To hear the media tell it, the most successful entrepreneurs are business and tech geniuses who stumble on solutions to life’s problems randomly, like Newton taking an apple to the head. But this view isn’t exactly accurate: there’s way more to entrepreneurship than sitting under trees (or in this era, in cafes and coworking spaces) waiting for inspiration to strike. Countless hours of planning and research are poured into the creation of a startup--especially where it concerns industry or niche.
So how do you settle on an industry to disrupt? When it comes to existing markets, the great promise of technology is that it can revolutionize spaces by creating new ways of business, increasing efficiency, and overall, doing more with less.
Markets vulnerable to disruption generally have a few risk factors, such as gross inefficiency, sky-high costs, powerful incumbents, and outdated ways of doing business. In short, look for an oligopoly--and then use technology to do it better, faster, and cheaper than what exists.
Consolidation and oligopolies
For something so common in American society, oligopolies aren’t a concept that most people are familiar with. That’s unfortunate, because they’re the best enemy an entrepreneur can have.
An oligopoly is a market dominated by two or more large firms, which block new arrivals, increase prices, slow innovation, and generally, tilt the playing field in their favor. Unlike a monopoly, where one company controls an industry tightly (think Standard Oil and John D. Rockefeller) oligopolies aren’t technically illegal--maybe one reason that they’re so common. Look for oligopolies in industries like music (Universal, Sony, BMG, Warner, and EMI); smartphones (Google and Apple); and mass media (Disney, Time Warner, CBS, NBC, News Corp, and Viacom).
Don’t be fooled by the illusion of choice. Whenever a handful of big companies control a large share of any market, consumers tend to lose both power and the ability to choose. Instead of being able to pick from one of many firms battling for business, customers instead just encounter a select few organizations, which have no incentive to improve at best, and at worst, may collaborate with their competitors to carve up the market.
For this reason, increased consolidation is an excellent predictor of disruption. As large companies slowly form, buying out their rivals to form massive, bloated entities, they make ripe pickings for nimble startups. Hungry upstarts have nothing to lose and can count on tech to achieve more with less.
Case in point: Kodak Eastman. As Harvard Business Review points out, the collapse of the camera giant wasn’t due to a lack of technology; after all, Kodak was the company that invented the digital camera. Instead, the problem was that Kodak was a massive, unwieldy incumbent; in 1976, one year after the digital camera was invented, Kodak controlled 90 percent of the market for photographic film and accounted for 85 percent of the cameras sold in the US. In fact, Kodak executives were worried that pivoting to digital would kill their existing (and very profitable) film photography business.
As a result, Kodak lost out to better cameras from Japanese companies like Sony or Panasonic. Kodak would never regain its dominant lead, and filed for bankruptcy in 2012.
Another criteria that you, as an entrepreneur, should seek out is inefficiency. I would even say that any Fortune 500 company founded before the 1990s can be disrupted in one way or another. They were born into different eras, and their operations reflect this: Xerox machines, typewriters, and outdated IT mainframes, to name a few. I’ve even seen F500 companies that still send faxes around internally--instead of using email or Slack!
Inertia is a powerful force, and it is especially pronounced at large corporations; big organizations, after all, tend to foster group think. Let’s keep doing things this way, the thinking goes, because we’ve always done it this way. The cure for this is agile methodology: streamline (and decentralize) the decision-making process and iterate quickly to build a product. Basically, fail fast and work in short bursts, so that your company can more quickly create a finished item.
As history shows time and again, the market waits for no one; those who are slow to adapt will find themselves left behind. Just look at Blockbuster: founded in Dallas in 1985, the company dominated the video store market, dictating the tastes and preferences of entire generations with their offerings alone. Within seven years of its founding, Blockbuster was sold for $8 billion to Viacom, and ran nearly 2,800 stores worldwide.
That is until Netflix came along. Frustrated by the steep $40 fee Blockbuster charged for late returns, Reed Hastings built Netflix, first as a mail-order DVD company and later pivoting to streaming, which became its true cash cow. Faced with competitors like Netflix and Redbox, Blockbuster failed to recognize their appeal, neglecting digital strategies, ignoring streaming, and only belatedly launching an app and independent rental kiosks (like Redbox). By the time Blockbuster filed for bankruptcy, it was worth $24 million.
When companies (and countries) just don’t care
The last criteria for disruption is sky-high discontent with the existing system. Todd Belveal, founder of rental car startup Silvercar, suggests looking at the average net promoter score for an industry in order to gauge how popular (or unpopular) the incumbents are. For instance, Apple has a net promoter score above 80, while car rental companies average 23.
Clearly, something’s got to give. Too often, incumbents become complacent, erecting barriers to success and sitting tight, even in the face of customer fury, because they can. In their minds, it’s too hard for a newbie to come and shake up the system, so there’s no need to bother with change. How could Comcast consistently have failing scores in customer service yet also possess the highest market share, especially in high speed internet?
Yet they shouldn’t sit easy, either. In terms of execution, Google Fiber may have failed to disrupt internet service providers (given its limited reach), even if it pushed existing ISPs to roll out faster connections to customers. If anything, a far more dangerous threat to ISPs come from a different area: local government. In 2016, Chattanooga’s local electric utility built its own government-owned, fiber optic internet with blazing fast speeds of 1 gigabit per second, virtually unheard of in areas with Comcast coverage. Instead of responding with faster speeds, however, the telecom industry responded with lobbying and legislation, forcing state officials to pass laws handing out cash to the incumbents.
This is the one example where the existing powers-that-be have succeeded--for now. But if anything is clear, it’s that this state of affairs can’t last forever. Organizations are powerful for a long time--until they’re not. As companies like TWA, Blockbuster, and Kodak show, just because you’re king of the hill today doesn’t mean that’ll be the case tomorrow.
In the end, finding an industry to disrupt isn’t difficult. Our society is filled with examples of powerful, lazy incumbents who turn a deaf ear to their customers, and are too slow and unwieldy to adapt to change. Like the Roadrunner versus Wile E. Coyote, savvy startups can leave their competition in the dirt--and reshape the market in the process.