A good policy for dealing with disruptions is to understand your own advantages, as well as the advantages of your disruptive competition. According to Michael Raynor’s The Innovator’s Manifesto the situation usually unravels like this: a legacy business has the advantage of a built-up customer base, technological infrastructure and larger resources. A disruptor has the advantage of a leaner business model and a rapidly scalable technology or plan that can outmaneuver established competition. The disruptor will leverage his advantage in predictable ways: he’ll offer similar services at a more attractive cost to the customer, beginning down-market and gradually creeping toward higher end customers.
The defending business has several ways of responding to this. It can double down on its old business model, defending against the incursion of the disruptor by offering short-lived special deals or superficially imitating the disruptor’s primary selling points. This strategy will likely work in the short term and may end up with the larger company buying out its disruptive competition, solely to keep them from continuing to compete. However, there will always be more disruptors and eventually one will persevere. The longer the legacy company spends in a defensive posture, the less likely it will be to survive.
This was the case with Blockbuster and Netflix, and also with Windows phones and iOS. Microsoft, by offering a superficially imitative product to compete against Apple is, in the words of Valve Software’s Gabe Newell, “hastening its own decline.” What Microsoft should be doing is ceding the mobile market to Apple and Android while working to create a disruption elsewhere. It should be a rule in business that you can’t out-disrupt a disruptor. What you can do is work to create your own disruption behind the scenes.
The advantage of legacy businesses is that they have tons of resources to work with. When a disruption comes into play, the losing strategy is to build up walls around your product and try to defend against the onslaught. Instead, allow your business to compete on its strengths: it’s a legacy business for a reason and customer loyalty will carry a lot of weight. Meanwhile, use the profits from the legacy business to invest in other growth areas. In other words, milk the declining business to invest in innovation, so that by the time the disruptor has rendered it obsolete, you’re already leapfrogging them somewhere else, beating them at their own game.