In last week’s article, The Lies We Tell to Justify Fruitless Innovation, we discussed the why of innovation difficulties. We also visualized the trajectories of sustaining vs. disruptive innovation:

The underlying outcomes of last week’s points are the focus of this week’s article.

Every company paves the way for its own disruption.

Consider the following scenario…

You’re an executive at a highly performing company focused on upmarket growth and increasing shareholder value. As you pursue these goals, you have a limited (perhaps large, but still limited) pool of resources and capital.

Should you…
A. Invest resources to protect the bottom end of your business, characterized by the least loyal and most price-sensitive consumers.
B. Invest those same resources toward the growth of the most profitable side of your business, characterized by loyal customers willing to pay premium prices for a high-end product.

If you’re like most executives, faced with the question above, the answer is a no-brainer. Why would you invest in the low end of your business when there’s more profitable growth opportunity sitting right in front of you?

When framed as we’ve described above, the cyclical nature of innovation and the fact that (as we shared last week) roughly 90% of publicly traded companies fail to sustain above-average shareholder returns for more than a few years become utterly unsurprising. The simple reality is this:

As companies enter their “sustaining” years, they systematically ignore disruptive opportunities and threats until it’s too late.

And they’re encouraged to do so by their boards, by their shareholders, and by the very corporate structures they have put in place to ensure their own longevity. The very metrics and operational processes that companies instill to create efficiency and maximize shareholder growth are the same factors that leave an open vulnerability. Smart disruptors will find those vulnerabilities and exploit them rigorously.

Take a step back and look at the scenario we’ve described above. Effectively, companies are inviting disruptors to exploit them.

Disruption works because incumbent companies aren’t motivated to protect the bottom end of their markets.

In fact, history is ripe with examples of incumbent companies happily divesting themselves of downmarket customers because it enables them to focus on higher margin opportunities.

Here are some examples of downmarket disruptions that have shaped industries:

Another up-and-coming example of disruption that we’ve yet to see play out fully is 3D-printed real estate. A 3D printed, 2-bedroom home can be built at a cost of $10,000 — massively less expensive than its typical wood-framed counterparts. While 3D printed homes have yet to become mainstream, this is a market well worth watching in coming years as the technology matures and the quality enables up-market movement.

When we think “disruption” we typically think startups run by ambitious entrepreneurs looking to leave a mark. There are clear takeaways that can benefit any entrepreneur looking to create a new business…

Let’s start with a simple truth: a sustaining innovation or technology is not a viable means to create a high-growth business. But, that doesn’t mean that it isn’t a reasonable way to enter a market; it simply makes for different market dynamics and shorter timelines.

If you’re bringing a sustaining technology or innovation to market, spend time up front carefully researching the market opportunity and figuring out where there’s white space amongst the incumbents. Leverage your knowledge and your technology to capture an untapped, up-market opportunity. And then look to exit quickly to an incumbent who sees your vision as an opportunity to attain faster growth than they could otherwise achieve on their own.

On the other hand, if you’re aiming to go to market with a disruptive technology or innovation, it’s important to remember this…

An idea that seems disruptive to one company may be viewed as sustaining to another.

In order to succeed, your disruptive innovation must prove disruptive market-wide. If it proves to be a sustaining opportunity to even one major incumbent and threatens their ability to grow up-market, you will lose. Target opportunities that incumbent competitors are highly likely to ignore (or even happily divest themselves of).

If you can accomplish the above, you’re highly likely to set yourself up for success. In fact, companies following a strategy of careful disruption increase their likelihood of success from 6% to 37%.

Go forth and conquer.

Southwest Airlines, established in 1971, revolutionized air travel by introducing a low-cost carrier (LCC) model that made flying more affordable and accessible. This approach not only transformed the airline industry but also led to a phenomenon known as the "Southwest Effect," where the airline's entry into new markets resulted in lower fares and increased demand.

The airline's success can be attributed to several key strategies:

These strategies not only minimized operational costs but also enhanced customer satisfaction by providing reliable and convenient services. The emphasis on employee satisfaction through fair wages and profit-sharing programs further contributed to a motivated workforce, which translated into better customer service.

The "Southwest Effect" describes the airline's impact on new markets. Upon entering a market, Southwest's low fares compelled incumbent airlines to reduce their prices to remain competitive. This competition led to increased passenger traffic and overall market growth, benefiting consumers with more travel options and lower costs.

Southwest Airlines' innovative approach set a precedent in the aviation industry, inspiring numerous other carriers to adopt similar low-cost models. Its focus on efficiency, employee satisfaction, and customer-centric services has solidified its position as a leader in the airline industry.

In the late 1950s, General Motors (GM) dominated the U.S. auto market, holding half the market share with a diverse portfolio of vehicles aimed at a broad consumer base. GM's strategy focused on catering to wealthier customers with premium models, leaving little interest in competing at the lower end of the market. Enter Toyota which introduced its first model in the United States, the Toyota Corona, in 1957. The Corona targeted budget-conscious buyers, offering a reliable and affordable alternative to GM’s higher-priced vehicles.

Toyota’s approach exemplified low-end disruption. While GM focused on high-margin, premium cars, Toyota incrementally moved upmarket, launching successive models like the Tercel, Corolla, Camry, Avalon, and eventually the luxury Lexus brand. This strategy placed increasing pressure on GM, which was gradually pushed toward the upper segments of the market. Toyota’s ability to innovate and expand its market reach highlighted the typical pattern of low-end disruptors overtaking incumbents.

However, GM’s story diverged from the usual outcome of disruption. Rather than succumbing entirely to Toyota’s encroachment, GM took steps to reclaim the lower end of the market. Faced with competition from energy-efficient imports during the 2000s, GM refocused on producing smaller, more efficient vehicles. Yet, the economic downturn of the late 2000s compounded the challenges posed by Toyota’s rise. GM's profits plummeted, leading to an $85 billion loss and a government bailout in 2009. The bailout came with conditions, including the resignation of then-CEO Rick Wagoner.

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