Entrepreneurs don’t disrupt, they expand

Upheaval should be a side-effect, not the main game.

Jack Dorsey is the CEO and co-founder of Twitter and payments company Square. Picture: Aaron Francis

Copying is perhaps the strongest force in the world. We are so predisposed to copy that it infiltrates our most innovative institutions, even the self-proclaimed hub of innovative thinking, Silicon Valley. Of course, those of us in Silicon Valley don’t call ourselves copycats; we call ourselves disrupters.

When Harvard Business School professor Clayton Christensen first popularised the disruption concept back in 1997, the idea was novel and interesting. But what Christensen originally called “disruptive innovation” has now been shortened to just “disruption”, and the oversimplification is profound.

I hear pitches every month from start-ups wishing to destroy the economics of some existing industry. Hidden — frequently well hidden — inside these pitches is the implication that the invisible hand of the economy will reallocate resources so that we will all be better off and enjoy a more efficient world after the carnage. It doesn’t always happen that way.

Jack Dorsey and I founded Square back in 2009 with the initial goal of expanding credit card acceptance for small businesses. Square merchants represent a healthy fraction of all US businesses accepting credit cards, but to existing merchants and their credit card providers Square caused remarkably little, if any, disruption. Why? Because instead of disrupting the market we expanded it.

When we entered the market, Heartland Payment Systems was teetering on the edge of bankruptcy, having barely survived the largest data breach in history. A decade later Heartland is still in business, along with every other major credit card processing firm that existed when we started. True, some of these firms merged or were bought out, but that cycle has been happening in the credit card industry since its beginning. In some ways we compete directly with PayPal, but PayPal is an order of magnitude larger than it was when we started. At the same time, Square has increased the number of credit card accepting merchants by roughly two million in 10 years.

Square co-founder Jim McKelvey

Our path of disruption has not been one of destruction. This surprised me, so I looked back on some of the great entrepreneurs of history to see whether their paths had been destructive ones or expansive ones. I learned that the vast majority of entrepreneurial ventures did not steal their customers from any established business but, rather, brought new people into a market, as we did.

When Southwest Airlines was beginning, the prevailing wisdom was that only the well-off wanted to fly places. As the first low-cost airline, Southwest invited regular people into the skies and found huge success. Herb Kelleher, a founder of the company and later its chief executive, proudly told me once that Southwest didn’t drive other airlines out of business but increased the total number of travellers.

“When we went into the Dallas-Houston market in ’71, it was the 34th largest market in the United States. We were there one year and it grew to be the fifth largest,” he said. “So in other words, we were just taking all of these people that had never flown and putting them on aeroplanes for the first time. But the remarkable thing is that all the other carriers increased their traffic on that route as well. We weren’t taking business from anyone, we were growing the market.” And the effect was not just in the Dallas-Houston market. Herb told me, “We come into new cities and traffic increases by 272 per cent in the first year.”

Of course TWA, Pan Am, Braniff, United, Continental, Northwest, US Airways and hundreds of other US carriers have plummeted into bankruptcy. But Southwest didn’t have anything to do with this; deregulation did. This explains why international carriers such as Pan Am that never directly competed with Southwest also failed.

Another famous disrupter, Ikea, also follows this pattern. In 2015 Ikea opened its first store in South Korea. Instead of gutting the South Korean furniture market, Ikea added to it. The two local South Korean furniture makers, Hanssem and Iloom, both saw increases in their sales — some as high as 10 per cent — and the entire South Korean furniture market, which had been flat for two decades, saw an unprecedented 7 per cent growth the year Ikea arrived. Was there disruption? Certainly, a lot of Korean furniture companies have disappeared; nearly half ceased operations between 2011 and 2016. But this downfall began four years before Ikea entered the market, so it’s hard to attribute all change to the Swedish giant.

Is disruption bad? Not by itself. But disruption has also never been the focus of good entrepreneurs. The focus of the entrepreneur should be the people who cannot get paid, or travel, or furnish their home. The entrepreneurs who succeed and rise to the top of their industries set out to build, not destroy. If disruption occurs, it is merely a side effect. The focus of the entrepreneur is on the horizon beyond the wall. If we glance at the system, it is neither to copy it nor to destroy it but simply to see how much more can be done.

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Jim McKelvey is a co-founder of Square and the author of The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time

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Copyright Harvard Business Review 2020/Distributed by New York Times Syndicate