1.1 Defining disruptive innovation and its characteristics
4 min read•august 16, 2024
shakes up markets by offering simpler, cheaper solutions that eventually outperform established products. It starts small, targets overlooked segments, and follows an S-curve of adoption. This process, introduced by , creates new value networks and business models.
Unlike sustaining innovations that improve existing products, disruptive innovations introduce new value propositions. They often start with lower profit margins but tap into new customer segments. This approach can transform industries, create new markets, and pose significant challenges for established firms.
Disruptive Innovation
Definition and Key Elements
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- Disruptive innovation describes a process where a product or service initially takes root in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors
- Clayton Christensen introduced the theory in his 1997 book "The "
- Focuses on underserved or overlooked markets, offering simpler and often cheaper solutions
- Follows a trajectory of improvement that eventually meets mainstream customer needs
- Often starts as inferior products or services but improves over time
- Creates new business models and value networks
- Enabled by technological advancements or novel applications of existing technologies (smartphones, electric vehicles)
- Distinct from radical or breakthrough innovation, which may not necessarily disrupt existing markets
Characteristics and Process
- Introduces a new value proposition rather than improving existing products
- Initially underperforms established products in mainstream markets but offers other benefits (simplicity, convenience, lower cost)
- Targets overlooked segments or new customers (Netflix targeting movie renters dissatisfied with late fees)
- Often ignored by due to lower initial profit margins
- Adoption typically follows an S-curve, starting slowly before accelerating rapidly
- Requires changes in business models (streaming services vs traditional cable TV)
- Higher risk profile due to market uncertainty and potential for failure
Disruptive vs Sustaining Innovations
Key Differences
- Sustaining innovations improve existing products along historically valued dimensions, while disruptive innovations introduce new value propositions
- Sustaining innovations target high-end customers with better performance, disruptive innovations target overlooked segments or new customers
- Disruptive innovations often require business model changes, sustaining innovations usually fit within existing models
- Adoption curve for disruptive innovations follows an S-curve, sustaining innovations often have more linear adoption rates
- Disruptive innovations have higher risk profiles due to market uncertainty
Market Approach and Customer Focus
- Sustaining innovations focus on existing mainstream customers (incremental improvements to smartphones)
- Disruptive innovations often create new markets or serve non-consumers (mobile banking in developing countries)
- Sustaining innovations aim to improve profit margins with existing customers
- Disruptive innovations may initially offer lower profit margins but tap into new customer segments
Impact of Disruptive Innovations
Market Creation and Transformation
- Create entirely new markets by serving non-consumers of existing products or services (personal computers)
- Expand total addressable market by increasing accessibility, affordability, or convenience (low-cost airlines)
- Redefine industry boundaries by combining features from multiple markets or creating new categories (smartphones combining phones, cameras, and computers)
- Introduce new performance metrics differing from traditional mainstream market values (digital cameras prioritizing convenience over image quality)
- Create new value networks, including suppliers, distributors, and complementary businesses (app ecosystems for mobile platforms)
- Shift customer expectations and behaviors, altering product or service consumption (on-demand streaming changing TV viewing habits)
- Lead to obsolescence of existing products, services, or business models (digital photography disrupting film photography)
Industry and Business Model Disruption
- Can cause decline or failure of incumbent firms unable to adapt (Blockbuster's failure to adapt to streaming)
- Create the "innovator's dilemma" for established companies (Kodak's struggle with digital photography)
- Shift market share and industry leadership, often favoring new entrants (Tesla in the automotive industry)
- Necessitate changes in organizational structures, core competencies, and resource allocation for established firms
- Lead to commoditization of previously high-margin products or services (personal computers)
- Impact extends beyond individual companies to affect entire ecosystems, including suppliers and regulatory frameworks
- Successful navigation requires balancing exploitation of existing business models with exploration of new opportunities
Disruptive Innovations and Industries
Challenges for Established Firms
- Face the "innovator's dilemma" where focus on current customers blinds them to disruptive threats
- Need to adapt organizational structures, core competencies, and resource allocation to remain competitive
- Must find new sources of differentiation and as products become commoditized
- Required to balance exploitation of existing business models with exploration of new opportunities
- Often need to develop ambidextrous organizational structures to manage both sustaining and disruptive innovation
Examples of Industry Disruption
- Streaming services disrupting traditional cable TV and movie rental businesses (Netflix, Hulu)
- Ride-sharing apps transforming the taxi and transportation industry (Uber, Lyft)
- E-commerce platforms reshaping retail and consumer behavior (Amazon, Alibaba)
- Fintech companies challenging traditional banking and financial services (PayPal, Robinhood)
- Electric vehicles disrupting the automotive industry (Tesla, Rivian)
- Renewable energy technologies transforming the power generation sector (solar, wind energy)
Key Terms to Review (18)
Business model innovation: Business model innovation refers to the process of creating, redefining, or transforming a company's existing business model to improve its competitive position and enhance value creation. This type of innovation often involves altering the way a company delivers products or services, engages with customers, and generates revenue, making it essential for adapting to market changes and emerging opportunities.
Clayton Christensen: Clayton Christensen was a renowned American academic and business consultant best known for his theory of disruptive innovation. His work provides a framework for understanding how smaller companies with fewer resources can successfully challenge established businesses, ultimately leading to significant changes in various industries.
Disruption Theory: Disruption theory explains how smaller companies with fewer resources can successfully challenge established businesses by introducing simpler, cheaper, and more accessible products or services. It connects to various aspects of innovation, particularly in understanding the dynamics of market change and how new technologies can upend traditional industries.
Disruptive innovation: Disruptive innovation refers to a process where a smaller company with fewer resources successfully challenges established businesses by focusing on underserved markets and offering simpler, more affordable solutions. This often leads to significant shifts in industry dynamics, as established companies may struggle to adapt to the new market conditions created by these innovations.
Electric Vehicles vs. Traditional Cars: Electric vehicles (EVs) are automobiles powered by electric motors and rechargeable batteries, while traditional cars typically rely on internal combustion engines (ICE) that run on gasoline or diesel fuel. The rise of electric vehicles represents a significant shift in the automotive industry, highlighting characteristics such as innovation, sustainability, and changing consumer preferences that align with the principles of disruptive innovation.
Incumbent Firms: Incumbent firms are established companies that hold a significant position in their respective industries, often enjoying competitive advantages such as brand loyalty, market share, and resources. These firms are typically resistant to change and may struggle to adapt when faced with disruptive innovations that challenge their existing business models and market dominance.
Innovation funnel: The innovation funnel is a model that illustrates the process of transforming ideas into viable products or services, showing how many ideas are generated at the start and how they are gradually filtered down to a select few that are developed and brought to market. This model helps organizations manage their innovation processes effectively by providing a visual representation of how ideas are screened, evaluated, and prioritized, ensuring that resources are allocated efficiently to the most promising innovations.
Innovator's Dilemma: The innovator's dilemma refers to the challenge faced by established companies when they must choose between investing in new, disruptive innovations or continuing to invest in their existing successful products. This dilemma arises because the company's existing customers and revenue streams often lead to a focus on sustaining innovations that improve current offerings, while disruptive innovations may initially serve a smaller or different market.
Joseph Schumpeter: Joseph Schumpeter was an Austrian economist known for his theories on economic development and the role of innovation in capitalism. His concepts of 'creative destruction' highlight how innovation leads to the obsolescence of old technologies and business models, fundamentally reshaping industries and economies. This idea is essential for understanding how disruptive innovation plays a crucial role in the current business landscape, as companies must adapt to technological advancements and shifting consumer preferences.
Low-End Disruption: Low-end disruption refers to a process where a smaller company with fewer resources successfully challenges established businesses by targeting overlooked segments of the market, often offering simpler, more affordable products or services. This concept highlights how incumbent companies can be vulnerable to competitors that start at the lower end of the market and gradually improve their offerings, capturing more market share over time.
Market Penetration: Market penetration refers to the strategy of increasing a company's share of existing markets through various tactics, such as lowering prices, enhancing product quality, or increasing marketing efforts. This concept is crucial for businesses aiming to solidify their position within a competitive landscape, particularly in the context of disruptive innovations where new entrants challenge established players.
Market transformation: Market transformation refers to the process through which significant changes occur in a market, often driven by disruptive innovations that reshape consumer preferences, industry dynamics, and competitive landscapes. This transformation can lead to the emergence of new business models, changes in the way products are delivered, and shifts in market leadership as traditional players adapt or are replaced by innovative entrants.
New-market disruption: New-market disruption refers to a type of disruptive innovation that creates a new segment of customers by introducing a product or service that is simpler, more affordable, or more accessible than existing offerings. This approach targets overlooked or non-consumers who previously had no access to the market, thereby transforming the competitive landscape. New-market disruptions often involve technological advancements or innovative business models that cater to unmet needs.
Prototyping: Prototyping is the process of creating a preliminary model or version of a product or solution that can be tested and evaluated for its feasibility, functionality, and design. This approach is crucial in the innovation process as it allows for rapid experimentation and iteration, enabling teams to refine their ideas and address potential issues early on. By visualizing concepts and gathering feedback, prototyping plays a significant role in formulating effective innovation strategies and understanding the unique characteristics of disruptive innovations.
Streaming services vs. cable TV: Streaming services are digital platforms that allow users to watch movies, shows, and other content over the internet without the need for traditional cable subscriptions. This shift from cable TV to streaming services represents a disruptive innovation in the media landscape, changing how audiences consume entertainment by offering on-demand access and flexibility.
Sustaining Innovation: Sustaining innovation refers to the process of improving existing products or services in a way that meets the needs of current customers and enhances a company's performance. This type of innovation typically focuses on maintaining market position and improving efficiency rather than creating entirely new markets. It is essential for organizations to balance sustaining innovations with disruptive innovations to adapt to changing environments and consumer expectations.
Technology adoption lifecycle: The technology adoption lifecycle is a model that describes the stages of adoption of new technologies among different groups of users, typically classified into five categories: innovators, early adopters, early majority, late majority, and laggards. This model helps to understand how disruptive innovations spread through society and how they can impact various stakeholders by influencing technology acceptance and integration.
Value Creation: Value creation refers to the process of enhancing the worth of a product, service, or organization through various means, such as innovation, improved efficiency, or better customer experience. This concept is crucial in understanding how businesses adapt and thrive, especially in a rapidly changing environment where disruptive innovation can redefine market dynamics and consumer expectations.