Disruption 101

We Online Spinners are talking a lot about disruption. Dave Morgan has been talking about disruption in the Advertising and Marketing Technology space. I’ve been looking at disruption in other areas, including academia. Cory Treffiletti, Kaila Colbin, Maarten Albarda have all looked at various aspects of disruption. A quick look back at the past few months’ Spin columns show that well over half of them deal with disruption in one way or another.

Maybe it’s time we did a primer on the idea of disruption.

Disruption is what happens when something stable becomes unstable. That’s kind of a “duh..obviously” statement, but there are some very important concepts lurking in there.

When an environment is stable, it allows for the development of extensive but fragile ecosystems. In a corporate sense, this allows for the development of very complicated supply chains, with several “value niches” emerging along that chain. The more complicated the chain, the higher the potential for profit. Each link adds another level of complication, allowing for someone to be squeezing a little more profit from the end consumer.

In addition to extensive ecosystems, stable environments also allow some members of those ecosystems to achieve significant scale. Things are predictable and this allows organizations to grow, embed processes and systems, thereby improving efficiency and profitability. Often, one organization can establish itself at several levels along the supply chain, maximizing its profit potential.

In our physical world, stability is generally a by-product of friction. The higher the degree of friction – or what economist Ronald Coase called “transactional costs” – the more stable the market becomes. Barriers to entry are higher. Competitive factors are dampened. Capital becomes the main predictor of success.

Then – everything changes. We get hit with instability.

In our current case, we got hit with a double whammy: The disruption we’re experiencing is caused by the removal of friction. Technology is reducing transactional costs in a huge swath of industries.

Technology is an interesting catalyst. We think that technology changes behaviors. I don’t believe so. I think technology enables behaviors to change, in that it allows its users to do something they already wanted to do, but couldn’t because of some obstacle. It allows for an attractive alternative that didn’t previously exist. That technology is usually offered to the broadest base of users available and this triggers the disruption, which starts from the ground up. Typically, technology also removes the friction that enables those delicate hierarchal supply chains to form and flourish.

When the disruption begins and the incumbent ecosystem is threatened, the first casualties are the most fragile members of that ecosystem. These are usually the smaller niche players that rely on the bigger hosts that make up the ecosystem. The bigger hosts can survive longer and often swallow up the first casualties in an attempt to shore up their defenses. They will also often make a half-hearted attempt to respond to the disruption by adopting the technology and going after the disruptors. This never works. Disruption is not in their genetic make up. Their priority is always protecting the status quo, because that’s where their profit lies.

As disruption forever alters the environment, eventually the previous ecosystem withers and dies. A new (temporary) stability emerges – along with a new ecosystem – built on the foundation of the previous disruption and the entire cycle starts again.

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