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.

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"

disruptive-innovation

What Is Disruptive Innovation? Disruptive Innovation In A Nutshell

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.

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.

So why do companies pursue innovation? 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:

  1. 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.
  2. 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.
  3. Innovative business model – 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. 

The publisher, Encyclopaedia Britannica, Inc., had the high end of the market cornered, 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. Encyclopedia Britannica, with its vast bulk and update cycles lasting more than a year, 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.

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 a mere $8.99/month.

Photography

Film companies such as Kodak enjoyed market dominance in the photography industry for decades. 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 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 the ability to fly between airports without having to move through the airport 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.

Connected Strategy Frameworks

Ansoff Matrix

ansoff-matrix
You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived by whether the market is new or existing, and the product is new or existing.

ReadAnsoff Matrix In A Nutshell

BCG Matrix

bcg-matrix
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.

ReadBCG Matrix

Balanced Scorecard

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First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.

ReadBalanced Scorecard

Blue Ocean Strategy

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A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

ReadBlue Ocean Strategy

PEST Analysis

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The PESTEL analysis is a framework that can help marketers assess whether macro-economic factors are affecting an organization. This is a critical step that helps organizations identify potential threats and weaknesses that can be used in other frameworks such as SWOT or to gain a broader and better understanding of the overall marketing environment.

ReadPestel Analysis

Scenario Planning

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Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.

ReadScenario Planning

SWOT Analysis

A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

ReadSWOT Analysis In A Nutshell

Growth Matrix

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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).

ReadGrowth Matrix In A Nutshell

Comparable Analysis Framework

comparable-company-analysis
A comparable company analysis is a process that enables the identification of similar organizations to be used as a comparison to understand the business and financial performance of the target company. To find comparables you can look at two key profiles: the business and financial profile. From the comparable company analysis it is possible to understand the competitive landscape of the target organization.

ReadComparable Analysis Framework In A Nutshell

Business Model Canvas

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The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.

ReadBusiness Model Canvas In A Nutshell

Business Experimentation 

business-experimentation
Business experiments help entrepreneurs test their hypotheses. Rather than define the problem by making too many hypotheses, a digital entrepreneur can formulate a few assumptions, design experiments, and check them against the actions of potential customers. Once measured, the impact, the entrepreneur, will be closer to define the problem.

ReadBusiness Experimentation

Speed Reversibility

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The speed-reversibility Matrix, by FourWeekMBA will help you understand how to allocate the resources based on the worst-case-scenario-test.

ReadSpeed-Reversibility Matrix

Blue Ocean

blue-ocean-strategy
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

ReadBlue Ocean Strategy

BCG Matrix

bcg-matrix
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.

Read moreBCG Matrix

AIDA Model

aida-model
AIDA stands for attention, interest, desire, and action. That is a model that is used in marketing to describe the potential journey a customer might go through before purchasing a product or service. The AIDA model helps organizations focus their efforts when optimizing their marketing activities based on the customers’ journeys.

Read moreAIDA Model

Pirate Funnel

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Venture capitalist, Dave McClure, coined the acronym AARRR which is a simplified model that enables to understand what metrics and channels to look at, at each stage for the users’ path toward becoming customers and referrers of a brand.

Read morePirate Funnel

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"