New research from IESE explores “informal disruptors” – companies that operate outside legal boundaries but quickly gain consumer acceptance due to the value they provide.
Take Napster, for example. This peer-to-peer audio file-sharing service disrupted the music industry during its brief existence before bankruptcy in 2002. Despite its involvement in digital piracy, Napster set the stage for legal alternatives like Spotify to emerge.
Pirate innovators
The report investigates how these informal disruptors transition to legality by formalizing their operations. It also examines how established firms can counter the threat of these innovators through collective lobbying and consumer education.
The study highlights that rapid social and technological changes have created institutional and regulatory gaps, allowing informal firms to disrupt major industries. Managers of established firms often lack legal means to combat these unregulated newcomers. In developed countries, the informal economy accounts for an average of 17.5% of the total economy.
This situation doesn’t last forever, of course. The authors argue that informal disruptors can and should formalize to stay competitive while gaining regulatory legitimacy and legal protections.
Established firms, which often struggle to match the innovation of these disruptors, can benefit by supporting the newly formal entities, fostering a fertile environment for new ventures. Uber’s transition to a formal operator in some markets, while withdrawing from others, is a notable example of managing this shift.
The researchers believe that this phenomenon, though under-researched, has significant implications for disruptive innovation, business model development, and the informal economy as a breeding ground for new ideas and practices.
“With rapid societal and technological shifts, institutional voids are increasingly likely, enabling informal firms to generate disruption,” the authors conclude. “Such firms leverage institutional voids to disrupt incumbents through BMI based on technological change and regulation avoidance.”
