What makes an industry ripe for disruption?

In today's guest blog Professor Mark Jenkins explores the factors that dictate when an industry is open to change, shining a light on the world of Formula 1 which is currently bracing itself for the introduction of electric alternative Formula E...

An industry can often be considered as ripe for disruption when...

1. It has grown complacent from past successes. In business it seems that for many industries success breeds the basis of failure, success creates complacency that slows down learning, makes the organisation harder to change and ultimately means that by the time they realise they are being disrupted it is too late. A classic sign of an industry right for disruption is that the firms within it see themselves as indestructible. Think about the national airlines, the banks, the oil companies and the car-makers.

2. It has lost touch with its customers. Because of the success the industry has enjoyed the focus has shifted to an obsession with maximising profit and tweaking product performance. Somewhere along the way they have forgotten both who the customer is and what they really value.

Take a look at how the computer industry was started by giants such as IBM, DEC and Honeywell, all multi-billion dollar corporations, who were ultimately destroyed because they had failed to recognise that the customer of the future was the man or woman in the street looking for cheap and effective PCs, not technologists wanting massive super-computers.

3. It doesn’t take new entrants seriously. The great thing about being disruptor of an established industry, is that the industry does not realise it is a threat. When the first Japanese cars were imported into the USA in the 1960s they were regarded as an oddity, a niche product that would never amount to very much and were not taken seriously by the big US auto makers. Today the Toyota Camry and Honda Accord are two of the top selling sedans in the USA.

4. The business model is out of date. The business model of the industry is the basis on which its success was built, it is based on a set of assumptions on the source and nature of revenue flows.

The micro-processor industry has a model based on the manufacture of technological components that go into devices such as smart-phones, their business model is therefore about making and selling high volumes of chips at a profit. In contrast ARM Holdings define their business model in terms of defining and licencing intellectual property (IP), this allows them to be far more adaptable as technologies shift and to capture value through licencing rather than manufacturing. It is a very different business model and one which the established industry finds both hard to recognise and imitate.

So can you think of any examples? From my world I can think of one: Formula One ticks each of the four boxes perfectly:

1. It has grown complacent from past successes. F1’s growth period was during the mid to late 1990s when the viewing figures rose exponentially, this growth in audience led to most of the leading auto-manufacturers pouring millions into the sport. Its growth has created many successful and rich organisations both in the F1 teams and in the management of the sport.

2. It has lost touch with its customers. Who is the customer? The TV companies are the key customer in the current F1 business model as it is the media rights that are the main inflow of cash created by the huge global audience (estimated at around 500 million). But take a look at the stands at a race, particularly during practice and qualifying and, with a few exceptions they will be empty. The fans are the real customers and F1 forgot about them quite some time ago.

3. It doesn’t take new entrants seriously. Later this year we will see the launch of Formula E (including a team from Virgin) with all electric cars racing around city circuits. It is criticised by the F1 fraternity as it is not seen as ‘proper’ racing – it doesn’t use purpose built circuits, the cars hardly make any noise and the race itself will only last an hour. The drivers will have to change cars during the race as the battery technology will not allow the cars to run for the entire hour.

4. The business model is out of date. The F1 business model is based on the assumption that here is a global spectacle which is watched across the world and therefore has TV companies queuing up to buy the rights to show the races. The future suggests that media will become far more fragmented so that the big TV deals may be a thing of the past, in addition the ‘big’ sponsor deal is also a rare species, just look at the way the cars are branded, the days of the big mega brand sponsor are past and marketing spend is become more tailored, more individual, which moves it away from the F1 model.

So will Formula E be the disruptor that replaces Formula 1? The F1 fraternity certainly does not see Formula E as a serious threat, but then like all disruptors that could be the secret of their success.

-This is a guest blog and may not represent the views of Virgin.com. Please see virgin.com/terms for more details.

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