Disruptive Change: When Trying Harder is Part of the Problem
By Steve Wunker
To some outsiders, insurance agents appear to be threatened with obsolescence. Commoditized products, the extensive information available online and the decreasing value placed on personal relationships could lead insureds to devalue the role of agents and instead make decisions largely on their own. A similar cycle has affected travel agents, decimating that industry. However, becoming a dinosaur is far from a certain destiny.
For example, obsolescence failed to play out with bank branches. In the 1990s, branches were the "obsolete" part of banking. Deposits and withdrawals were moving rapidly to automated channels, and branches were a large infrastructure cost to carry. Some banks de-prioritized branches in favor of virtual channels. Yet by 2007, the industry had done an about-face. The data speaks clearly: branches help sell products. Their function may have changed in the past decade, but their importance in differentiating banks and boosting their share of the customer’s wallet remains.
Drugstores were also viewed as doomed. When Wal-Mart can undercut Walgreens by 20 percent on many items, why would consumers keep the costly retail network in business? Yet drugstores, too, have proven resilient. It turns out that consumers value convenience as much as price, and they place particular importance on advice from the pharmacist. On which route is the insurance agent headed? Patterns of innovation provide a guide.
Each of the industries experienced what is called "disruptive innovation" Unlike innovation that sustains existing business models, disruptive innovation upends them. The innovation is frequently not a new technology, but a new way of doing business. Southwest disrupted the airline business, and Vanguard disrupted asset management. In each case, the new form of business offered a certain set of customers a "good enough" offering that satisfied them along most dimensions of performance, but excelled on one or two dimensions, such as convenience or price. The new business made money in a different way, and it initially captured customers who were not the incumbents' main priority. Like almost any business proposition, the new business gradually improved, sometimes to the point where it could capture much of the market.
Incumbents were blindsided and incapable of response. Often, the disruptors' main competition was not even an incumbent, but nonconsumption — the lack of any product being consumed because the category simply did not exist. Disruptive innovation occurs in almost every industry, and it never stops. Sears, Roebuck and Co. disrupted corner shops with their catalogues, which were disrupted by Marshall Fields' department stores, which were disrupted by "big box" retailers. Merrill Lynch brought stock trading from Wall Street to Main Street, but Charles Schwab made investing more inexpensive and convenient for a certain class of investor. And E*Trade enabled the rise of a whole new category of investor. The key to surviving disruption is to update the reason you are in business.