Know What is Going to Kill or Transform Your Industry – Part II
How are industries disrupted? We have already identified the three most common causes: technology, business practices, and law. But if we want to do a good job anticipating disruption, we need to know exactly what kinds of changes are likely to lead to disruption.
As a general rule, disruption occurs because customer behavior changes radically – or the customer disappears altogether. For example, the shift from land lines to cell phones (which is much more noticeable in younger generations today), is a radical change in customer behavior for telephone-oriented operations, and it may mark a complete disappearance for those whose markets depend on the existent of land-line service (companies that make RJ-11 jacks or pay phones, for example).
Some disruptions lead to very rapid change and disappearance of a market. The rise of “smart phones”, for example, eliminated the consumers’ desire for a stand-alone personal digital assistant, making devices such as the Palm Pilot obsolete almost overnight. Technological convergence has a tendency to eliminate discrete devices as they are combined into a single technology.
Other disruptions can take a longer time to play out. The land line to cell phone migration is an example; so is the slow change from in-person to online banking, which started in the 1980s and is still playing out.
So what kinds of things cause changes in customer behavior? Certainly, the three root causes we discussed earlier – technology, business practices, and law, are at play here. But to gain a more fundamental understanding of disruptive change, you need to think about how customers behave. As a rule, customers make choices to seek pleasure or utility, and avoid pain. This may be as simple as buying a candy bar – seeking the pleasure of sugar and chocolate – or as complex as buying insurance – avoiding the pain of an unanticipated financial loss. In most business transactions, there is a delicate balance between the pleasure and utility of the product or service purchased, and the pain of paying for that product or service. In other words, most purchases involve customers doing something they would prefer not to do, spending money. Root cause changes, such as technology, may dramatically change a customer’s perception of pleasure, utility and pain in your market, because the change may change the fundamental experience of these three attributes.
Let’s examine an example of radical change. Changes in telephone technology and business practices led to the rise of call centers as a customer contact point. This change was largely driven by suppliers desire to reduce cost by centralizing customer contacts and also by using technology to increase efficiency (both time efficiency and global market efficiency, by moving operations to markets with lower costs). So far – increased utility for suppliers, and reduced pain, which may or may not be passed on to customers in the way of reduced prices.
From the customer perspective, this shift looks different. There is increased pain, as shifting responsibilities, reduced communications and technical abilities, and depersonalization of service came with the increasing use of call centers. In some markets, this decreased value was accepted as a given, since all competitors essentially pursued the same change in business practices. In others, the difference between the high pain and low pain offering led to unexpected changes in customer behavior. For example, in the airline industry, the aggravation of low-cost call centers and long hold times led to accelerated adoption of online travel services. This, in turn, enabled customers to quickly use technology to sort air travel options by price (and usually, by price alone), so that the market became increasingly commoditized. One could argue that, by partially shifting the cost of the phone operation to the customer (in the form of longer hold times), airlines created a strong incentive to seek alternative ways of purchasing their product. This dramatic shift essentially destroyed most of the travel agency industry in a very short time, and also – because of ticket price competition – led to the bankruptcy of several airlines. Viewed from the perspective of the travel agents, this shift was extremely rapid and devastating. When you look at how customer motivations interacted with shifts in business practices, it was entirely predictable (and, in fact, I did predict it when working with one airline in the early 1990’s).
While economists point out that customers do not always make rational choices, there are usually emotional balances driving customer behaviors. Some consumers, for example, will spend 5 minutes driving out of their way to save 50 cents on a tank of gasoline for a car. When you put it in price terms, this makes sense – “I bought here to save 3 cents a gallon.” – but when you put the decision in relative terms, it is clearly irrational “I just spent time to be compensated at a rate of $6 an hour.” So, when assessing how customers may dramatically shift their behavior, be sure to look for the emotional equations that are dominating people’s thinking, and not just the rational ones. Here are the most common emotional decision drivers:
1. Price – far too easy to focus on, because price is credible above most other claims.
2. Status – customers will pay extra to be perceived as high status.
3. Sex – customers will pay extra to think they are more attractive as romantic partners.
4. Pampering/aggravation – customers will pay extra to feel they are treated well or to avoid the perception of mistreatment.
5. Fear/hope – customers will pay extra to avoid things they fear or obtain a chance to achieve something they hope for (which is why lottery tickets sell).
When examining your markets, be sure to look at the effects that changing technology, business practices and laws have on all five of these things in the minds of your customers. Whether your customers are consumers or companies, you will find that any of these can lead to significant disruption – and therefore both threat and opportunity – in your markets.
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