Seeing what’s next

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Seeing what’s next

Using the theories of innovation to predict industry changes (2004)
By Clayton M.Christensen, Scott D.Anthony and Erik A.Roth

It is quite interesting to know from the book that one can make money not only from upscale or customers with big pockets. One can also make money from nonconsumers.

Companies can create new-market disruptive innovations to reach nonconsumers (people who are not consuming, they have a job they need to get done).

They can introduce up-market sustaining innovations to reach undershot customers (current customers). They can also introduce low end disruptive innovations or modular displacements to reach overshot customers (customers willing to pay decreasing premiums for improvements they used to value)

 

Case study : Southwest Airlines, which grew as a low-end disruptor

Southwest built two shields that made incumbent response difficult : its point-to-point route structure and its low-cost business model. In the 1960s, 3 Texan entrepreneurs formed an airline called Southwest to travel between Houston, Dallas, and San Antonio.

Most people who traveled between these cities had to travel by car or by bus. Flights were few and were expensive. Southwest entered by competing on these routes against nonconsumption – seeking to make it so cheap and simple to fly that people would fly instead of drive.

In addition, Southwest’s founders made a critical decision to fly out of Houston Hobby and Dallas Love Field airports instead of Houston Intercontinental and Dalls-Forth Worth airports to save costs. The second-tier airports were delighted to have increased business, and because they had fewer flights, allowed Southwest to load and unload passengers quickly, saving on expensive airport fees.

Southwest’s offering historically could be classified as inferior. You couldn’t get everywhere via Southwest. It flew a limited number of routes and primarily offered point-to-point travel. It didn’t provide free food. You did not get an assigned seat. But its customers were delighted with this relatively simple service offering because the alternative for many was not to fly at all.

Southwest’s approach of only using airports in smaller cities provided its first shield of asymmetric motivation. Major airlines were not interested in playing a point-to-point game, especially out of smaller cities. This business model allowed it to earn attractive returns at low price points.

Instead of marching up-market to take customers away from incumbents, Southwest replicated its business model by offering flights on new routes. It continued to face little competition on its routes because it stayed in its freestanding value network and fought the tempation to invade the mainstream hub-and-spoke system.  This expansion model provided years of profitable growth.

However, Southwest’s strategy may have a limit. When it expands to all available second-tier airports, it must move up by offering more hub-and-spoke service, stop growing or create a new disruptive growth market.

 

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