Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
Aspect
Explanation
Concept Overview
Disruptive Innovation is a theory developed by Clayton Christensen that describes a process in which a smaller, often overlooked company with a simpler or lower-cost product or service gradually disrupts and displaces established market leaders. This theory challenges the conventional belief that market leaders always maintain their dominance. Instead, it suggests that disruptive innovations can create entirely new markets or change the dynamics of existing ones.
Characteristics
Disruptive innovations often share specific characteristics: 1. Simplicity: They are typically simpler and more accessible than existing solutions. 2. Cost-Effectiveness: They offer a cost advantage, making them attractive to underserved or non-consumers. 3. Niche Focus: They initially target niche or underserved markets. 4. Performance Trajectory: Over time, disruptive innovations improve in performance, challenging incumbent products. 5. Market Reorientation: They may create new markets or shift the focus of existing ones.
Examples
Notable examples of disruptive innovations include: 1. Personal Computers: PCs disrupted the mainframe computer market by offering affordable computing power. 2. Digital Cameras: Digital cameras disrupted traditional film photography. 3. Online Streaming: Streaming services disrupted the DVD rental and cable TV industries. 4. Electric Vehicles: EVs are disrupting the traditional automotive industry. 5. Mobile Phones: Mobile phones disrupted landline telephony and have evolved into smartphones, changing various industries.
Implications
Disruptive innovations have significant implications: 1. Market Upheaval: They can lead to market disruptions, causing established companies to lose market share or even go out of business. 2. Business Model Innovation: Companies may need to adapt their business models to remain competitive. 3. Competitive Advantage: Embracing disruptive innovations can provide a competitive advantage. 4. Continuous Improvement: Incumbents must focus on innovation to stay ahead of potential disruptors. 5. New Opportunities: Disruptive innovations can create new opportunities for entrepreneurs and startups.
Challenges
Challenges in dealing with disruptive innovation include recognizing it early, balancing investments in existing products and new innovations, and overcoming resistance to change within established organizations. Companies may also struggle to disrupt their own successful products, as it can involve cannibalizing existing revenue streams.
Table of Contents
Understanding disruptive innovation
Christensen first introduced the theory behind disruptive innovation in his 1997 book The Innovator’s Dilemma and a follow-up entitled The Innovator’s Solution.
In the books, he posited that there were two types of technologies businesses dealt with.
Sustainable technologies enabled a business to improve its performance over a predictable timeframe and remain competitive.
Disruptive technologies, on the other hand, were less predictable and potentially more devastating to industry competitiveness.
Disruptive innovation typically occurs when a product or service establishes itself at the bottom of a market.
This process is facilitated by the product being less expensive and thus more accessible than competitor products, which tend to be expensive, sophisticated, and accessible to relatively few consumers.
It’s important to note that disruptive innovations are not breakthrough technologies that turn good products into great products.
Instead, they are simply innovations that make products or services more accessible and affordable to a larger percentage of the population.
Why does disruptive innovation occur?
Disruptive innovation occurs because most companies tend to innovate faster than their customers’ needs evolve.
This causes a situation where the end product or service is too sophisticated, complex, or expensive for the majority of consumers in a target audience.
Historically, innovation has been associated with success as it helps the business corner the higher end of the market with the most profitable products.
But this strategy leaves room at the bottom end of the market for a disruptive innovator to enter and potentially become a threat.
Disruptive innovators tend to operate in markets characterized by lower gross margins, smaller target markets, and simpler products and services.
These traits make the bottom end of the market unprofitable and undesirable for firms that have already developed sustaining innovations.
What are the ingredients for disruptive innovation?
In the previous section, we talked about the conditions necessary for a new company to enter the bottom end of the market.
Let’s now explain how this new company can become disruptive by looking at the required ingredients:
Enabling technology
Or technology that can significantly change or improve the way consumers do things.
The speed with which disruptive innovation can occur is a function of how quickly enabling technology is developed and improved upon for mass uptake.
Having said that, it should be noted that the speed of disruption is not the sole determinant of success.
Coherent value network
For disruptive innovation to occur, the network of suppliers, distributors, and partners must also benefit from the enabling technology.
It is not enough for consumers alone to benefit.
Innovative business model
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
This is simply a business model that targets consumers at the bottom end of the market with innovative products.
Since the model is characterized by low-profit margins and simpler product design, the solutions should be easy to use and economical to produce.
Examples of disruptive innovation
There are countless examples of disruptive innovation in business. In this section, we’ll take a look at some of the more interesting case studies.
Academia
Encyclopedia Britannica was a market leader in encyclopedias and had been printed for 244 years until the last copy was released in 2012.
Encyclopedia Britannica, Inc.’s publisher had cornered the high end of the market, with each edition selling for over $1000.
However, print encyclopedias were quickly usurped by free, digital versions such as Wikipedia.
Wikipedia offered an encyclopedia of unlimited size that was portable and updated constantly.
Wikipedia is sustained by the Wikimedia Foundation, which is supported mostly by donations and contributions, which in 2021 amounted to over $153 million. Wikipedia is among the most popular websites on earth, and it is, as of these days, an open, non-profit project, on which other twelve projects have been developed.
With its vast bulk and update cycles lasting more than a year, Encyclopedia Britannica was ultimately displaced by a disruptive innovator.
Media entertainment
At its peak, video and game rental company Blockbuster operated more than 9,000 stores and employed approximately 84,300 people.
Blockbuster was an American movie and video game rental chain. The company went from industry leader to filing for bankruptcy with $1 billion in debt in less than a decade.
Blockbuster relied on late fees to drive a high proportion of revenue. This strategy proved uncompetitive after Netflix offered fee-free movie rentals by mail. Blockbuster lost significant market share to Netflix in the ensuing years and experienced a decline in profit after abolishing late fees in an attempt to remain competitive.
Blockbuster’s demise is mostly due to an inability to innovate. Although passing on the offer to purchase Netflix is noteworthy, the company failed because of a myopic focus on its outdated rental franchise model.
Though video and game rentals were relatively cheap, increasing data speeds and bandwidth instituted a general shift toward video streaming.
Blockbuster was displaced by smaller players such as Netflix, who offered a cheaper and more convenient alternative.
Today, the company owns the rights to more than 13,000 titles, with prices starting at a mere $8.99/month.
Photography
Film companies such as Kodak enjoyed market dominance in the photography industry for decades.
Kodak is an American photography product and service company founded in 1892 by George Eastman and Henry A. Strong. After dominating the photographic film industry for decades, the company filed for bankruptcy in 2012.
Kodak was not ignorant of digital camera technology. But it did fail at various stages to commit to digital products entirely despite overwhelming evidence that the technology would prove profitable.
Kodak was also the victim of the changing retail landscape and consumer sentiment toward foreign products in the United States. Blind in its devotion to printing, it also missed an opportunity to create a Facebook-style photo-sharing website three years before Facebook itself was conceived.
The company’s photographic film products were synonymous with quality and professionalism, but Kodak was eventually displaced by digital camera manufacturers such as Canon, Sony, Pentax, and Nikon.
Digital photography disrupted film photography because it was more convenient and required less expertise to develop photographs.
Though digital cameras were relatively expensive when they first appeared, the number of digital photographs a consumer could take was not limited by the cost or restrictiveness of film.
Transportation
To date, Concorde is the only supersonic jet that has entered into commercial production.
High operating costs and limited seat capacity meant Concorde tickets were mostly purchased by the wealthy or super-wealthy.
Concorde was a supersonic passenger airliner jointly developed and manufactured by Sud Aviation and the British Aircraft Corporation (BAC). After more than three decades in the sky, the entire fleet was retired in 2003.
Concorde was not a commercially viable aircraft. The presence of a sonic boom limited its routes to those occurring over the open ocean. It was also heavy on fuel which made Air France and British Airways vulnerable to price hikes.
Concorde’s fate was sealed by a fatal crash in 2000 and the September 11 terrorist attacks the following year. A collapse in the first-class market and consumer avoidance of air travel exposed the aircraft’s lack of commercial viability.
Concorde services ended in 2003 due to high operating costs and a high-profile accident.
However, the rising affordability of small, private jets was also a contributing factor.
Though these jets did not travel at supersonic speed, their quieter operation meant they could fly routes off-limits to the extremely loud Concorde.
Many private jet owners also enjoyed flying between airports without having to move through the terminal with hundreds of commercial passengers.
Key takeaways
Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances. The term was popularised by American academic and business consultant Clayton M. Christensen.
Disruptive innovation occurs since most companies tend to innovate faster than their customers’ needs evolve. Innovation typically favors products or services that are too sophisticated, complex, or expensive for the target audience.
For a market entrant to become a disruptive innovator, there are three crucial ingredients. Technology with the capacity to significantly improve the way consumers do things must first exist. This technology must also benefit suppliers and contractors. Lastly, there must also be a business model that targets consumers at the bottom end of the market with innovative products.
Key Highlights
Definition and Origin: Disruptive innovation, coined by Clayton M. Christensen, refers to a process where a product or service starts at the bottom of the market and eventually displaces established competitors. Christensen is recognized as a significant management thinker.
Types of Technologies: Christensen identified two types of technologies: sustainable and disruptive. Sustainable technologies improve performance predictably, while disruptive technologies are less predictable and can disrupt industry competitiveness.
Process of Disruption: Disruptive innovation unfolds when a product or service gains traction at the market’s lower end. It is usually more accessible and affordable than existing products, which are often expensive and sophisticated.
Not Breakthrough Technologies: Disruptive innovations differ from breakthrough technologies. They make products or services more affordable and accessible, rather than turning good products into great ones.
Causes of Disruption: Companies innovate faster than customer needs evolve, leading to products becoming too sophisticated or expensive for the majority. This creates an opening for disruptive innovators to target the less-profitable bottom end of the market.
Ingredients for Disruption: Three essential ingredients for a new company to become a disruptive innovator:
Enabling Technology: Technology that significantly changes how consumers operate.
Coherent Value Network: Suppliers, distributors, and partners must also benefit from the technology, not just consumers.
Innovative Business Model: A model targeting the lower market end with affordable, easy-to-use solutions.
Examples of Disruptive Innovation:
Academia: Encyclopedia Britannica was displaced by Wikipedia’s free digital encyclopedia.
Media Entertainment: Blockbuster lost to Netflix due to its failure to adapt to streaming trends.
Photography: Kodak lost its film dominance to digital cameras.
Transportation: Concorde faced retirement due to high operating costs and limited routes, while small private jets became affordable alternatives.
Case Studies
Company
Disruptive Innovation Strategy
Industry Transformation
Key Innovations and Disruptions
Market Impact and Growth
Apple
Transformative consumer electronics
Personal computing and mobile devices
iPhone, iPad, App Store ecosystem
Dominated the smartphone and tablet markets
Amazon
E-commerce and cloud computing
Retail and web services
Online marketplace, AWS cloud services, Prime membership
Became the world’s largest online retailer and cloud provider
Google
Internet search and digital advertising
Online search and digital advertising
PageRank algorithm, AdWords, Android OS, Google Maps
Became the dominant search engine and digital advertising platform
Microsoft
Personal computing and software ecosystems
Software and business solutions
Windows OS, Office Suite, Azure cloud platform
Established a strong foothold in operating systems and cloud services
Facebook
Social networking and online advertising
Social media and digital advertising
News Feed, targeted advertising, acquisition of Instagram
Grew to billions of users and became a major advertising platform
Netflix
Streaming media and original content
Traditional TV and movie rental
On-demand streaming, original content production
Revolutionized the way people consume entertainment
Airbnb
Peer-to-peer lodging and travel experiences
Hospitality and travel industry
Online platform for short-term rentals and unique stays
Disrupted the hotel industry and expanded global travel options
Uber
Ride-sharing and on-demand transportation
Taxi and transportation services
Ride-sharing app, food delivery, and logistics services
Transformed urban transportation and delivery services
Tesla
Electric vehicles and sustainable energy solutions
Automotive and energy industries
High-performance electric cars, battery technology
Pioneered electric vehicle adoption and renewable energy solutions
SpaceX
Private space exploration and satellite deployment
Aerospace and space exploration
Reusable rockets, commercial space travel
Reduced space launch costs and expanded commercial space travel
Airbnb
Peer-to-peer lodging and travel experiences
Hospitality and travel industry
Online platform for short-term rentals and unique stays
Disrupted the hotel industry and expanded global travel options
Uber
Ride-sharing and on-demand transportation
Taxi and transportation services
Ride-sharing app, food delivery, and logistics services
Transformed urban transportation and delivery services
Tesla
Electric vehicles and sustainable energy solutions
Automotive and energy industries
High-performance electric cars, battery technology
Pioneered electric vehicle adoption and renewable energy solutions
SpaceX
Private space exploration and satellite deployment
Aerospace and space exploration
Reusable rockets, commercial space travel
Reduced space launch costs and expanded commercial space travel
Airbnb
Peer-to-peer lodging and travel experiences
Hospitality and travel industry
Online platform for short-term rentals and unique stays
Disrupted the hotel industry and expanded global travel options
Uber
Ride-sharing and on-demand transportation
Taxi and transportation services
Ride-sharing app, food delivery, and logistics services
Transformed urban transportation and delivery services
Tesla
Electric vehicles and sustainable energy solutions
Automotive and energy industries
High-performance electric cars, battery technology
Pioneered electric vehicle adoption and renewable energy solutions
SpaceX
Private space exploration and satellite deployment
Aerospace and space exploration
Reusable rockets, commercial space travel
Reduced space launch costs and expanded commercial space travel
What are the four points to disruptive innovation?
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
Disruptive innovation
A disruptive innovation is an innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
