The close of another semester means we have run another loop around the track of a common, recurring conversation: Is there such a thing as high-end disruption?
It’s a reasonable question. Before Clay ever wrote about disruption, the term itself carried certain associations that have since made its precise definition a challenge. Clay has even confessed that if he could rebrand the “disruptive” effect today, he’d call it by a different name that carries less baggage.
Add to this the Silicon Valley vogue that the word has taken on, and the conversation becomes even more complicated. There are many cool companies making expensive things that have in fact disrupted industries in the sense of having unsettled or shaken them up. But these accomplishments do not necessarily meet the stricter definition that we hold.
Admittedly, the difference can be difficult to parse. At the Forum, we ourselves puzzle over companies such as Peloton and Brandless, which are pioneering new models. But are they disruptive? And if not, why?
In our understanding, disruption is a relative term that describes a theory of competition. It’s important to be precise, because disruption confers unusual benefits in terms of growth and profitability. And it has some key markers that reinforce why it is difficult to disrupt from the top of the market. These include a bias toward a low-end or new market offering, the presence of asymmetric motivation, and the potential for a trajectory of product improvement.
Here are three reasons why high end disruption is unlikely to occur.
1. The high end is a fortified hill.
Industries form and organize at the high end of the market, where valuable customers are willing to pay premium prices for new products and services. These circumstances signal sustaining competition, in which established players are powerfully motivated to defend their grip on their most lucrative consumer segments. Such contests favor deep-pocketed incumbents, and we can predict that the efforts of new entrants will be forcefully countered unless outright purchased by major players. The recent entrance of both Tempur Sealy and Serta Simmons into the direct-to-consumer, mattress-in-a-box space is a perfectly predictable example of the sustaining contest that Casper triggered by having entered at the high end of the market.
2. The high end is a hard place to hide.
A central tenet of disruption theory is the unique dynamic that occurs when incumbents are not incentivized to defend broad segments of their businesses (at least until it’s too late). This happens when new entrants launch inexpensive offerings aimed at the lowest tiers of the market. As a result, established players are actually happy to cede their low-margin business lines to startups, not realizing that those same startups will one day eat their lunch. This asymmetry of interest buys disruptive entrants valuable air cover, allowing them time to build their businesses virtually without competition. In a recent example, micro-vehicles such as e-scooters are now beginning to replace trips in conventional cars, despite having once been mocked by automotive manufacturers. Entrants at the high end do not benefit from this element of surprise.
3. You can’t shrink your way to growth.
Companies that enter at the high end of a market will eventually need to expand downward in order to grow, but this is a difficult proposition. For a company designed to be profitable in low-cost environments, more and more profit falls to the bottom line as that company moves up into more and more expensive market tiers. For companies seeking to move in the opposite direction, the reverse is true. As a result, the economics of expansion look bad for companies that begin at the high-end, and we can predict that their growth initiatives will meet resistance on every front. For example, the new Tesla Model 3 is now priced at $78,000, more than twice what the company originally predicted it would charge.
The threat of disruption lurks in the basement, not on the roof. And while companies such as Tesla and Uber are not disruptive, they are nonetheless unusual for having successfully challenged incumbents in sustaining competition. Theory would suggest that as new entrants in these circumstances, the scales are not tilted in their favor.
Yet the current success of Tesla and Uber highlights aspects of disruption theory that we don’t yet well understand. For one, what is the impact of regulation on disruptive technologies? Uber’s growth has shown how regulation may simulate the benefits of asymmetric motivation by causing incumbents to mistakenly assume their own safety. Could the regulation of taxi medallions have contributed to Uber’s rise?
The dynamics of disruption at the extreme high end are another. How for example does the value of luxury fashion houses persist, even when knockoff goods are cheaply and widely available? We welcome further investigation along these lines.
Have a thought about high end disruption? We invite you to discuss in the comments, join the conversation on Twitter, or send us a note.