How does the emergence of Amazon.com Inc. compare to the steel industry? It has emerged as a source of disruptive innovation that found a new way to offer buyers what they needed—like the steel “mini-mills” that gradually stole market share from mammoth U.S. steel mills—even if it meant taking a long road to profits and free cash flow.
That comparison and others were laid out in detail during the opening keynote of the inaugural B2B Next conference in Chicago, by Clay Christensen, a professor at Harvard Business School, and Ann Christensen, president of the Clayton Christensen Institute for Disruptive Innovation.
“What causes successful companies to fail is the theory of disruption,” Clay Christensen said to an audience of more than 700.
He illustrated as an example, under the heading “Flee or Flight Response to Profit,” how the large, integrated steel companies of the mid-20th century lost market share to upstart mini-mills that found ways to operate at less cost to produce basic steel products and sell them at low prices. And he and Ann Christensen, his daughter, told how the mini-mills—initially dismissed by large established mills as non-competitors making only basic products of low quality—went on to work their way up to gain a dominant market position in all categories of steel, from basic rebar to higher-end structural steel and sheet metal used in the construction and manufacturing.
Mini-mills gain traction
As the mini-mills first gained traction in the basic rebar market, offering relatively low-quality products at low prices, the large mills wrote off the rebar business, figuring the low-cost, low-margin products were not worth worrying about, Clay Christensen noted. Wall Street investors, meanwhile, rewarded both the large mills and their mini competitors, as each did well in their own markets, he added.
But as the mini-mills grew and gained financial strength, they took their business model into the higher-end steel product categories. “The response of the big mills was not to fight but to flee; the margins were not good,” Christensen said.
He went onto to provide as another example of disruption the fall from market strength by Digital Equipment Corp., a major provider of computer systems that failed to adjust to changing market demand for small personal computers in the 1980s and ‘90s. It kept focusing on its traditional high-margin market of large computers, figuring the new low end of the market for personal computers wasn’t worth pursuing. Before the end of the 1990’s, DEC had lost out to the new generation of personal computer makers.
Disruption occurs at the bottom
The lesson for companies today trying to grow in B2B digital commerce, Christensen said, is to realize that disruption often occurs at the bottom of the market—simple products at low cost made available to a large base of customers—rather than in pricey, high-margin products for a niche audience. That kind of disruption—along with an online interface designed to make purchasing easy for business buyers—brings the kind of value many customers want and drives fast growth.
That mix of competitive pricing and service is what has helped to propel Amazon’s B2B sales, as it has made it easier and faster for buyers to find what they need for their business, he added. When facing competitors like Amazon, he noted, companies need to determine “what are customers really trying to get done to do their job better.”
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