5.4 Disruptive innovation and business model innovation
3 min read•august 14, 2024
shakes up industries by creating new markets and value networks. It starts with products that seem inferior but offer unique benefits, eventually improving to meet mainstream needs while retaining advantages. This process can topple market leaders and transform entire sectors.
For established companies, disruptive innovation poses a major challenge. They must decide whether to create separate units, partner with disruptors, adapt their business model, or stick to their guns. The best approach depends on the specific situation and requires careful analysis.
Disruptive Innovation and Impact
Definition and Characteristics
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- Disruptive innovation is a term coined by describing innovations that create new markets and value networks, eventually disrupting established market-leading firms and products
- Often initially considered inferior by most of an incumbent's customers, but offer other valuable features to a few fringe customers (less expensive, more convenient, simpler)
- Performance improves over time to a level acceptable to mainstream customers, while maintaining advantageous attributes, leading to disruption of the established market
Impact on Industries
- Displaces market leaders, transforms value propositions, and reshapes industry boundaries
- Examples:
- Personal computers disrupted mainframes
- Smartphones disrupted traditional cell phones
- Streaming services disrupted the video rental industry ( vs Blockbuster)
- Digital photography disrupted film photography (digital cameras vs Kodak)
Characteristics of Disruptive Technologies
Attributes of Disruptive Technologies
- Often simpler, cheaper, and more convenient than existing technologies
- Attractive to a new set of customers or enables new applications
- Start as inferior to existing technologies in performance, but improve rapidly and eventually surpass incumbent technology performance
Disruptive Business Models
- Target overlooked or underserved customer segments with a different than incumbents
- Involve a new way of creating, delivering, or capturing value (different cost structure, distribution channel, revenue model)
- Often developed by new entrants rather than incumbent firms constrained by existing business models, organizational structures, and customer base
Business Model Innovation for Advantage
Definition and Benefits
- Involves fundamentally rethinking how a company creates, delivers, and captures value by reconfiguring activities, resources, and partnerships
- Powerful source of competitive advantage enabling differentiation from competitors, tapping into new markets, and creating new value propositions
Process Stages
- Ideation: Generating and exploring new business model ideas (brainstorming, scenario planning, customer insights)
- Concept Development: Refining and testing promising business model concepts (prototyping, market research, financial modeling)
- Detailed Design: Specifying key elements of the new business model (value proposition, target customers, key activities, resources, partnerships)
- Implementation: Executing the new business model, requiring changes to organizational structure, processes, culture, and engagement with external partners and stakeholders
Strategies for Incumbent Firms vs Disruption
Challenges Faced by Incumbents
- Struggle to respond effectively to disruptive innovation due to constraints from existing business models, organizational structures, and customer base
Strategic Response Options
- Create a separate business unit or spin-off company to independently develop and commercialize the disruptive innovation
- Acquire or partner with the disruptive innovator for access to their technology, business model, and customer base while maintaining control
- Adapt existing business model to incorporate elements of the disruptive innovation (offer lower-cost or more convenient version of product/service)
- Ignore or downplay the threat of disruptive innovation and focus on defending existing market position and serving current customers
Considerations for Choosing a Strategy
- Most effective response depends on specific characteristics of the industry, incumbent firm, and disruptive innovation itself
- Requires careful analysis of strategic options and their potential risks and rewards
- Examples:
- Netflix began as a DVD-by-mail service, then pivoted to streaming to disrupt video rental incumbents like Blockbuster
- Apple's iPhone disrupted incumbent mobile phone makers like Nokia and Motorola who were slow to adapt to the smartphone revolution
Key Terms to Review (20)
Airbnb: Airbnb is an online marketplace that connects people seeking short-term lodging with hosts who have available space to rent, such as homes, apartments, or even unique accommodations. This platform has disrupted traditional hospitality models by allowing individuals to monetize their extra space while providing travelers with diverse and often more affordable lodging options compared to hotels. Its business model combines technology and community, making it a prime example of disruptive innovation in the travel industry.
Blue Ocean Strategy: Blue Ocean Strategy is a business approach that encourages companies to create new market spaces, or 'blue oceans', where competition is minimal or non-existent, instead of competing in overcrowded markets, or 'red oceans'. This strategy focuses on value innovation, aiming to offer customers unique products or services while reducing costs, thus creating new demand and fostering sustainable growth.
Business model canvas: The business model canvas is a strategic management tool that provides a visual framework for developing, describing, and analyzing business models. It helps entrepreneurs and organizations identify key components of their business such as value propositions, customer segments, revenue streams, and key resources, facilitating a clear understanding of how all parts fit together. This tool is particularly useful when discussing disruptive innovation and the evolution of business models as it highlights areas ripe for change and strategic recommendations.
Business model innovation: Business model innovation is the process of developing new or modified ways of creating, delivering, and capturing value in a business. This involves rethinking existing business models or creating entirely new ones to enhance competitiveness and adapt to changing market conditions. It can often lead to significant transformations in how a company operates and engages with its customers.
Chasm: In the context of innovation, a chasm refers to a significant gap between early adopters of a technology or product and the majority of potential users who may be slower to embrace it. This concept highlights the challenges companies face when trying to transition from niche markets to mainstream acceptance, often resulting in failed innovations if not addressed effectively.
Clayton Christensen: Clayton Christensen was a renowned academic and author, best known for his theory of disruptive innovation, which explains how smaller companies with fewer resources can successfully challenge established businesses. His ideas emphasize the importance of understanding how innovations can create new markets and value networks, often displacing dominant firms. This concept connects to how companies must adapt their business models and leverage networks to thrive in a rapidly changing landscape.
Disruptive innovation: Disruptive innovation refers to the process by which a smaller company with fewer resources successfully challenges established businesses, often by offering simpler, more affordable, or more convenient products or services. This type of innovation typically starts at the bottom of the market and eventually moves up, displacing established competitors and altering industry dynamics.
Disruptive technology: Disruptive technology refers to innovations that significantly alter or replace existing products or services in a market, often leading to the creation of new markets or value networks. This type of technology typically starts at the bottom of the market and gradually moves upward, eventually displacing established competitors. It often brings new value propositions that can change consumer behavior and business practices.
Diversification: Diversification is a strategy that involves a company expanding into new markets or product lines to reduce risk and increase growth opportunities. This can take the form of related diversification, where the new ventures are connected to existing operations, or unrelated diversification, where the new ventures are in entirely different industries. This concept plays a crucial role in strategic planning and helps organizations navigate competitive landscapes by leveraging their resources and capabilities across various sectors.
Freemium model: The freemium model is a business strategy that offers basic services or products for free, while charging for advanced features or premium content. This approach allows companies to attract a large user base by providing free access, with the intent of converting a portion of those users into paying customers. The freemium model effectively combines elements of disruptive innovation and business model innovation, as it challenges traditional pricing strategies and creates new market opportunities.
Industry shakeup: An industry shakeup refers to a significant disruption in the existing market dynamics, often resulting from major innovations, shifts in consumer behavior, or new entrants that challenge established players. This upheaval can lead to changes in market share, the emergence of new business models, and the potential for both opportunities and threats for existing companies. The phenomenon is often linked to disruptive innovation and can cause established firms to rethink their strategies to remain competitive.
Market disruption: Market disruption refers to significant changes in an industry that alter the existing competitive landscape, often resulting from new technologies, business models, or shifts in consumer behavior. It can lead to the obsolescence of established products or services and give rise to new market leaders as companies adapt to the changing environment.
Market Transformation: Market transformation refers to the process by which a significant shift occurs in the way a market operates, often driven by innovation and changing consumer behaviors. This transformation can lead to new business models, altered competitive dynamics, and an overall reevaluation of industry standards. It often accompanies disruptive innovation, where emerging technologies or business practices challenge and replace existing market structures.
Netflix: Netflix is a streaming service that provides a wide variety of award-winning TV shows, movies, anime, documentaries, and more on thousands of internet-connected devices. Its disruptive innovation has transformed the entertainment industry by shifting the way content is consumed, moving from traditional cable subscriptions to on-demand streaming, allowing users to watch what they want, when they want.
Pivoting: Pivoting refers to the strategic decision-making process in which a business changes its direction or focus to adapt to new market conditions, customer needs, or competitive pressures. This concept is crucial in the context of disruptive innovation and business model innovation, as companies often need to pivot to stay relevant and competitive. It involves reassessing current strategies and making adjustments that can lead to new growth opportunities or enhanced performance.
Subscription model: A subscription model is a business strategy where customers pay a recurring fee to access a product or service over a specified period. This model allows companies to establish a steady revenue stream while providing customers with continuous access to offerings, often with added benefits such as updates or exclusive content. This approach has been pivotal in transforming industries and driving innovative business practices.
Technology Adoption Curve: The technology adoption curve is a model that illustrates the acceptance and diffusion of new technologies over time, categorized into different groups of users. This model helps to understand how various segments of society embrace innovations, ranging from innovators to laggards, and can be crucial for businesses trying to implement disruptive innovation or develop new business models. It reflects the dynamics of market acceptance, showing that early adopters can significantly influence mainstream adoption.
The innovator's dilemma: The innovator's dilemma refers to the challenge that established companies face when they prioritize their existing successful products and business models over emerging disruptive innovations that could eventually displace them. This situation often leads to companies failing to adapt or invest in new technologies or markets, as they may view them as unprofitable or too risky compared to their current operations.
Value Proposition: A value proposition is a clear statement that explains how a product or service solves a customer's problem or improves their situation, delivering specific benefits that set it apart from competitors. It encompasses both the functional and emotional benefits that a customer gains, influencing their purchasing decisions and loyalty.
Value Proposition Canvas: The Value Proposition Canvas is a strategic tool that helps businesses ensure that their product or service offerings align with the needs and desires of their customers. It provides a clear framework to visualize how a company's value proposition meets customer demands and identifies potential gaps that may require innovation or adjustment. This canvas plays a vital role in shaping business models, especially in the context of disruptive innovation.