What is Business Disruption and how does it work?

Sangeet Choudary is a widely published technology analyst and innovation consultant.

His popular blog Platform Thinking analyzes disruption and innovation in digital markets; he also contributed to the book “Managing Startups,” is a mentor at several incubators and accelerators, and serves on the advisory boards of prominent startups like SkillShare.

We caught up with Choudary to hear his thoughts on how to build a disruptive business; “platform thinking” and why it’s important; and disruptive innovation, especially as it relates to entrepreneurs and marketplace business models.

1. You write about “Platform Thinking” — can you describe what that is and how it applies to businesses?

Platform Thinking explains how Internet businesses differ from traditional ones.

Traditionally, pipes have been the dominant model of business. Firms create stuff, push them out and sell them to customers. We see pipes everywhere! Every consumer good that we use essentially comes to us via a pipe — manufacturing runs on a pipe model, television and radio are pipes, our education system is a pipe. Prior to the Internet, much of the services industry ran on the pipe model as well.

Had the Internet not come up, we would never have seen platform business models becoming important. Unlike pipes, platforms do not just create and push stuff out; they allow users to create and consume value. There has been and continues to be a massive shift towards disruptive businesses that run on a platform model, like AirBnB, Twitter, YouTube, oDesk and Kickstarter.

2. What industries do you think are ripe for disruption in the near future?

There are four industries in particular that are ripe for disruption: education, legal services, financial services and healthcare.

Across these industries, information and data are either the end product or are critical to end-product delivery. However, tight regulation of these industries prevents easy disruption. The key challenge for disruptors today is their ability to ‘hack’ these regulations. We’ve already seen regulations come in the way of disruption in travel/rental (AirBnB) and in transportation (Uber, Carpooling.com).

3. What advice would you give to startups and entrepreneurs starting a business today? How can they identify industries that are ripe for disruption?

The best way to identify an industry for disruption is to focus on solving an inefficiency. The startup needs to figure out the structural characteristics of the industry that give rise to the inefficiency, and determine a solution to improve or fix the inadequacy.

There are three structural characteristics of industries that are ripe for disruption:

1. These industries have inefficient gatekeepers. Take for example, the media industry. The entire editorial model is breaking down as community curation tools become more widespread. Gatekeepers thrive on controlling market access but the Internet blows that away, allowing startups to disrupt such industries.

2. Companies in these industries compete because of privileged access to supply. Just as gatekeepers have privileged access to market demand, some industries have privileged access to supply. Hotels, for example, are the only entities that have spare rooms to let out and taxi companies are the only ones with fleets of cars. Both of these models have been disrupted by startups that allow anyone to market a spare room or car.

3. These industries are extremely fragmented — Internet startups often aggregate highly fragmented industries. Look at what LinkedIn is doing to the hiring industry or what OpenTable did to the restaurant industry. This aggregation is nearly impossible without the Internet and that’s where these startups create unique value.

4. Why do you think most Internet businesses fail and so few succeed?

Let me talk specifically about Internet businesses with network effects. I believe most such businesses fail because they erroneously believe that their job is to build and ship technology and that technology is the end product. Building technology is definitely a critical part of running an Internet startup, but a startup’s work doesn’t end there. Enabling users to create value and interact with each other is an extremely important and poorly understood part of building internet businesses. In particular:

• The value of a marketplace lies in the network of buyers and sellers, not in the technology itself.

• Running an Internet business with network effects is not just about finding customers for your products, it’s about building interactions on top of your product.

• Internet businesses typically fail because their monetization efforts deplete value from the community. (Think of what advertising does to social networks.)

5. What are the keys to successful marketplace businesses?

There are three broad factors critical to the success of marketplace businesses:

• Liquidity: Liquidity is a state where there are a minimum number of producers and consumers in the marketplace and there is a high expectation of transactions taking place.

• Curation of Products/Services (Quality): Users visit a marketplace with a transactional intent and want to find what they’re looking for easily and quickly. A user visiting AirBnB or Yelp has a specific purpose in mind. The quality of the search algorithm and the intuitiveness of the navigation are therefore critical to delivering value.

• Curation of Participants (Reliability/Trust): Building trust is central to marketplaces where transactions carry risk. Focus on the trust metric is very important to move from appealing to an early adopter audience to appealing to a mainstream audience.

Source: https://www.upwork.com