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What is disruptive innovation?
How does David pick off Goliath?
Why has the “small guy” picked off the well established “market and in some cases Global giant” and succeeded where the odds were stacked so heavily against them?
How can you understand the theory and implement the practice?
For the last 100 years, we have seen more innovation than in the past 1000 years.
Innovation as such, grows at an exponential rate.
Not only do we need to innovate with our products and services but we also need to innovate with technology in order to keep up with world trends and maintain our profit share of the market we want to play in.
Disruptive influence doesn’t kick in just because a cheaper option has entered the market.
The pay off comes where the innovation satisfies the mainstream target customers expectation of quality, better than how they have been satisfied by existing supply chains up to now.
- accessibility to new application and customers
- opening up a new horizon of opportunities
- time saving
All part of the shift for disruptive influence to move the mainstream customers across to the new service provider.
Disruptive influence will continue to evolve as a defined strategy, to be considered and factored into the established market dominators and for organisations launching new products or services, using a business plan as their compass as opposed to their product or service.
Perhaps we will see disruptive innovation with more frequency and less shock, but with today’s speed of innovative, I think we will continue to be shocked.
“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price.
Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.
Disruptive innovations originate in low-end or new-market footholds.
Disruptive innovations are made possible because they get started in two types of markets that incumbents overlook. Low-end footholds exist because incumbents typically try to provide their most profitable and demanding customers with ever-improving products and services, and they pay less attention to less-demanding customers. In fact, incumbents’ offerings often overshoot the performance requirements of the latter. This opens the door to a disrupter focused (at first) on providing those low-end customers with a “good enough” product.
In the case of new-market footholds, disrupters create a market where none existed. Put simply, they find a way to turn non-consumers into consumers. For example, in the early days of photocopying technology, Xerox targeted large corporations and charged high prices in order to provide the performance that those customers required. School librarians, bowling-league operators, and other small customers, priced out of the market, made do with carbon paper or mimeograph machines. Then in the late 1970s, new challengers introduced personal copiers, offering an affordable solution to individuals and small organizations—and a new market was created. From this relatively modest beginning, personal photocopier makers gradually built a major position in the mainstream photocopier market that Xerox valued.
A disruptive innovation, by definition, starts from one of those two footholds.
1. Disruption is a process.
The term “disruptive innovation” is misleading when it is used to refer to a product or service at one fixed point, rather than to the evolution of that product or service over time. The first minicomputers were disruptive not merely because they were low-end upstarts when they appeared on the scene, nor because they were later heralded as superior to mainframes in many markets; they were disruptive by virtue of the path they followed from the fringe to the mainstream.
Most every innovation—disruptive or not—begins life as a small-scale experiment. Disrupters tend to focus on getting the business model, rather than merely the product, just right. When they succeed, their movement from the fringe (the low end of the market or a new market) to the mainstream erodes first the incumbents’ market share and then their profitability. This process can take time, and incumbents can get quite creative in the defence of their established franchises. For example, more than 50 years after the first discount department store was opened, mainstream retail companies still operate their traditional department-store formats.
Complete substitution, if it comes at all, may take decades, because the incremental profit from staying with the old model for one more year trumps proposals to write off the assets in one stroke.
The fact that disruption can take time helps to explain why incumbents frequently overlook disrupters. For example, when Netflix launched, in 1997, its initial service wasn’t appealing to most of Blockbuster’s customers, who rented movies (typically new releases) on impulse. Netflix had an exclusively online interface and a large inventory of movies, but delivery through the U.S. mail meant selections took several days to arrive. The service appealed to only a few customer groups—movie buffs who didn’t care about new releases, early adopters of DVD players, and online shoppers. If Netflix had not eventually begun to serve a broader segment of the market, Blockbuster’s decision to ignore this competitor would not have been a strategic blunder: The two companies filled very different needs for their (different) customers.
Because disruption can take time, incumbents frequently overlook disrupters.
However, as new technologies allowed Netflix to shift to streaming video over the internet, the company did eventually become appealing to Blockbuster’s core customers, offering a wider selection of content with an all-you-can-watch, on-demand, low-price, high-quality, highly convenient approach. And it got there via a classically disruptive path. If Netflix (like Uber) had begun by launching a service targeted at a larger competitor’s core market, Blockbuster’s response would very likely have been a vigorous and perhaps successful counterattack. But failing to respond effectively to the trajectory that Netflix was on led Blockbuster to collapse.
2. Disrupters often build business models that are very different from those of the established businesses.
One high-profile example of using an innovative business model to effect a disruption is Apple’s iPhone. The product that Apple debuted in 2007 was a sustaining innovation in the smartphone market: It targeted the same customers coveted by incumbents, and its initial success is likely explained by product superiority. The iPhone’s subsequent growth is better explained by disruption—not of other smartphones but of the laptop as the primary access point to the internet. This was achieved not merely through product improvements but also through the introduction of a new business model. By building a facilitated network connecting application developers with phone users, Apple changed the game. The iPhone created a new market for internet access and eventually was able to challenge laptops as mainstream users’ device of choice for going online.
3. Some disruptive innovations succeed; some don’t.
A third common mistake is to focus on the results achieved—to claim that a company is disruptive by virtue of its success. But success is not built into the definition of disruption: Not every disruptive path leads to a triumph, and not every triumphant newcomer follows a disruptive path.
For example, any number of internet-based retailers pursued disruptive paths in the late 1990s, but only a small number prospered. The failures are not evidence of the deficiencies of disruption theory; they are simply boundary markers for the theory’s application. The theory says very little about how to win in the foothold market, other than to play the odds and avoid head-on competition with better-resourced incumbents.
If we call every business success a “disruption,” then companies that rise to the top in very different ways will be seen as sources of insight into a common strategy for succeeding. This creates a danger: Managers may mix and match behaviours that are very likely inconsistent with one another and thus unlikely to yield the hoped-for result. For example, both Uber and Apple’s iPhone owe their success to a platform-based model: Uber digitally connects riders with drivers; the iPhone connects app developers with phone users. But Uber, true to its nature as a sustaining innovation, has focused on expanding its network and functionality in ways that make it better than traditional taxis. Apple, on the other hand, has followed a disruptive path by building its ecosystem of app developers so as to make the iPhone more like a personal computer.
4. The mantra “Disrupt or be disrupted” can misguide us.
Incumbent companies do need to respond to disruption if it’s occurring, but they should not overreact by dismantling a still-profitable business. Instead, they should continue to strengthen relationships with core customers by investing in sustaining innovations. In addition, they can create a new division focused solely on the growth opportunities that arise from the disruption. Our research suggests that the success of this new enterprise depends in large part on keeping it separate from the core business. That means that for some time, incumbents will find themselves managing two very different operations.
Of course, as the disruptive stand-alone business grows, it may eventually steal customers from the core. But corporate leaders should not try to solve this problem before it is a problem.
What a Disruptive Innovation Lens Can Reveal
It is rare that a technology or product is inherently sustaining or disruptive. And when new technology is developed, disruption theory does not dictate what managers should do. Instead it helps them make a strategic choice between taking a sustaining path and taking a disruptive one.
The theory of disruption predicts that when an entrant tackles incumbent competitors head-on, offering better products or services, the incumbents will accelerate their innovations to defend their business. Either they will beat back the entrant by offering even better services or products at comparable prices, or one of them will acquire the entrant. The data supports the theory’s prediction that entrants pursuing a sustaining strategy for a stand-alone business will face steep odds: In Christensen’s seminal study of the disk drive industry, only 6% of sustaining entrants managed to succeed.
When new technology arises, disruption theory can guide strategic choices.
How Our Thinking About Disruption Has Developed
Initially, the theory of disruptive innovation was simply a statement about correlation.
First, researchers realized that a company’s propensity for strategic change is profoundly affected by the interests of customers who provide the resources the firm needs to survive. In other words, incumbents (sensibly) listen to their existing customers and concentrate on sustaining innovations as a result.
Researchers then arrived at a second insight: Incumbents’ focus on their existing customers becomes institutionalized in internal processes that make it difficult for even senior managers to shift investment to disruptive innovations. For example, interviews with managers of established companies in the disk drive industry revealed that resource allocation processes prioritized sustaining innovations (which had high margins and targeted large markets with well-known customers) while inadvertently starving disruptive innovations (meant for smaller markets with poorly defined customers).
Smart disrupters improve their products and drive upmarket.
Those two insights helped explain why incumbents rarely responded effectively (if at all) to disruptive innovations, but not why entrants eventually moved upmarket to challenge incumbents, over and over again. It turns out, however, that the same forces leading incumbents to ignore early-stage disruptions also compel disrupters ultimately to disrupt.
What we’ve realized is that, very often, low-end and new-market footholds are populated not by a lone would-be disrupter, but by several comparable entrant firms whose products are simpler, more convenient, or less costly than those sold by incumbents. The incumbents provide a de facto price umbrella, allowing many of the entrants to enjoy profitable growth within the foothold market. But that lasts only for a time: As incumbents (rationally, but mistakenly) cede the foothold market, they effectively remove the price umbrella, and price-based competition among the entrants reigns. Some entrants will founder, but the smart ones—the true disrupters—will improve their products and drive upmarket, where, once again, they can compete at the margin against higher-cost established competitors. The disruptive effect drives every competitor—incumbent and entrant—upmarket.
With those explanations in hand, the theory of disruptive innovation went beyond simple correlation to a theory of causation as well. The key elements of that theory have been tested and validated through studies of many industries, including retail, computers, printing, motorcycles, cars, semiconductors, cardiovascular surgery, management education, financial services, management consulting, cameras, communications, and computer-aided design software. Some content from Harvard Business Review
How to stay up with and in front of the game:
- Set budgets for your business, including budget your time
- Allocate time and funds for marketing
- Allocate time and funds for marketing
- Conduct SWOT analysis of your marketing and your industry, regularly
- Stay on top of the innovations that are taking place
- Research your innovation opportunities with your existing and potential markets
- keep your eye on others doing the same
- Factor innovations in technology, communication, IT, infrastructure and delivery
- Survey your teams and your clients regularly
If you would like to learn how to innovate with the potential of doing it using the disrupt model, get unstuck from a situation in your business, but you don’t know where to start, we can help!
At ABC Business Improvement we will organise a meeting where you will;
– Uncover the challenges you are facing
– Define a path to overcome them
– Create a first step plan to move forward
– Gain a sense of excitement and relief, knowing where you are going
Be one of the first 5 to contact us this week and we will organise a ‘innovate and disrupt’ strategy session today…
If you are ready to be challenged and you are sick of being stuck in your current predicament, I implore you to take up this offer.