The Disruptors

Introduction

Imperial Germany – a relatively new player on the world stage – was growing rapidly at the end of the 19th century. But this wasn't enough for its ruler, Kaiser Wilhelm II, who was determined to secure her "place in the sun” alongside traditional European powers. To take that place, the Kaiser reasoned, Germany would have to imitate its rivals and build an overseas empire. But an empire demanded a top-flight navy. A powerful fleet meant Germany could acquire and protect colonies, secure crucial trade routes, and enjoy the respect afforded a first-rate power.

The idea quickly led to determined action. In 1897, the Kaiser appointed the talented Admiral Alfred von Tirpitz as naval minister, and Germany embarked on its challenge to the world's great naval power, the United Kingdom.[2] Through a series of Naval Acts beginning in 1898, Germany set to building its battle fleet. Direct competition with Britain drove German naval plans. Tirpitz meant to threaten her dominance at sea, even though the German fleet would always be smaller than that of their British rivals.

By 1900, 38 battleships had been authorized. The British promptly recognized the gravity of the threat to their traditional sphere of dominance. The Admiralty had adopted a "two-power standard," which mandated that the Royal Navy be as large as the navies of its two closest competitors combined. It could not allow the Germans to throw off that balance, as Britain's navy guaranteed its empire – the source of its economic wealth - which then covered one quarter of the world. Income from the empire allowed it in turn to maintain its massive naval edge. The navy was also the guarantee against invasion of the island kingdom.[3]

The British initiated a series of diplomatic moves to allow it to focus on the challenge. It also started restructuring its own force to specifically take on the Germans. But the major coup – one which changed navies everywhere - came in 1906, when the British launched the HMS Dreadnought. This new class of battleship, the most powerful fighting machine in history to that point, rendered all previous classes obsolete. The huge new ships were armed entirely with "big guns," were heavily armored, and boasted steam turbine engines that allowed them to reach 21 knots, making them the fastest battleships in the world.[4]

Overnight, German naval construction plans were rendered irrelevant. It had no choice but to develop its own dreadnought battleship, and this it did with alacrity. It was able to lay down four Nassau-class dreadnoughts in 1907, which were launched by 1910. Along with subsequent classes, the German had ten capital ships sailing or being built by 1909, more than enough to alarm Britain.

But it wasn't enough to bring the German High Seas Fleet to parity with the British Grand Fleet, which opened the First World War with 22 dreadnoughts to Germany's 15. German shipyards could not keep pace with their British counterparts, taking two to three times as long to make each warship. Britain "leveraged its industrial base to produce ships of high quality quickly, thereby complicating rivals’ planning."[5] The British had successfully parried the traditional challenge from the German navy, beating them in the head-to-head competition over the size of the surface fleet.

Recognizing it could never match Britain in battleship construction, the Germans pinned their hopes on a realm where the dominant British surface fleet was blind, helpless, and largely irrelevant- underwater. All leading navies had submarines at the time, but none envisioned their potential as the Germans would. The British, who had far more submarines than the Germans at the start of the war, used them primarily as patrols to screen for the surface fleet and for coastal operations.[6] But the German admirals understood that the cramped little vessels could be the strategic equalizer for which they had been searching. They deployed their U-boats as lone hunters.[7] Initially, the German concept was to use the submarines to pare down the Grand Fleet by luring its surface ships into U-boat traps. The approach achieved some initial success. In September 1914, a single U-boat sank three British battleships in rapid succession. But the effort ultimately failed, so German commanders looked to the submarines to do the British what the Grand Fleet was doing to them - starve the enemy public into submission.

The U-boats were deadly against merchant shipping. The first unrestricted U-boat campaign, which started in February 1915, saw 115 ships sunk in three months. International pressure forced Germany to put an end to the campaign but it opened a second round a year later, sinking 212 ships.

It was the third round of unrestricted submarine warfare that was most effective. In February and March 1917 alone, U-boats sunk 500 ships. The campaign cut the number of merchant ships arriving to British ports by three quarters. It even led to food rationing in Britain, including among troops on the Western front. In all, 375 U- boats sunk 2,600 ships during the war.

In time, the allies adapted to the new challenge with a burst of innovation. They developed defensive measures, including the armed convoy. But actually attacking the U-boats was much harder, especially given the difficulty in locating the lurking submarines in the first place. Some solutions centered on novel uses of existing platforms, like airplanes and zeppelins. The Royal Navy created an attack submarine, the R-class, designed to sink U-boats. The British also developed technological innovations to counter the U-boat challenge, including the hydrophone, which enabled surface ships to find the depth of nearby submarines. The depth charge, a new weapon, became an important complement to the hydrophone.

By early 1918, the threat was largely under control, though ships were still lost across the Atlantic, even in American waters. But the situation was stable enough for huge numbers of US troops to sail for Europe safely in troop convoys, decisively tipping the balance in the Allies' favor.

Ultimately, the innovative German U-boat effort failed to force the British to their knees before the Americans could bring their numbers to bear. Moreover, it likely inflamed American support for entering the war. But the German vision for a new strategic use for submarines gave its navy a real opportunity to influence, perhaps decisively, the outcome of the war. It forced the allies to adapt quickly, and without significant technological and conceptual innovation, they would not have been able to absorb the U-boat threat as effectively as they did by 1918.

The German U-boat campaign reflects an approach that challengers to more powerful rivals – including modern terrorist groups - have used repeatedly. Instead of challenging the established power in traditional ways, they look to take the struggle to realms where it is barely present, if at all. In the business world, this is called "creating a new market."

The creation of new markets lies at the core of "disruptive innovation," through which smaller organizations, from armed groups to hi-tech startups, erode the dominance of established competitors. Disruptive innovation offers an opening for upstarts, and represents an Achilles' heel for traditional organizations. But within the danger lies opportunity. Understanding the essence of disruptive innovation enables existing powers to cope with the challenge, and to even disrupt their dangerous new competitors.

Creating New Markets

A company has two basic approaches to competition. It can mount a head-to-head challenge against its rival in the same market, attempting to snatch a market share by making a better or cheaper product. Or it can create a new market where its rival is barely - or not at all - present.

Just as the German navy failed to match the British in dreadnought construction, small companies are generally unable to compete with large, established firms directly. "Incumbents almost always win battles of sustaining innovations. Their superior resources and well- honed processes are almost insurmountable strengths," write three leading management professors in the Harvard Management Update.[8] In the WWI example, British resources and production capacity allowed it to stay ahead of the German challenge.

"Sustaining innovations," referenced in the HMU article, are incremental improvements to establish products and service along dimensions that have traditionally been seen as having value. The iPhone 7 and Windows 10, for instance, are sustaining innovations, improving upon existing products in ways that customers conventionally desire.

Despite their dominance in direct competition, leading companies have fallen, or have been forced to stop producing certain products, after smaller competitors opened up new markets in "unclaimed territory," eventually taking over traditional markets. Not long ago, Encyclopedia Britannica led the print encyclopedia market. But the product suffered from many drawbacks. It costs more than a thousand dollars, weighed more than 80 pounds, and was made up of dozens of volumes. Wikipedia, the free online encyclopedia, came without these disadvantages, and, in addition, can be updated almost immediately. In short order, it drove print encyclopedias out of the market they had so recently dominated. After 244 years, Encyclopedia Britannica closed its print version in 2012.[9]

The new markets are not necessarily based on new products. They often involve a novel use of existing ones. Home Depot created a new market in do-it-yourself home repair in the United States, building a $24 billion business in 20 years aimed at customers who didn't want to pay for a contractor but lacked the expertise to complete a project without some guidance. Home Depot did not take that massive market share from existing hardware stores; instead it used an approach called termed "recombination" to join together the knowledge of construction professionals with the prices of a local hardware store to create a new market.[10]

Other innovations combined elements of existing products to create new markets. Sony's Walkman, which debuted in 1979 and went on to sell almost 400 million units, combined the acoustics and the image of the Boombox with the size and convenience of transistor radios.[11] Other markets are created by simply conceiving of an existing product differently. Starbucks took a ubiquitous product, coffee, and recast it as a specialty product that was part of a larger experience and culture, for which customers were willing to pay.[12]

The creation of new markets often spurs rapid growth, and can reinvigorate an entire industry. Bookstores were in decline in the late 1980s. Independent stores looked to be on their last legs, and Americans were reading less than previous generations. Enter Borders and Barnes & Noble, the two companies that introduced the book superstore. They sold customers on the book-buying experience, allowing them to sit, drink, and read all day – and into the night - in their plush sofas. Their staff, many of whom have advanced degrees, are not merely cashiers, but are passionate about books. The companies quickly rose to become the two biggest bookstores in the US, invigorating the retail book industry at the same time. Locations where Borders or Barnes & Noble open up new superstores see consumption of books rise by over 50% among the general public.[13]

During World War I, the German navy initially tried to match the British surface fleet in the traditional realm, throwing massive resources into the construction of surface battleships, but it was no match for the British naval budget or production. As long as they were driven by the conventional wisdom of what constituted naval power, the Germans could only compete with the British in areas where the Royal Navy was already established and was extremely powerful.

It was a new way of thinking that enabled the Imperial Navy to challenge Britain. Submarines - a new but existing technology - became hunters that threatened the survival of the British home front, a test Britain was initially ill-equipped to handle. In business terms, this is called a "disruptive innovation."

Disruptive innovation

The term, coined by leading theorist Clayton M. Christensen of Harvard University, describes an innovation that creates a new market for new customers, and in the end enters the existing market to replace the established competitor. As time progresses, the product can move up into the more expensive end of the market to drive out the established firm. "Incumbents..." he and his co-authors write, "almost always lose battles where the attacker has a legitimate disruptive innovation."[14] Disruptive innovations often do not perform as well as the established products, but come with other benefits- cheaper, simpler, and easier to use.[15] They are not necessarily ideal solutions, but present potential opportunities to smaller challengers. They often operate in "unoccupied" territory that challenges the accepted boundaries of competition. As time progresses, the product can move up into the more expensive end of the market to drive out the established firm.

 Disruptive innovations are more than simply a new product – they are predicated upon a strategic vision that sees the world in a new way. Generally, companies "focus on matching and beating their rivals, and as a result their strategies tend to converge along the same basic dimensions of competition."[16] These competitors operate from the same implicit set of beliefs about who they are and how to compete in their industry. This competitive convergence cause firms to compete by making gradual improvements in cost and/or quality.[17] In the pre-World War I naval construction race, both Germany and Britain initially shared the same set of beliefs about the centrality of the dreadnought in the fight over naval supremacy.

Disruptive innovations depend on visionaries who conceive of not only a different way of playing the game, but one that is also in conflict with the existing method.[18] And it demands individuals who can take that vision and turn it into reality. Those visionaries must understand both the limitations and potential of the market, alongside their own limitations and potential.

Disruptive innovations progress up through the market. Innovative companies often start at the low-end – selling to the poorest customers or creating inferior products compared to the established competitors, which then climb up through the market to capture its higher end. 

The history of steel minimills in the United States is an example of this "climb-up" phenomenon. Minimills entered the American steel markets in the 1960s, challenging the huge integrated steel mills. They use small electric furnaces to melt down junkyard scrap metal, which allows them to be 20% more efficient than their larger competitors, and gives them the flexibility to reduce or increase output to match demand. Integrated steel mills, on the other hand, use massive blast furnaces to produce steel from raw materials, which are extremely costly to heat up and cool down, meaning they have to run continuously in order to be profitable, and cannot be adjusted to match demand.

Despite the efficiency of the minimills, their steel was only acceptable to the low-quality rebar market. Larger, integrated steel mills had no problem ceding the rebar market to the upstart minimills. Rebar profit margins were 7 percent, and only made up 4 percent of the steel produced. The integrated mills focused their efforts on higher-quality, more profitable steel products, while minimills captured the rebar market. Eventually, rebar became so cheap that minimills had to move up in the market and make higher quality steel in the form of angle iron, where margins were 12 percent. Again, the iron market collapsed, forcing the minimills to improve their products and move up into a more profitable market.[19] This process repeated itself over the course of decades, with the minimills climbing up the steel market and driving out the established firms.

Disruptive innovations don't need to take place that slowly. While it took many years for disruptors to drive competitors of out of the market in the industrial age, in the technological/information age, the process has sped up dramatically. Examples of the "big-bang disruptors" abound: Netflix began offering low-cost, streaming movies and TV shows in 2007. Within three years, Blockbuster, which had dominated the movie rental industry, was filing for bankruptcy. Free navigation apps like Waze caused the stock of navigation devices such as TomTom to nose-dive, and forced them to reinvent themselves for the world of smartphones and apps. Apple's iPhone, initially dismissed as inferior to Blackberries and Nokia, drove the two market leaders into a steep downward spiral within two years. (On the day of the iPhone's launch, Nokia's market cap was $114.5 billion. In 2013, its devices business was sold for $7.2 billion. Blackberry went from $40 billion to $4.7 billion.)[20] And the pace that online trends pick up steam looks to be accelerating.

Within a week of its release, the Pokemon Go app had been downloaded over 7 million times, breaking all previous records.[21]

Disruptive innovations are rarely identified as serious challenges by their larger competitors until they have improved enough to disrupt the market. At that point, established firms must adapt or be driven out of the market.[22] In World War I, the British and their allies understood the strategic implications of the submarine only once vital merchant shipping was disrupted. The allies were forced to adapt their methods of sailing, adopting the armed convoy, and to develop technological countermeasures against U-boats. 

But releasing one successful disruptive innovation does not guarantee long-term growth for the upstart. Better-funded rivals adapt and imitate their challengers, while other disruptors might create new markets as well. Rapid  growth rarely lasts longer than a few years. To continue to grow, companies must repeatedly rethink the market and disrupt it.[23] Germany's innovation with its use of submarines gave it an advantage for only several years; once the Allies responded, the Imperial Navy failed to innovate again to give it a new advantage. Apple, however, has succeeded in creating disruptive innovations repeatedly. Since the 1980s, the company has released its personal computer, the iPod, iTunes, the iPhone, and the iPad, which created new markets and disrupted existing ones.

VNSAs and Disruptive Innovation

Like upstart business firms, violent non-state actors (VNSAs) are looking to challenge much wealthier and more established rivals. While disruptive innovations in business are used to increase profits and even improve the world, VNSAs use them to deal with the advantages of their state adversaries on the battlefield. Like young firms, these organizations are looking to grow. They want to gain supporters and fighters, improve their arsenal, and carry out more effective attacks. In short, they look to become increasingly deadly.

As VSNAs adapt and disrupt their adversaries, conventional militaries seek to adapt in response. The two sides engage in a battle of innovation, looking for an edge in the fight to learn more effectively and remain more relevant. When these organizations succeed, they are able to dictate where the battle is fought, then move up into more "quality markets"- gaining capabilities and lethality, eventually challenging maneuvering land forces and advanced fighter jets – and sometimes drive out their larger competitors.

The primary characteristics of the disruptive innovation of these organizations, and of their adversaries, are:

Innovative conception of existing technologies – These organizations conceive of new strategic uses for existing technologies, like other upstarts. Imperial Germany turned the submarine into the key to endangering the British ability to sustain its home front, and Starbucks took coffee and reconceived of its place in the market and its meaning to customers, changing the industry permanently.

Climb-up through the market – Terrorist organizations climb-up from a cell-based, decentralized terrorist organization to a military organization with a clear C2 structure and network, training camps, and sophisticated learning processes, becoming a formidable conventional fighting force.

Late recognition of threat before rapid growth – The response of larger and more established rivals to the disruptive innovations has mirrored the reactions of businesses facing similar challenges. State militaries have failed to identify many threats until they are manifested in the loss of life, and only then the system begins to innovate rapidly. The innovations lead to growth in the way of new ideas and technologies in the new battlefields they create.

Need for repeated innovation – Upstart companies that create new markets have to keep innovating every few years if they wish to continue their rapid growth. Otherwise, their better-funded rivals adapt and manage to prevent them from capturing more of the market.

Solutions

The same business model that explains the way upstarts challenge large organizations also holds answers to the threat. Approaches with which established companies have succeeded in adapting and fending off competitors can guide conventional militaries in countering enemy attempts to bring the fighting into areas where it has the advantage.

Scholars in the business management field have come up with a number of approaches with which established companies can deal with disruptive innovation. An especially clear presentation of these possibilities appears in the Winter 2003 version of the MIT Sloan Management Review, titled "Responses to Disruptive Strategic Innovation," which offers the following approaches:[24]

Invest in the traditional market - The first option is the renewed focus on the company's existing strengths, with the goal of preventing the new challenger from capturing too much of the market. The new company doesn’t grab all the market in many instances, just a portion of it. The budget airlines that have flourished in Europe, including Ryanair and easyJet, are examples of upstarts that only managed to capture a certain share of the market. Large, traditional airlines identified the threat, and began to emphasize the comfort and luxury of their aircraft, along with other features that only they could offer and the cheaper airlines could not.

Ignore the Disruptive Innovation - The second approach is to ignore the innovation altogether, with the understanding that it is operating in an entirely different market. Large insurance companies ignored new firms that started to sell insurance online and by telephone. They understood that their own traditional services were designed for wealthy clients, something that internet insurance sales did not threaten. These new companies were fighting for lower- and middle-income customers.

Disrupt the Disruptor - Established companies can also turn an upstart's challenge on its head, and disrupt the disruptor. Just as the innovator creates a new market that disrupts its competitor, the incumbent firm can create another new market to undermine the one created by the smaller rival. Until the late 1960s, Swiss companies dominated the watch market, holding 48% of the market in 1965. Then Timex, Seiko, and other companies started offering cheaper watches with new technology and features. The Swiss share of the market nose-dived to 15% in 1980. Instead of imitating its competitors, the Swiss companies responded with their own disruption – the new Swatch watch. They did not try to match price or user-friendliness, but added a new element – style, which stole customers away from the cheaper Timex watches. Today, Swatch is the best-selling watch in the world.

Play a Double Game - The fourth solution is to do two things simultaneously – to adopt the innovation, while at the same time continuing on the familiar and established path. In response to the advent of companies selling direct insurance by telephone, the Royal Bank of Scotland created a new sub-company dedicated to the new market, while at the same time continuing with its traditional activities as a bank.

Embrace the Innovation and Amplify It - The fifth option is to adopt the innovation and scale it up. In the business world, the history of online brokerage is a classic example of this solution. The first online stock broker was the now-forgotten Net Investor, founded in Chicago in 1995. But within six years, the giant Charles Schwab had conquered the market. The company did not invent online stock trading, but instead took someone else's idea and scaled it up drastically.

Conclusion

Israel, along with other conventional powers, will continue to find itself challenged by terrorist and guerrilla organizations for the foreseeable future. The outcome of these conflicts will, to a great extent, hinge on the ability of the sides to adapt and innovate. Organizations like Hamas will keep seeking "new markets," ways to transfer the fight to realms in which the resource and experience advantage of the state actor is less relevant, it at all. Where these groups succeed, they will be able to climb-up and eventually pose a threat in more critical and traditional areas. Some conventional militaries, like established companies, will be defeated.

But disruptive innovations do not guarantee victory for the upstart. State militaries have a number of approaches with which to answer these challenges, responses that have been proven in the private sector. These solutions range from ignoring the disruption, to adopting it, and even to disrupting it back.

But no solution is possible without identifying the innovation. Unfortunately for conventional powers, they usually fail to recognize the threat- be it U-boats or tunnels- until it has already taken a toll. The framework presented here will help state militaries conceptualize and identify the threat, and provides them a range of options for responding to it.

Ideally, VNSAs will find it increasingly difficult to find new realms in which to fight, as military leaders recognize and respond to the threat in a timely fashion. Then, successful disruptive innovations will remain in the hands of entrepreneurs trying to improve the world, and not organizations looking to spread violence.

[1] Lazer Berman is Head of joint learning at the Dado Center, and is a reserve captain in the IDF’s Commando Brigade.

[2] Simon Chin, Todd Harrison, Andrew Krepinevich, "Strategy in Austerity," Center for Strategy and Budgetary Assessments, 2012, p. 47.

[3] Chin et al, "Strategy in Austerity," CSBA, 35.

[4] Mark Stille, British Dreadnought vs. German Dreadnought: Jutland 1916, Osprey, 2010, p. 10.

[5] Chin et al, "Strategy in Austerity," CSBA, xii.

[6] "Killers of the Sea",World War I in Colour. Directed by Jonathan Martin. Performed by Kenneth Branagh. Capital Entertainment, 2005 DVD.

[7] "Killers of the Sea, World War I, 2005.

[8] Scott Anthony, Clayton Christensen, and Michael Raynor, ”Six Keys to Building New Markets by Unleashing Disruptive Innovation," Harvard Management Update, March 9, 2003. http://hbswk.hbs.edu/item/six-keys- to-building-new-markets-by-unleashing-disruptive-innovation

[9] Tom McCarthy, "Encyclopedia Britannica halts print publication after 244 years," The Guardian, March 13, 2012. http://www.theguardian.com/books/2012/mar/13/encyclopedia-britannica- halts-print-publication

[10] W. Chan Kim and Renee Mauborgne, "Creating New Market Space," Harvard Business Review, January-February 1999. https://hbr.org/1999/01/creating-new-market-space

[11] Kim and Mauborgne, "Creating New Market Space,"

[12] Ibid.

[13] Ibid.

[14] Christensen, et al., ”Six Keys to Building New Markets by Unleashing Disruptive Innovation," Harvard Management Update.

[15] Ibid.

[16] Kim and Mauborgne, "Creating New Market Space," Harvard Business Review.

[17] Ibid.

[18] Constantinos Charitou and Constantinos Markides, "Responses to Disruptive Innovation," MIT Sloan Management Review, Winter 2003. http://sloanreview.mit.edu/article/responses-to-disruptive-strategic- innovation/

[19] Christensen, et al., ”Six Keys to Building New Markets by Unleashing Disruptive Innovation," Harvard Management Update.

[20] Kevin Tofel, "Blackberry: The one time smartphone leader, its fall, and the comeback that never happened," Gigaom, October 1, 2013. https://gigaom.com/2013/10/01/blackberry-the-one-time-smartphone- leader-its-fall-and-the-comeback-that-never-happened/

[21] Ibid.

[22] Ibid.

[23] Robert Glaser, Joel Polodny, Richard Sandor, Robert Shiller, "What does it take to create a market?" Yale Insights, October 23, 2007. http://insights.som.yale.edu/insights/what-does-it-take-create-market

[24] Charitou and Markides, "Responses to Disruptive Innovation," MIT Sloan Management Review. The five approaches and business examples listed here are based on this article.