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Recipe for Disruption Leans on Lazy Incumbents

Rita Gunther McGrath, Special to CNBC.com
Monday, 22 Apr 2013 | 12:02 PM ET
LevelUp
Source: LevelUp
LevelUp

It may seem counterintuitive to lead with the status quo over innovation when searching out a model for business disruption. Nevertheless, identifying where lack of change can work to your advantage is often the first step. Tinkering with innovation in a vacuum may lead to eureka moments, but it won't necessarily lead to success.

In other words, the would-be disruptor first needs to select a target, and there's no better target than a lazy incumbent. Better yet, an entire niche or setting in which multiple incumbents have enjoyed a privileged position for a long time. Stability in a sector is often synonymous with lack of change.

Managers in these niches don't have to take many many risks to move forward in their careers, so guess what? They don't. Powerful people enjoying long, stable careers, lots of perks and very few challenges to their authority are just what the disruptor ordered. Brownie points if the leaders in your target segment take a "I don't want any surprises, and don't bring me bad news" approach to hearing from their direct-reports. Ideally, the incumbents count on sizable revenue flows.

(Read more: What Neflix, IBM Teach Us About Disruption)

Ripe disruption opportunities at the moment might include mobile phone operators that charge their customers monthly fees to pay for phone purchase subsidies (long after the phones have been paid for!); cable operators that insist on selling bundles of channels to customers who would prefer to pay less to watch only the channels they really want; energy utilities whose main customer is often thought of as the regulator rather than the end user; or, the one that I'm going to use as my example in this post, the people in the payments business who make a mountain of profits on transactions that cost them a fraction of the price.

Next, think about the customer need you'll be addressing. It might be the same need that the incumbent provides, or it could conceivably be a way of making what the incumbent provides unnecessary. Or doing the same thing, but at a fraction of the price. Can you think of a customer need that is not being met, is being met badly or expensively, or is being met in such a way that infuriates customers? Might they reward you for making their experience better?

(Read more: The Wearable Revolution)

If you answered yes to any of the preceding questions, it's time to move on to finding a disruptive solution. Look for a technology or service that does one or more of the following:

•Relaxes a significant constraint

•Gets around an entry barrier or other impediment to competition

•Scales an activity that never could be scaled before, dramatically reducing cost

•Makes the attributes of the incumbent offering less attractive or even enraging

•Eliminates the need for the incumbent's offering altogether

Finally, you'll need a business model. It should allow you to make money in ways your incumbent opponent can't. Then it's hard work, parsimony and focus to bring that model into prototype form. Be prepared for a lot of iteration along the way, but be clear on the vision you are driving.

(Read more: What Dooms Innovation to the Graveyard?)

The example: LevelUp by Scvngr

For a small business owner, one of the most exasperating facts of life is the bite that gets taken out of every sale made with a credit card because of what the industry calls "interchange fees." LevelUp has developed an app that, when used by a LevelUp customer, allows a merchant to accept a payment for a fraction of the cost of the traditional cards.

The payment goes to zero if the merchant uses LevelUp's services to promote their business locally. LevelUp gets paid if the merchant is successful. Customers like the convenience (and the discounts and points they get from LevelUp). Merchants are happy to get some of their own revenue back. Looks like a pretty nice scenario for everyone, except, perhaps, those lazy incumbents getting disrupted by a whole new way to pay.

--Rita Gunther McGrath is a professor at Columbia Business School. Her new book, The End of Competitive Advantage, spelling out a new, disruptive, playbook for strategy, will be published by Harvard Business School Publishing in June.

Read more: Disruptors Can Delay the Apple iPod Way

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