7.2 Disruptive technologies and business models
4 min read•august 15, 2024
Disruptive technologies shake up industries by offering simpler, cheaper alternatives that appeal to overlooked markets. They start small but grow to challenge established players, forcing them to adapt or risk becoming obsolete.
Companies can respond to disruption by setting up separate units to explore new ideas, partnering with startups, or even disrupting themselves. Fostering a culture of innovation and agility is key to staying ahead in rapidly changing markets.
Disruptive Innovation and its Characteristics
Defining Disruptive Innovation
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- is a term coined by to describe a new technology or business model that unexpectedly displaces an established one by addressing a market that incumbents overlooked
- Disruptive innovations often start by targeting low-end or new market segments that are underserved by existing solutions
- Over time, disruptive innovations improve in performance and move upmarket, eventually displacing incumbent solutions in mainstream markets
Key Characteristics of Disruptive Innovations
- Initially underperform compared to existing solutions in mainstream markets
- Appeal to overlooked or new market segments with different needs and preferences
- Often simpler, more convenient, and less expensive than incumbent offerings
- Make the product or service accessible to a wider customer base
- Incumbents struggle to respond due to the innovator's dilemma, where their focus on serving high-end customers and maximizing short-term profits hinders their ability to invest in and adapt to new technologies
Disruptive Technologies and their Impact
Digital Disruption
- Digital photography disrupted the film industry by offering a more convenient and cost-effective way to capture and share images (digital cameras, )
- Led to the decline of traditional camera and film companies (, )
- (, ) disrupted the entertainment industry by providing on-demand access to vast libraries of content
- Challenged traditional cable TV and music distribution models (Blockbuster, CD sales)
Transportation and E-commerce Disruption
- Ride-sharing platforms (, ) disrupted the transportation industry by leveraging mobile technology and a gig economy model
- Offered more convenient and affordable alternatives to traditional taxis and car ownership
- giants (, ) disrupted the retail industry by offering a wide selection of products, competitive prices, and fast delivery
- Forced brick-and-mortar stores to adapt or face declining sales (Sears, Toys "R" Us)
Convergence and Mobile Disruption
- Smartphones disrupted multiple industries by converging multiple functions into a single, portable device
- Impacted mobile phones, cameras, personal computing, and navigation systems
- Mobile apps and platforms (, Uber) leveraged smartphone capabilities to create new disruptive business models
- Challenged established players in various industries (Garmin, Flip Video cameras)
Challenges and Opportunities of Disruptive Models
Regulatory and Competitive Challenges
- Disruptive business models often challenge established industry norms and regulations
- Can lead to legal and political battles as incumbents seek to protect their interests (Uber vs. taxi unions)
- Successful disruptive business models can create powerful network effects and economies of scale
- Makes it difficult for new entrants to compete once the disruptor has established a dominant position (Amazon, Facebook)
Market Expansion and Growth Opportunities
- Disruptive innovations can create new markets and expand the overall size of an industry
- Provides growth opportunities for both new entrants and adaptable incumbents
- Disruptive business models often prioritize growth and market share over short-term financial returns
- Can face challenges in achieving profitability in the early stages of development
Balancing Innovation and Existing Business
- Incumbent firms face the challenge of balancing investments in their existing business while also allocating resources to explore and develop disruptive technologies and business models
- Requires a delicate balance between maintaining cash flows from core offerings and investing in potentially cannibalizing innovations
- Organizational culture and structure can hinder incumbent's ability to respond to disruptive threats (Kodak, Blockbuster)
Responding to and Leveraging Disruptive Innovations
Organizational Strategies
- Incumbent firms can respond by setting up separate business units or subsidiaries to explore and develop new technologies and business models (Google X, )
- Insulates disruptive efforts from the constraints and priorities of the core business
- Companies can engage in strategic partnerships or acquisitions with disruptive startups to gain access to new technologies, talent, and market insights (, )
Adaptive Approaches
- Firms can adopt a "fast follower" strategy, closely monitoring the development of disruptive innovations and quickly adapting their own offerings once the market potential becomes clear ()
- Companies can proactively disrupt their own business models by cannibalizing existing products and services in favor of new, potentially disruptive offerings (Adobe shifting from perpetual licenses to subscription-based Creative Cloud)
- Focus on building strong customer relationships, brand loyalty, and unique value propositions that can help retain customers even in the face of disruptive competition (Apple's ecosystem, Starbucks' customer experience)
Fostering a Culture of Innovation
- Organizations can foster a culture of innovation and agility to better respond to disruptive threats and opportunities
- Encourage experimentation, risk-taking, and continuous learning across the organization
- Embrace failure as a necessary part of the innovation process and learn from it
- Empower employees to challenge the status quo and propose new ideas (Google's 20% time, 3M's 15% rule)
- Cultivate a diverse and inclusive workforce to bring different perspectives and ideas to the table
Key Terms to Review (29)
Adobe Creative Cloud: Adobe Creative Cloud is a suite of software applications and services offered by Adobe Systems that enables users to create, design, and manage digital content across various platforms. This cloud-based platform provides access to a wide range of creative tools such as Photoshop, Illustrator, and Premiere Pro, allowing individuals and teams to collaborate efficiently while utilizing powerful resources for creative work.
Alibaba: Alibaba is a leading Chinese e-commerce platform founded in 1999 by Jack Ma and his co-founders. It connects businesses and consumers through a variety of online services, including wholesale and retail sales, cloud computing, and digital payments. The company's innovative business model disrupted traditional retail by providing an accessible platform for small and medium-sized enterprises (SMEs) to reach global markets.
Amazon: Amazon is a multinational technology company primarily known for its e-commerce platform, which revolutionized the retail industry through its use of technology and logistics. The company's innovative approach disrupted traditional business models, leading to significant changes in consumer behavior and supply chain management.
Amazon Web Services: Amazon Web Services (AWS) is a comprehensive and widely adopted cloud platform offered by Amazon that provides a mix of infrastructure as a service (IaaS), platform as a service (PaaS), and software as a service (SaaS). With services ranging from computing power to storage and machine learning, AWS has revolutionized how businesses operate, allowing them to scale rapidly and innovate without the traditional costs of physical infrastructure.
Clayton Christensen: Clayton Christensen was an influential scholar and business consultant 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 innovation in business and entrepreneurship, demonstrating how new technologies can transform industries and create opportunities for entrepreneurs to thrive in competitive markets.
Competitive advantage: Competitive advantage refers to the unique attributes or capabilities that allow a company to outperform its competitors and achieve superior performance. This can stem from various sources such as cost leadership, product differentiation, or the use of innovative technologies. Understanding how to leverage these advantages is crucial for businesses to establish and maintain their position in rapidly changing markets, especially in relation to disruptive technologies and business models.
Digital disruption: Digital disruption refers to the changes that occur when new digital technologies and business models transform how companies operate, often displacing established market leaders and altering traditional ways of doing business. This transformation can lead to significant shifts in consumer behavior, production processes, and industry dynamics, compelling organizations to adapt rapidly or risk obsolescence.
Disruptive innovation: Disruptive innovation refers to a process where a smaller company with fewer resources successfully challenges established businesses, often by offering simpler, more affordable products or services. This type of innovation typically starts at the bottom of the market and gradually moves upward, eventually displacing the dominant industry players. It plays a crucial role in transforming industries, particularly in science, technology, and business.
E-commerce: E-commerce, or electronic commerce, refers to the buying and selling of goods and services over the internet. It encompasses a wide range of online business activities, including retail sales, online auctions, and electronic payments. E-commerce has transformed traditional business models by enabling companies to reach a global audience and streamline operations through technology.
Early adopters: Early adopters are individuals or groups who are among the first to embrace and utilize new technologies, products, or ideas before they become mainstream. Their willingness to take risks and experiment with innovations often makes them influential in shaping the market and consumer trends, as they provide valuable feedback and help drive adoption rates for disruptive technologies.
Facebook and Instagram: Facebook and Instagram are social media platforms that facilitate communication, sharing of content, and social networking among users. Facebook, founded in 2004, allows users to create profiles, connect with friends, and share various forms of media, while Instagram, launched in 2010 and acquired by Facebook in 2012, focuses primarily on photo and video sharing. Both platforms have revolutionized how businesses interact with consumers, leveraging user-generated content to create new business models.
Freemium model: The freemium model is a business strategy that offers basic services or products for free while charging a premium for advanced features or services. This approach allows companies to attract a large user base by providing free access, while monetizing a smaller percentage of those users who are willing to pay for enhanced functionalities. The model is particularly effective in digital industries, where it disrupts traditional pricing strategies and creates new revenue opportunities.
Fujifilm: Fujifilm is a Japanese multinational photography and imaging company, initially known for its film production but has since evolved into a major player in digital imaging and medical systems. The company's ability to adapt to disruptive technologies, such as the digital camera revolution, has allowed it to pivot its business model and expand into diverse sectors, including healthcare and materials science.
Gm and cruise automation: GM and cruise automation refers to the integration of advanced technologies in General Motors vehicles that enable automated driving features, enhancing safety and convenience on the road. This technology includes adaptive cruise control, lane-keeping assistance, and other systems designed to assist drivers by automating certain driving tasks, thereby transforming traditional automotive experiences and influencing new business models in the automotive industry.
Instagram: Instagram is a social media platform focused on photo and video sharing, launched in 2010, that has transformed how people communicate and connect online. It allows users to capture and share moments visually, enhancing engagement through likes, comments, and hashtags. Instagram's innovative features, like Stories and IGTV, have redefined content consumption and influenced digital marketing strategies across various industries.
Kodak: Kodak is a brand synonymous with photography and imaging technology, especially known for its innovations in film and camera production. The company played a pivotal role in popularizing photography for the masses, introducing products that made taking pictures accessible and affordable. However, Kodak's failure to adapt to the digital photography revolution highlights the challenges companies face when disruptive technologies change the landscape of their industries.
Lyft: Lyft is a ride-sharing platform that allows users to request transportation from drivers using a mobile app. It has transformed the way people travel, emphasizing convenience, affordability, and efficiency in personal transportation. Lyft is often seen as a disruptive technology because it challenges traditional taxi services and introduces a new business model focused on peer-to-peer service.
Market Disruption: Market disruption refers to a significant change in the way a market operates, often caused by the introduction of new products, services, or technologies that challenge existing norms and practices. This shift can lead to the obsolescence of established businesses and the emergence of new players, fundamentally altering competitive dynamics. Disruptive innovations often create new markets or reshape existing ones, highlighting the importance of adapting business models to survive.
Market penetration: Market penetration is a business strategy focused on increasing the market share of an existing product or service within its current market. This approach often involves tactics such as competitive pricing, enhanced marketing efforts, and promotional campaigns to attract more customers and improve sales. The effectiveness of market penetration can be significantly influenced by the presence of disruptive technologies that reshape industries and consumer behavior.
Microsoft and Cloud Computing: Microsoft and cloud computing refers to Microsoft's suite of cloud services and solutions that allow individuals and organizations to access, store, and manage data over the internet instead of relying on local servers or personal computers. This integration of technology has transformed traditional business models by enabling greater scalability, flexibility, and efficiency in operations, allowing companies to innovate faster and respond to market changes more effectively.
Netflix: Netflix is a streaming service that offers a wide variety of TV shows, movies, documentaries, and original content, available for online viewing. It revolutionized the entertainment industry by introducing a subscription-based model that allows users to watch content on-demand, shifting the focus from traditional cable television to digital streaming.
Obsolescence: Obsolescence refers to the process by which a product, service, or technology becomes outdated or no longer useful, often due to advancements in innovation or changes in consumer preferences. This can lead to a decline in demand and the eventual discontinuation of the item, impacting business strategies and market dynamics significantly.
Smartphones: Smartphones are mobile devices that combine the functionality of a phone with advanced computing capabilities, allowing users to run applications, access the internet, and communicate in various ways. These devices have transformed how people interact with technology, enabling a shift towards mobile-centric lifestyles and disrupting traditional business models in numerous industries.
Spotify: Spotify is a digital music streaming service that allows users to access a vast library of songs, albums, and podcasts on-demand. It revolutionized the way people consume music by offering personalized playlists and recommendations based on user preferences, creating a new business model in the music industry that disrupted traditional sales methods and promoted the use of streaming over physical media.
Streaming services: Streaming services are digital platforms that allow users to access and consume audio, video, or other content over the internet without needing to download files. These services have transformed how people consume media, offering a wide variety of entertainment options on demand and often disrupting traditional broadcasting and distribution models.
Subscription model: A subscription model is a business strategy where customers pay a recurring price at regular intervals—monthly, yearly, or otherwise—to gain access to a product or service. This model often fosters customer loyalty, ensures steady revenue streams for businesses, and allows for continuous updates or improvements to the offerings, making it a compelling choice in today's digital economy.
Technology maturity: Technology maturity refers to the stage of development and readiness of a technology for widespread adoption and integration into various sectors, particularly in business. This concept illustrates how a technology progresses from initial research and development phases through testing, pilot implementations, and ultimately to full deployment, influencing business models and strategies.
Uber: Uber is a technology platform that connects passengers with drivers through a mobile application, fundamentally changing the way people access transportation. This model utilizes disruptive technology to challenge traditional taxi services, creating a new business model that emphasizes convenience, pricing transparency, and user experience. By leveraging smartphone technology and a rating system, Uber transformed personal transportation and initiated discussions around regulation, labor practices, and the gig economy.
User experience: User experience (UX) refers to the overall satisfaction and emotional response a person has when interacting with a product, service, or system. It encompasses various factors, including usability, accessibility, design, and the user's personal feelings toward the experience. In today's digital landscape, a positive user experience is crucial for businesses that want to leverage disruptive technologies and innovative business models to stand out and succeed.