written by Thomas Bartman, Senior Researcher, Forum for Growth & Innovation

When our research team meets with executives, many of whom run some of the world’s most successful companies, one of the most common questions we are asked is “how do I spot credible threats emerging in adjacent markets, and what do I do about them?”

Managers today are aware of the risks posed by products that don’t clearly fall within their category because they’ve observed it happen many times in recent history. Mobile phones replaced landlines, the iPod/iTunes combination replaced the Walkman and hydraulic excavators replaced steam shovels. In the language of Disruption theory, we call those examples “New-Market Disruptions.”

New-Market Disruptions are particularly difficult for incumbent firms to spot because they emerge in a new plane of competition that competes on different measures of performance than the original plane. To the incumbent, this often doesn’t look like disruption at all, and that leads many incumbents to make mistakes that allow entrants to build substantial businesses or even topple the incumbent.

To explain how smart managers fall into these mistakes, I’m going to explain the phenomenon in three parts. In this first post, I’m going to present an overview of New-Market Disruption; stay tuned for future posts on the mistakes managers make and what they should do instead as well as a successful example about Daimler’s Car2Go car sharing business.

Part 1 — New Market Disruption

Clay Christensen, the leader of the Forum for Growth and Innovation where I research, first wrote about New-Market Disruption in his best-selling book The Innovator’s Solution. New-Market Disruption differs from Low-End Disruption by emerging in a new plane of competition — or more colloquially, a new market, whereas Low-End Disruptors emerge at the bottom of the original plane of competition.

Incumbents recognize Low-End Disruption when their least-demanding customers abandon them for the entrant but New-Market Disruptions are more subtle. They compete against “non-consumption” meaning that their customers weren’t active in the original market. This makes them more difficult to spot, but we’ve found that managers in the incumbent firms are often very aware of the emergence of the new market they just don’t acknowledge the significance of the threat because they don’t categorize the entrant as Disruptive.

Because the new-market disruption creates a new market, managers at the incumbent firm are often initially skeptical that the market exists and that the entrant’s business model is viable. This makes sense; these managers know more about the industry than anyone else and, their thinking goes, if there were an opportunity in that space, they would’ve already exploited it. Plus, they’ve seen dozens of entrants try the same approach before and fail.

When discussing the rise of a disruptive entrant in his industry, an executive from a leading firm told us “what you have to realize is that there have been dozens of other startups that have tried that approach before and failed; we even developed plans to launch that exact business and killed it when our initial tests came back negative. So it’s not like everyone sees this company coming and immediately recognizes that they will be able to make it work. It’s easy to look at them in hindsight and say ‘how did you miss that?!’ but in the beginning the successes look just like the failures.”

We’re sympathetic to how difficult it is to spot these disruptors early and our best advice is to study the theory and recognize the patterns of New-Market Disruptions. They often start small, creating new markets and drawing non-consumers into the market with lower costs or simpler, more accessible products. The key attribute to recognize is that they increase the number of consumers or consumption occasions rather than stealing share from existing consumption.

Like all Disruptive Innovations, they also possess a technological core that enables them to improve their products’ performance faster than consumers’ can utilize the improvements. Executives need to monitor the edges of their market — marginal or infrequent consumers — and look for consumers that are switching between the products or defecting the original market for the new one. This is the most obvious warning sign the managers will receive in a New-Market Disruption.

Stay tuned for Part 2 coming soon — Managers’ ineffective responses and what they should do instead.