Dynamic Range Can Spark Market Disruption

Dynamic range--the difference between the highest and lowest possible values in any set--is important in music, photography, communication and power systems.

But the concept also might apply for business strategy, as when firms measure their operating or financial performance against other suppliers in the same business. Up to a point, that makes good sense.

It means something when the number of customers, profit margin or gross revenue, churn rate, market share, debt ratio or customer additions for one supplier is higher or lower than another.

In highly-stable industries, such comparisons are highly valuable, as major disruptive attacks from outside the industry are highly unlikely. In such stable settings, change from one year to the next is likely to be highly incremental.

So benchmarking--the practice of comparing one’s performance against other firms in the same industry--is useful. Typically, such measures provide an indication of how well a firm is doing, compared to its existing competitors, and in a stable industry, that is all that really matters.

Also, the difference between the worst and the best performance can, in a stable industry, be rather small. Under such conditions, the value of big investments to gain a little improvement might be questionable.

That arguably is especially true when the dynamic range is small. In other words, when the difference between the best performer and the worst is limited, any effort to improve might yield little in the way of operational results, which in turn might yield little in the way of financial results.

Quite the opposite might be true in unstable industries where the financial or operating dynamic range is large. Where the difference between the best and worst performance is quite large, and where an industry is unstable, small to moderate investments might well have important operating and financial implications.

One thinks of the impact online news sources or apps have had on legacy media, the impact of over the top Internet calling and messaging on legacy voice and messaging markets, or the impact of online retailing as cases in point.

Likewise, many predict similar disruptions to education, television and other markets that so far have been relatively immune from attack.

On the other hand, where dynamic range is small, and the difference between the best and worst performances is slight, it is fair to question the potential of any investments to alter contestant market positions, or even the possibility of disruption.

Major disruptions, one might argue, happen when a market is large and attractive, dynamic range also is large, and new ways of meeting demand are conceivable.

That also is when benchmarking is most dangerous. As logical as it is for Comcast to benchmark against Verizon or AT&T, that leaves all the contestants open to a disruptive attack by Google Fiber, which aims to fundamentally reset expectations about Internet access value and price.

Traditionally, Internet service providers, video entertainment services and now even in some cases the major social media apps have ranked poorly on measures of customer satisfaction or customer service.

A 2012 study suggested Internet service providers, video service suppliers and even mobile phone companies scored at the bottom of services customers would recommend to others, and is generally considered a measure of consumer loyalty.

There also is some reasonable dynamic range on measures of customer service, for example, which might account for the recent divergence of supplier performance. But it is a complicated matter.

The mobile business, for example, has rather narrow dynamic range, in terms of customer service. And though customer service is not the same thing as value proposition, T-Mobile US so far has been able to exploit differences in value proposition to great effect.

The danger, for legacy providers, is when an unexpected outside attack occurs. You might argue one direct impact of the Google Fiber launch has been to dramatically increase dynamic range in the Internet access market, making the distance between the best offer, and the worst, much wider.

No amount of benchmarking protects incumbents when dynamic range suddenly increases. And that is true whether an industry ranks near the top, or near the bottom, of consumer experience studies.

An old adage in the cable TV business is that “we give customers a chance to think about canceling every 30 days, when we send the bill.”

Intangible products always are hard to value, and it might simply be that consumers tend to value any service less favorably than tangible products they also buy. Think “iPhone” as compared to “Internet access” or “mobile service” without which the iPhone has little value.

But in any industry, the prevailing standards are susceptible to disruption. And that is what has changed in the U.S. Internet access industry. Dynamic range has been disrupted.

And that is where benchmarking can be a problem. It is true that dissatisfied consumers will continue to use products for which there is perceived to be little differentiation or alternatives.

Airlines are the best case in point. Airlines virtually always rank near the bottom of the ACSI rankings. And yet people still fly.

But that leaves room for a disruptive attack by a contestant that performs much better than benchmarking would suggest is necessary.

So how much better could some contestants do, and what does it take for them to pull away from the competition? Google Fiber provides one answer: disrupt dynamic range.