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 / Summer 2005 / Issue 39(originally published by Booz & Company)


Top-Down Disruption

Cost Curve Riders
FedEx’s overnight document-delivery service and Wang Labs’ word-processing system are two examples of top-down disruptions that overturned established markets. When Federal Express started up in the early 1970s, the U.S. package-delivery business was dominated by two big organizations. The United States Postal Service held a near-monopoly on the delivery of letters and other documents, and it also shipped small parcels, mainly between residences. United Parcel Service (UPS) had a flourishing operation shipping packages of various sizes to homes and offices.

In pursuing their particular business models, both the postal service and UPS overlooked an opportunity at the high end of the market. Businesses often needed to ship documents to other businesses very quickly, and these time-sensitive commercial customers were more than happy to pay a premium for such a service. FedEx saw this competitive opening, and it organized itself to deliver documents and other small packages overnight, using its own fleet of aircraft. On a critical measure of shipping performance, delivery time, FedEx’s service outstripped that of its competitors — the best UPS could offer was second-day delivery — and it was able to charge its exclusive set of customers a high price for its unprecedented speed.

The profits from this lucrative niche eventually allowed FedEx to expand its operation, and the resulting scale economies, together with continuing technological advances in managing and tracking shipments, enabled it to introduce more affordable services that appealed to the broader business market. By fundamentally changing customers’ expectations regarding shipment speed and service, FedEx disrupted the entire package-delivery market. Caught flat-footed, both the postal service and UPS had to retool their operations to compete with the fast-growing upstart.

Wang’s word-processing system followed a similar top-down trajectory. Wang Laboratories introduced its microprocessor-based word-processing system in 1976, a quarter-century after the company’s founding. Although rudimentary word-processing applications had been in existence for some years, at the time most business documents were still typed on typewriters, and even minor revisions required laborious cycles of marking up and then retyping pages. Wang’s system, which combined desktop workstations with a central data server, offered superior performance on almost every measure of document production, including revision speed, output quality, reprint capability, and the ability to support collaborative composition.

Companies with intensive requirements for document production, such as law and consulting firms, were happy to pay a premium to gain these benefits and reap the resulting productivity improvements. Like FedEx, Wang was able to capitalize on its early success — and on the continuing fall in computer component prices — to introduce cheaper systems that were appealing and affordable to the broader business market. It too disrupted the industry by changing the expectations and buying criteria of customers. (Wang’s reign was short, however. In just a few years, it would fall victim to a Christensen-style bottom-up disruption, as corporations embraced cheap PC programs for word processing, such as Micropro’s WordStar and Microsoft’s Word.)

The FedEx and Wang stories reveal why top-down disruptions can be so powerful. Innovative, topnotch products are usually very costly to produce. In the early stages of their development, only a small group of power users is able to justify their purchase. But production costs tend to go down quickly, as suppliers gain experience and scale and as the prices of the underlying technologies drop. At the same time, the broader market becomes aware of the benefits of the new product and increasingly open to embracing it. The astute innovator thus is able to use a high-end niche as an outpost for launching a raid on the broader market. The top-down disruptor simply follows the cost curve into the mainstream of buyers. In the process, it redefines the industry — and secures its own competitive dominance.

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