Displacing Unicorns With Mermaids
Identifying bi-directional innovations as opposed to labelling them incorrectly within disruptive frameworks may prove to be a fundamental aid to innovators and investors alike. Here, I make the first of any such distinction yet so far.
In disruption as it is defined by Clayton Christensen, incumbent innovators are replaced by innovators who disrupt the central innovation paradigm of high-performance, high-quality, increased market share by offering a low-performance, low-sophistication technology that appeals to a new, untapped market of consumers. Ultimately, as the quality is gradually increased while the scale is widened among the “early adopters” of the new innovation, mainstream customers adopt the new disruptive innovation, displacing the better-quality incumbent one.
In recent years, a number of innovations that look superficially disruptive have been mislabelled so. Uber’s taxi app is perhaps the most prominent example of the mislabelling of disruption. Uber’s taxi app conforms to none of the strict disruptive innovation characteristics, after all. Specifically, app installation for more convenient ordering by the customer is not a downgrade of the taxi service product offering, but rather it improves the overall service offering, while the product does not aim to target non-users of taxis but rather existing taxi riders.
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However mislabelled Uber might be when it is described as a disruptive innovation, it is equally misleading to dismiss the fact that the net effect of Uber’s innovation is having on transportation market is not in some way similar to that which a disruptive innovation has, or that there are no close similarities. Uber’s innovation might not target cab riders as new consumers, but it has opened the market up massively for “gig economy” taxi drivers, who have had a significantly eroding impact on a formerly monopolized (mostly) market segment of operators. At the same time, while it is true that Uber has not led to a lower standard of service quality, the nature of its innovation poses a threat to service quality that is not in any conventional way manageable. In London, United Kingdom, for example, taxi drivers are traditionally extensively-trained, knowledgeable professionals who do not need to read a map or consult a guide to service a customer’s potential route. Uber drivers, by contrast, rely on GPS roadmaps for the customer’s route, and rarely have a comprehensive knowledge of the roads. A similar comparison can be noticed in other markets too. The effect, although not noticeable to the taxi rider most of the time, cannot be said to exclude core disruptive characteristics that when combined with the wider segment of new workers fundamentally change the nature of the service offering in a way that is not consistent with pure market-scale expansion innovations. Uber threatens to, and indeed most likely will succeed at, displacing the professional taxi driving career-man and his licensed people-carrier with an unknowledgeable, often young and mostly inexperienced freelancer driving his own car. At the same time, it is possible to notice that many more students and young people are turning to taxi driving in their spare time or simply on the way to school or work sometimes, into an extra income earner. Another distinctive effect of all these supply-side readjustments is ultimately to deprive small businesses of the sort of cheap, unskilled labor that their owners typically depend on. These effects combined are entirely consistent with the results that disruptive innovations have on markets of non-consumption.
The peculiar limbo status of Uber, sitting somewhere between incumbent and disruptive innovator gives rise to a new potential paradigm for innovators: that of the bi-directional innovator. Bi-directional innovators approach product and service offerings with fundamentally different attitudes to either incumbent or disruptive innovators.
Specifically, market share is defined by such innovators not by consumption but by production.
In the case of bi-directional innovations, new inexperienced workers are crowd-sourced via a single technology to displace what amounts to a more professionally-trained, higher-skilled workforce, at the same time as incumbent market-share is annexed gradually into the same fold. Another example of bi-directional innovations is Blockchain token offerings and digital asset exchanges. In this case, professional issuers who are often not required to do register extensive offering documents (sometimes legally and other times materially) displace the roles of incumbent financial professionals and legal teams, upsetting regulators in exactly the same way transport authorities are discomforted by Uber taxi drivers.
I characterise such innovators as bi-directional because like incumbents, their goal is ultimately expansion of and dominance of conventional market share (Uber wants taxi riders while Binance wants stock market investors) while at the same time, such innovators’ methods of acquiring this market share is disruptive of an existing professional (often legally-enforced) standardization via a low-grade technology implementation (there is nothing technologically sophisticated about Blockchain which amounts to an alternate digital dynamic data worksheet).
Why Does It Matter?
Bi-directional innovations have completely opposite effects on disruptive innovations. Clayton Christensen illustrates it thus:
“… both Uber and Apple’s iPhone owe their success to a platform-based model: Uber digitally connects riders with drivers; the iPhone connects app developers with phone users. But Uber, true to its nature as a sustaining innovation, has focused on expanding its network and functionality in ways that make it better than traditional taxis. Apple, on the other hand, has followed a disruptive path by building its ecosystem of app developers so as to make the iPhone more like a personal computer.”
But even the father of innovation himself has no explanation for Uber:
“According to disruption theory, Uber is an outlier, and we do not have a universal way to account for such atypical outcomes.”
Critically, now we may here. In disruptive innovations, first-mover advantage is critical, if not essential. Apple’s i-store was pretty-near impossible to displace until Spotify came along, and now Spotify pretty much runs the music market. This did not use to be the case: many different highly-competitive music publishing houses and record labels served, alongside the many record store brands, the customer with music. These days, it’s only Spotify (and maybe, just about still, Apple, but not for long if so.) Thus, disruption is inherently monopolistic. It creates one central supplier whose scale is impossible to dominate.
For bi-directional innovators, the trend is the opposite of monopolistic market dominance by one player: in fact, it’s fragmentary. Taxis used to be controlled by local monopolies (and still in some cases are where regulation bans taxi app innovations). Stock exchanges are monopolistic inherently, too: there is a maximum of 2 or 3 per country — but the inherent bi-directionalist (if you like, demand-chain led) framework that crypto exchanges innovate within means that it’s now anyone’s game to compete with Binance (and Uber).
Another distinction between disruptive and bi-directional innovators is that whereas disruptive innovators exclusively profit from the realignment of value networks, because their innovation entry-point stems from workforce adjustments, bi-directional innovators profit by realigning not just value networks but also supply-chain systems.
Apple makes a profit when it harnesses a large enough value network to sell MP3 files to. Uber, by contrast, was not as reliant on its value network in the initial stages, and merely “gamified” the customer experience with features such as “surge pricing” instead, in order to make up for the initially low level of revenue provided from its niche customer base and to incentivize its unskilled workforce.
Similarly, Binance, by virtue of holding the lion’s share of BNB, its network digital currency, is not as reliant as was Apple on building a vast network of customers overnight since a substantial portion of Binance’s profit is derived from increases in its own currency value versus fiat currency values (which also makes the currency a better purchaser of other digital assets on its platform and hence increases the customer experience while resulting in larger gains from trading fees).
Uber, in other words, created profits by manufacturing expensive, high-margin taxi rides while Binance creates profits in addition to its scale-normalized income growth in the form of trading fees by manufacturing and selling its own payment currency. In this way, simultaneous value chain and value network realignments achieve less core customer value network-reliant dependency for bi-directional innovators than they do for disruptive innovators. That makes them extremely dangerous, and unlike disruption, yields a hyper-competitive market packet full of entrants at any one time.
If this is so, the consequential implications are huge, to say the least, since then in that case the explosion of markets of monopoly-style incumbent status into markets of multiple bi-directional players may become the defining hallmark of the post-disruptive innovation era. If that is the case, we — innovators, entrepreneurs, venture capitalists — alike might well have it all back right now: for if so, then it’s not about discovering or becoming the unicorn. That is bi-directional fiction: it is simply not possible. Rather, it becomes all about the many mermaids out there. That is a completely alternate focus to the current one we generally adopt with respect to innovation modelling.
Bi-Directional Innovators was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.