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.
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:
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
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.
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.
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.
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 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 |
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 |
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?
The four points of disruptive innovation are:
Read Next: Business Model Innovation, Business Models.