Disruptive Innovation : Management Funda; July'08

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What is it?

The term ‘Disruptive Innovation’ first appeared in the 1997 best-seller ‘The Innovator’s Dilemma’ by Harvard Business School professor Clayton Christensen. Disruptive innovation is an innovation that improves a product or service in ways that the market does not expect. It disrupts the market and forces other competitor companies to radically change their business or face serious consequences. It can be of two types:-

  • Low-end : This is typically cheaper or simpler to use version of an existing product that targets low end customers. 
  • New market disruption: This addresses an entirely new set of customers in the same product space.

When a Disruptive innovation is made, usually by a new entrant, an established company, instead of retaining its share in a not so profitable segment, tends to move up-market and focus on its more profitable customers. Eventually the disruptive innovation meets the demands of the most profitable segment and drives the established company out of the market. A good example is producers of downloadable Digital Media disrupting companies producing CDs. File sharing technologies, were initially free. Then came inexpensive online retailers such as the iTunes music store. This low end disruption eventually undermined the sales of physical CDs. Similarly, Google.com has disrupted online advertising and created a new revenue stream by placing highly targeted text ads besides the search results of its search engine. In contrast a Sustaining Innovation seldom causes the downfall of established companies. It improves the performance of existing products along the dimensions that mainstream customers value. For example Contact Lenses as an improvement over Eye Glasses.

Examples of Disruptive Innovations

Disruptive innovations can happen in a process or a business model too. Dell’s adoption of just-in-time delivery for its computers’ electronics parts, substantially cutting warehousing and depreciation costs is a process disruptive innovation. Disruptive innovations have been demonstrated by no frills airlines with their low-cost business model allowing them to strongly compete with established airlines. So how does one know one is making a disruptive innovation?

Determining if an innovative idea is Disruptive

Step 1: Firstly explore whether the idea can become a new-market disruption by determining…

  • Whether there is a large population who historically has not had the money, equipment, or skill to use it themselves and as a result went without it altogether or paid someone with more expertise to do it for them?
  • Whether customers need to go to an inconvenient, centralized location to use the product or service?

Step 2: Then explore the potential for a low-end disruption by determining…

  • Whether customers at the market low-end would be happy to purchase a product with less, but good enough performance if they could get it at a lower price?
  • Whether a business model can be created that enables to earn attractive profits at the discount prices required to win the business of the over served customers at the low end?

Step 3: If the idea passes the new-market or low-end disruption test, finally determine…

  • Whether the innovation is disruptive to all of the important existing players in the industry? If it seems to be sustaining to one or more of them, then that player has an edge, and the entrant is unlikely to win.

But what if it is not your company but your competition that is making the disruption, how will you deal with that

Dealing with Disruption from competition

Let’s examine the reasons companies fail to counter competition from disruptors effectively. They are:-

  • Tendency to listen to and focus too much on its main customers failing to recognize potentially disruptive innovations that serve only marginal customers.
  • Not taking Disruptive products seriously since they compare badly with existing products.
  • Not being interested in deceptively small markets typically available for a disruptive innovation compared to the market for the established product.
  • Even if a disruptive innovation is recognized, reluctance to take advantage of it, since it would involve competing with one’s existing and more profitable technological approach.

In order to address these problems companies can adopt the following two approaches:-

  • Chase the market: Create small independent business unit to cater to the emerging market and at the same time continue to push technological demands in your core market so that performance stays above what disruptive technologies can achieve. Quantum Corporation, a leading producer of 8-inch drives was not sure what applications 3.5-inch drives could have in the computer industry. Instead of shelving the project they created a spin-off unit to develop 3.5.inch drives. After 10 years the 8-inch market had completely disappeared while their small venture had grown to become the world’s largest disk drive producer.
  • Find new market based on one’s expertise: When it became clear that digital imagery would forever change the photography market, Fuji not only began producing digital imagery products but also identified numerous opportunities for using its photographic chemicals knowledge.  

Conclusion

To sustain and grow a business it is imperative that one not only makes disruptive innovations but also detects them early enough in one's competitive landscape. So, next time you brainstorm on generating revenues for your company think of how your competition is possibly disrupting your business or better still how you can innovatively disrupt your competition. And needless to say this will be one disruption that your company is going to welcome!

Reference

  • Disruptive technology’, http://en.wikipedia.org/wiki/Disruptive_technology
    Scocco, D, ‘Disruptive Innovation’, October 04, 2006, http://innovationzen.com/blog/2006/10/04/disruptive-innovation/.
  • ‘Key Concepts - Disruptive Innovation’, http://www.claytonchristensen.com/disruptive_innovation.html.
  • Osterwalder, A, ‘Designing Disruptive Innovations’, November 28, 2005,http://business-model-design.blogspot.com/2005/11/designing-disruptive-innovations.html.
  • Baumgartner, J, ‘The best strategies for dealing with disruptive innovation’, 8/29/2008, http://www.innovationtools.com/Articles/EnterpriseDetails.asp?a=340
  • Patrick, ‘What is Disruptive Innovation?’, 1/08/2005, http://www.brinq.com/workshop/archives/2005/01/08/what-is-disruptive-innovation/