: On Chains, Shops and Networks.

Solution Shops: A solution shop, or a business with such a business model deals with problems and solutions that are unknown, unstructured or unpredictable. Examples of solution shops—or businesses that use this business model type—are general hospitals, many consulting firms and R&D groups. Because the problems these firms address are not (yet) defined and their connections to outcomes of interest are also not (yet) known, Solution Shops must be paid for inputs, not outcomes.

Value-added Process Businesses: Value-added Processes Businesses (VAPs) transform inputs into predictable outputs. Manufacturing—indeed all product companies—are VAPs. Education often operates as a VAP, taking in the raw material of students and, say, in two years mints them as new Harvard MBAs. VAPs are paid for outcomes, not inputs.

Facilitated Network Businesses: These businesses facilitate interactions between parties. eBay is a Network business—it facilitates buyers and sellers. In the discussion of Apple and disruption, I note that Apple disrupted software development by creating a part of the firm that operated on this different business-model type. Sometimes, such business are referred to as having a “two-sided” market. Other examples are things we would call “platform” businesses.

This is why, in my experience, most “platform plays” fail—as they assume the “Field of Dreams” rule: if you build it, they will come.” This is false. In order to succeed, a platform has to provide a way for people outside the firm to make money by using their platform. (Think: Uber.)

This is precisely what Apple did with the AppStore. They enabled first musicians and music companies a new way to distribute their content and be paid for it. (Compare with Napster.) The iPhone’s success is due principally to this business model shift. Remarkably, Apple has maintained both business-model types under one roof—an exceedingly rare achievement that wasn’t without controversy internally.

The success of the iPhone has facilitated the development of other networks, built so that non-Apple developers can create software for Macs, iPads and now the Apple Watch.

This third type of Disruption is less common and, as with other types of disruption, rarely happens inside the same firm. Nevertheless, as with all “flavors” of Disruptive Innovation, it has repeatedly transformed industries.

*Note: I use terminology slightly different from the original, but it has become standard among those of us who do research on the theories related to Disruptive Market Entry.

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