Today, when companies can either disrupt or be disrupted, the term “disruption” generates great passion and sentiments — to the extent that it is one of the most overused and misused words in today’s business lexicon.
What exactly is disruption?
A widely accepted definition of disruption is that it is an idea that shakes up an industry and puts the existing business models of the incumbents through a stress test.
Let us consider a few examples to understand disruption.
The business model of the travel accommodation industry works on having room inventory, and addition of new rooms through capex/JVs etc. drives growth. In such an industry, Airbnb allowed anyone with spare mattresses or rooms to rent them out to a potentially global market. Thus, Airbnb has become one of the significant providers of travel accommodation — without holding any room inventory in a traditional sense!
Another example is WhatsApp, which has disrupted the traditional instant messaging business model dominated by telecom majors — without buying any spectrum or installing any towers. WhatsApp, incorporated in 2009, was acquired by Facebook for over US$19 billion in 2014 and is one of the large instant messaging providers globally.
In fact, Apple iPhone can also be qualified as a disruptor. It disrupted the business models of various PC players by challenging the mind-set that internet can only be accessed effectively through a PC.
There are many others that might fit the definition of “disruption,” such as Zerodha, Uber and Ola Cabs.
In all these examples, the disruptors have not only disrupted the incumbent business models but have also been able to sustain/survive with the new business model that they created.
So, the obvious question is: what is making these disruptors click and allowing them to sustain their redefined business model?
We have developed a unique equation to answer this question.
Sd = U0 + S1 + G2 + C3
After analyzing the traits of various disruptors, successful disruption (Sd) can be potentially a combination of a unique business idea (U0), a strong management team (S1), good governance (G2) and continuous innovation (C3).
While U0 is inherent in each disruption, getting S1, G2 and C3 right is the key to success/sustenance.
Let us start with S1. We need to remember that disruptions are eventually managed as businesses and thus like any business, it is important to have a fully functional management team. It is important to evolve and strengthen the founder’s support system by getting the right talent at the right time.
For example, while Travis Kalanick may be the public face of Uber, he has not built the company by himself. Like any chief executive, he has a team of 20+ senior executives to manage all parts of the business, from handling people operations internally to putting out regulatory fires externally. Out of these 20+, only a handful are from the initial team that incorporated Uber or helped it in the first few years.
It is important to appreciate that beyond a point, it is not possible for the founder to run the show on an individual brilliance. Therefore, it is important to have a steady stream of talent available and have an effective succession planning.
Another important aspect of the equation is G2. Given that disruptors usually achieve massive growth in a relatively short time, keeping G2 on track is always a fundamental challenge.
Let us take Zerodha as an example. Zerodha is not a traditional broking house and also has no back end association with any bank; therefore, in order to instill confidence among its customers and market regulators, it claims to have set up a compliance and internal audit function to monitor it activities and enable it to say on track.
Another fundamental aspect of G2 seems to be a strong board. For instance, Airbnb’s board on-boarded good public profiles including senior people from LinkedIn, Sequoia Capital etc. A strong board helps the organization to stay on track with its vision/strategy and also enable out-of-the-box thinking around market trends/innovation. Most of these companies are also audited by reputed audit firms and focus on trying to maintain a healthy cash flow.
Lastly, the most important aspect of Sd is to play on the strength, which is innovation. A unique business idea can quickly lose its steam and become the norm of the day if it is not constantly evolved.
For instance, WhatsApp has further disrupted the instant messaging concept by adding features to allow users to share documents, images, videos, user location and audio messages while messaging. As a result, WhatsApp is now considered appropriate for even business application and use.
In conclusion, the following should be the focus areas to get the equation right.
- Right team with succession planning
- A well-skilled/independent board
- Focus on cash and costs
- Effective governance focus and tools — internal audit, external audit by good audit firms, regulatory and compliance, standard operating procedures, ERP etc.
- Constant strategy/SWOT evaluation — especially innovation refresh