Harvard Business Publishing

When a company talks about trading off pure performance in the name of lower prices, disruptive alarm bells start ringing. After all, companies like Dell Computer, Southwest Airlines, Wal-Mart, Charles Schwab, and Nucor have prospered by following this kind of low-cost disruptive strategy.

A startup company called LifeSize Communications hopes to be next on the list. As described in a recent BusinessWeek article, the company offers reasonably high-quality videoconferencing over the Internet at prices that are sharply below emerging market leaders Cisco Systems and Hewlett-Packard. LifeSize's solutions range from $5,000 to $40,000, compared to as much as $300,000 for Cisco's solutions.

It's reasonable to predict that we'll see an increasing number of similar low-cost strategies as economic woes continue and start-up companies seek to find the opportunity in economic turmoil. Therefore, it's natural to ask: How can you tell if a low-cost disruptor is going to succeed?

Our analysis of companies that have successfully and unsuccessfully followed low-cost disruptive strategies suggest that for LifeSize to succeed, it must be able to answer yes to three key questions:

1. Does it cross the "good enough" threshold? Stripping out performance to lower costs is not that difficult. But stripping out too much performance can leave a company with a product that actually under-delivers against a customer's needs. Consider a free, but inaudible, mobile phone, or a $200 laptop computer with 5 minutes of battery life. You must cross acceptable performance thresholds before price even enters into the equation.
2. Does the company's product / performance bundle run counter to the market leader's natural improvement trajectory? Staking out a low cost position isn't all that meaningful if a powerful competitor quickly crashes your party. Cisco has been quite clear in its desire to lower its price points to appeal to broader market groups. If natural product improvements lead to Cisco introducing a similarly featured, similarly priced product, LifeSize will be in trouble.
3. Does the company have a sustainable cost advantage? Lower input costs do not immediately translate into market success. Rather, low-cost disruptors have the greatest chance of success when they change the model in a way that makes incumbent success difficult. For example, Nucor didn't just offer lower priced steel. It used a completely different production technology (minimills) that allowed it to earn attractive profits at low price points. These kinds of production or business model advantages are much more difficult to replicate than particular features or functionality bundles.

Of course, the potentially massive videoconferencing market could support multiple players. But if LifeSize doesn't meet the three conditions detailed above, its chances of long-term success are quite low.