Disruptive innovation

From CEOpedia | Management online

Disruptive innovation is an innovation that creates a new market and eventually disrupts an existing market, displacing established market-leading firms and products. It is not driven by the market, but it is a completely different way of delivering a product that consumers are used to. The term was defined and first analyzed by the American scholar Clayton M. Christensen and his collaborators beginning in 1995 (Rahman Airini et al. 2017).

Incumbent vs Entrants

Disruption describes a process whereby a smaller company with fewer resources (Entrants) is able to successfully challenge established business (Incumbents). As incumbents focus on improving their products and services for their most demanding 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 lower price. Incumbents, pursuing higher profitability in more-demanding segments, tend not to respond strongly. 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 (Christensen, C. M. et al. 2015).

Sustaining vs Disruptive

Fig. 1. Disruptive innovation model. Source: Bower, J. L., & Christensen, C. M.

Disruption theory differentiates "disruptive innovations" from what are called "sustaining innovations." (Bower, J. L., & Christensen, C. M. 1995). The latter targets demanding high-end customers, make good products better in the eyes of an incumbent's existing customers: the fifth blade in a razor, the clearer TV picture, better mobile phone reception. These improvements can be incremental advances, year-by-year improvements or major breakthroughs, however it doesn't matter how technologically difficult the innovation is, this strategy enables firms to sell more products to their most profitable customers and established competitors almost always win because they have the resources to do it (Christensen, C.M. 2013). Disruptive innovations, on the other hand, don't attempt to bring better products to established customers in existing markets.

Rather, they disrupt and redefine the market by introducing products and services that are not as good as currently available products. So that, they are initially considered inferior by most of an incumbent's customers. But disruptive innovations offer other benefits, they are simpler, more convenient, and less expensive products that appeal to new or less-demanding customers (Christensen C.M. 2019). Typically, customers are not willing to switch to the new offering merely because it is less expensive, instead, they wait until its quality rises enough to satisfy them. Once it is happened, they adopt the new product and accept its lower price.

Disruptive innovation model

This diagram contrasts product performance trajectories represented by the red lines showing how products or services improve over time, with customer demand trajectories, that is a rate of improvement that customers can utilize or absorb represented by the blue lines showing customers’ willingness to pay for performance. As incumbent companies introduce higher-quality products or services to satisfy the high end of the market where profitability is highest, they overshoot the needs of low-end customers and many mainstream customers because producing products or services that are actually too sophisticated, too expensive, and too complicated for many customers in their market.

This leaves an opening for entrants to find footholds in the less-profitable segments that incumbents are neglecting. Entrants on a disruptive technology improve the performance of their offerings and move upmarket challenging the incumbents. So, when a small business manages to take root in the market and crosses a figurative line between low-end and mainstream market, we can state that disruption has occurred. When it is good enough, it will be accepted by customers and it replaces the incumbent's product (Christensen C. M. et al. 2015).

Examples of Disruptive innovation

  • Digital streaming services: Digital streaming services, such as Netflix, Hulu, and Amazon Prime, have disrupted the traditional cable and satellite TV industry by providing consumers with a cheaper and more convenient way to watch their favorite shows and movies.
  • Ride-hailing apps: Ride-hailing apps, such as Uber and Lyft, have disrupted the traditional taxi and car service industry by providing consumers with a more convenient and often cheaper way to get from point A to point B.
  • Online retail: Online retail, such as Amazon, has disrupted the traditional retail industry by providing consumers with a more convenient and often cheaper way to purchase goods.
  • Cloud computing: Cloud computing, such as Microsoft Azure, has disrupted the traditional IT industry by providing businesses with a more efficient and cost-effective way to store and manage their data.

Advantages of Disruptive innovation

Disruptive innovations bring a wide variety of advantages to the market, including:

  • Increased competition: Disruptive innovations can create a new competitive landscape, forcing incumbent firms to develop more innovative products and services to remain competitive.
  • Lower prices: Disruptive innovations often come with lower prices than existing products, providing more value to customers and increasing market penetration.
  • Increased efficiency: Disruptive innovations can also increase efficiency and reduce costs, making them attractive to businesses.
  • More options: By introducing new products and services, disruptive innovations can provide customers with more options, allowing them to find the best fit for their needs.
  • Increased innovation: Disruptive innovations can also spur the development of new products, services, and business models, creating a more dynamic market.

Limitations of Disruptive innovation

  • Disruptive innovation can be difficult to implement, as it often requires companies to make radical changes to their business models to accommodate new technology or customer needs.
  • Disruptive innovations can be costly, as they require substantial investments in research and development, as well as marketing and sales efforts.
  • Disruptive innovations can be risky, as they involve new technologies and processes that could fail or be difficult to implement.
  • Disruptive innovations can be difficult to understand and measure, as they involve complex dynamics and processes that are difficult to track and analyze.
  • Disruptive innovations can be difficult to sustain, as they require companies to continuously innovate and adjust to changing customer needs and market conditions.

Other approaches related to Disruptive innovation

  • Open innovation: a term used to describe the process of companies collaborating with external partners to develop innovative products and services. It is a way to create value by leveraging external knowledge, resources and capabilities.
  • Blue ocean strategy: a strategic approach that focuses on creating uncontested market space ("blue oceans") and making competition irrelevant. It is the opposite of the red ocean strategy, which focuses on competing in existing markets.
  • Lean innovation: a term used to describe an approach to product development that is focused on fast, low-cost experimentation and rapid iterations. It is an alternative to the traditional, slower product development process.
  • Design thinking: an iterative process of problem solving that combines creative and analytical thinking to identify customer needs and create solutions that are both innovative and valuable.

In conclusion, disruptive innovation is an approach that creates new markets and displaces existing ones, while open innovation, blue ocean strategy, lean innovation and design thinking are other approaches to creating innovative products and services that are valuable to customers.


Disruptive innovation — recommended articles
Retail innovation — Innovation process — Imitator strategy — Disruptive business model — Potential product — Radical innovation — Competitive product — Low cost strategy — Dominant design

References

Author: Alex Chiesa

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