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Imagine you’re at the top of a successful company. You know what product you sell and you know who your customers are. Things are ticking over nicely. But beware complacency. If your business hasn’t been disrupted by innovators already, the chances are it soon will be. Your instinct will be to defend your business, attack your disruptor, or both. But tackling an attacker head-on will rarely succeed. You need a smarter strategy. To outflank your disruptor, you need to take a different path.
Think of it this way. Your established business is playing the first game. The disruptor is playing the second. To survive and flourish, you need to play a third, not just fire cannonballs at them in the hope they retreat. Just look at how established, successful businesses have dealt with the challenges of disruptors: how have they responded to – and profited from – tackling a threat? What was their third game?
Start with the watch industry. In the early 1960s, if you wanted a quality watch, you bought a Swiss one. The craftsmanship and accuracy of their timepieces meant the Swiss dominated the 300-year old watchmaking industry. Come the 1970s, and enter Seiko, Timex and a clutch of Japanese watchmakers who used quartz technology to offer new functions and features – all at a lower price. The Swiss watchmakers’ market share plummeted from 48% of global production in 1965 to 15% by 1980. The disruptors adopted the cardinal rule of any successful attack: they did not try to beat the Swiss at their own game – the promise of quality and accuracy. Instead, the newcomers offered something different - lower prices, more features and greater functionality.
At this point, the Swiss could have responded to the invasion by tackling it head-on. They could have offered cheap, modern watches, in an attempt to claw back previously loyal customers from the Japanese. But they took a different approach. They fought back with their own, completely different value proposition– style and fashion. The Swiss reinvented the watch as a fashion item. They reasoned that consumers could buy a new watch with a distinctive look every few months to go with their clothes or mood. The strategy succeeded. That product – the Swatch watch – became the most popular watch in the world.
The first game, played over hundreds of years by the Swiss, was about the accuracy of the watch. The second game, played by the Japanese, was won by offering cutting-edge technology and a cheaper price. In the third game, the Swiss came back. By making the watch a fashion item, they capitalised on a hitherto unexploited attribute of the product. Three decades on, the Japanese encroachment on the Swiss watch market seems little more than a hiccup.
Now look at games consoles. If you were a teenager in the Nineties, you either had a Nintendo or you were the only one of your friends without one. Nintendo ruled the global games console market. Then along came Microsoft’s X-box and Sony’s Playstation, who chased Nintendo so far out of town that by 2001, industry analysts predicted that the company would withdraw from the home console market completely.
Nintendo was unable to compete with the superior graphics, sophisticated games and profits reaped from grown-up audiences - audiences with plenty of cash to spend. Nintendo was the loser in an unrelenting battle between the three games manufacturers, in which X-box and Sony were continually outpacing one another with better technology, processing speeds and graphics.
However, Nintendo wasn’t going to give up. In 2002 with the appointment of Satoru Iwata as CEO, the company took on a transformative new strategy. Iwata wanted to abandon the relentless pursuit of ever-advancing technology. Instead, Nintendo set about focusing on a completely different, and hitherto ignored, audience segment.
The increasing complexity of games then on offer had shrunk the audience to a minority of young men who had enough time on their hands to perfect playing them. These young men played alone, away from their parents, siblings and partners. Iwata made a decision that, in hindsight, seems an elementally simple one: he decided to make games for families.
In 2006, the Wii was born. The Wii was far more than just a different product. It offered a fundamentally different way of playing games. Everything before it had targeted teenagers who would spend days in their bedroom killing things on screen.
Nintendo’s Wii was to provide wholesome family entertainment that got people moving and interacting with one another. It would include everyone - mothers, fathers, sisters and brothers. By allowing whole body movements using motion sensor technology, people could play tennis, baseball or golf, with a controller that looked more like a TV remote than a complicated console. Nintendo was smart. Everything was made as family-friendly as possible. Reflecting on this approach, Nintendo rejected the idea of a fancy celebrity-filled Hollywood launch; instead, they staged a kick-off event with working women as guests of honour.
Wii outsold the Playstation 3 by a factor of three-to-one in Japan and five-to one in the US. It was the fastest-selling console ever seen in the UK market, selling more than one million in just eight months of 2007. The Wii Fit game was rolled out in the same year, with yoga, aerobics, balance and strength exercises included. It became the fifth best-selling videogame in history.
Nintendo, which appeared to have been soundly beaten by the end of the Nineties, ended up on top. By August 2009, Nintendo had 49% of the market. Microsoft had 29.3% and Sony had 21.7%. Nintendo provides one of the best examples of how to disrupt your disruptor in the history of global business.
‘Agility is about getting on and doing something, rather than spending an age tied up with micro-analysis’
Introducing something brand new in your business is a gamble. Is there enough demand for it? Are there enough consumers out there who will say “I would like my watch to be a fashion item”? Or, “I would like to play a game with my whole family”? The airline industry, for instance, has yet to come up with its equivalent of the Swatch or the Wii. How can long-established airlines respond to the disruption of low-cost carriers such as Ryan Air and EasyJet? For airlines, what is the third game? Does one exist? It is certainly difficult to think of a new dimension here that everybody else has missed over the last 100 years.
But once you have summoned the immense creativity needed for true innovation, and are sure that enough people want to buy what you’re selling, there’s another crucial question: how easy is it for your competitors to imitate it? If you try to differentiate for the sake of differentiation and do not think this through, your competitive advantage will soon slip through your fingers.
Here are some ideas for developing and playing your own third game.
1. Have courage, agility and patience
Doing something totally new takes immense courage. The watch industry had been giving people something that told the time accurately for 300 years until Swatch turned watches into fashion items. It could have been a profoundly stupid idea, but they tried it. Agility is about getting on and actually doing something, rather than spending an age tied up with micro-analysis of hypothetical outcomes. And once you’re doing it, keep doing it. Many companies try a new idea for two to three years then ditch it: if you come up with something radically different, you need to keep going.
Look at Nestle. Before Starbucks, Costa, Caffe Nero and their ilk, most people drank instant coffee. When plastic lidded cardboard cups started becoming the high-street accessory du jour, Nestle’s freeze-dried Nescafe granules lost much of their appeal. Nespresso revitalised the coffee business of Nestle. But is Nespresso really a coffee product? Or is it a lifestyle choice? Look at the design of a Nespresso machine. Look at the capsules, the different colours, the sleek lines. Is Nespresso in the coffee industry or the luxury goods industry? It took Nestle’s Nespresso 20 years to break even and turn a profit. Unless you are patient and willing to invest and spend money, you cannot succeed.
2. Attack. Don’t just defend
For the newspaper business , disruption arrived in the nineties in the form of online news. Research has found that in responding to this disruption, the newspaper companies that saw online news as more than just a threat – the ones that also saw it as an opportunity – were the ones that succeeded in responding to it.
If you’re a newspaper boss, you might speculate that revenues from the paper business are going to halve over the next ten years. But at the same time, there are new markets created by the online distribution of news that are going to grow. So what do you do? You can defend your core – your print business – but you also need to attack. Success comes from the ability to defend and attack at the same time.
3. Think positive
Fear is a poor motivator. There is a great deal of evidence from psychology that proves this. It has a short-term effect in bringing about change, but over time, fear dissipates and people go back to their old habits.
A study at Harvard medical school looked at people who had undergone heart operations. Some 90 percent of these patients went back to the behaviours that got them in trouble (such as smoking) within six months of their operation. Doctors had told them if they keep smoking, they were going to die. That scared them, but it seems it didn’t scare them enough. What about the 10 percent who didn’t take up smoking again? Like the others, they had been told that they would die if they didn’t give up; but crucially, they were also told that if they continued their abstinence, they would be able to play with their grandchildren or walk with their husband or wife in the park. Give people something to hope for and an emotionally positive message if you want enduring results.
Bear this in mind in responding to a disruptor. Galvanize your people by giving them something positive and emotional to aim for rather than something negative to avoid.
4. Act like an entrepreneur
None of this is easy. Today’s firms face mammoth challenges and disruption is only one of those. But if you look at disruptors, there’s an element they all share. They think and act like new entrants. To succeed as a new entrant, you need to avoid imitating the companies that are already in that market—you need to attack them by breaking the rules. If the established firm wants to disrupt its disruptor, it must break rules too. That means that like every start-up, it must be willing to make short-term sacrifices.
To play the third game you need fresh thinking. Forget the core business. If you are British Airways trying to compete with EasyJet, don’t think like an airline business. Think like a start-up. It won’t guarantee success, but it will provide an escape from the orthodoxies and tired mental models of established businesses.
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