Disruptive innovation

Definition

Disruptive innovation refers to the process by which a smaller company with fewer resources is able to successfully challenge established businesses, often by offering simpler, more affordable alternatives to existing products or services. This kind of innovation typically starts at the bottom of the market and gradually moves up, ultimately displacing established competitors and reshaping entire industries. It plays a crucial role in technological progress and productivity by fostering competition and enabling new market entrants.

5 Must Know Facts For Your Next Test

1. Disruptive innovations often begin in niche markets, targeting underserved customers who may not prioritize performance or features.
2. Examples of disruptive innovations include the rise of digital photography over film cameras and streaming services over traditional cable television.
3. Established companies often struggle to adopt disruptive innovations due to their focus on sustaining existing products that meet the needs of their most profitable customers.
4. Disruptive innovation can lead to significant shifts in productivity as new technologies create efficiencies that were previously unattainable with older systems.
5. Understanding disruptive innovation helps businesses anticipate changes in consumer preferences and adapt their strategies to remain competitive in evolving markets.

Review Questions

• How does disruptive innovation differ from sustaining innovation in terms of market impact?
  • Disruptive innovation differs from sustaining innovation primarily in its approach to market challenges. While sustaining innovation focuses on improving existing products for current customers, disruptive innovation targets overlooked segments with simpler and more affordable solutions. This often leads to significant market impact as disruptors can capture market share from established companies, forcing them to reevaluate their business strategies.
• Discuss the implications of disruptive innovation for established companies in terms of adapting their business models.
  • The implications of disruptive innovation for established companies are profound. To adapt their business models effectively, these companies must be willing to explore new markets and consider radical changes to their product offerings. This may involve investing in research and development for new technologies, adopting flexible organizational structures, or even spinning off divisions to focus on disruptive opportunities without being hindered by existing operations.
• Evaluate the role of technology in fostering disruptive innovation and its impact on productivity across industries.
  • Technology plays a crucial role in fostering disruptive innovation by enabling new solutions that challenge traditional methods and practices. As advancements occur, they often lead to increased productivity by automating processes, reducing costs, and creating better access to goods and services. This impact can be seen across various industries, from manufacturing to healthcare, where technology-driven innovations have transformed how businesses operate and deliver value to consumers.

Related terms

Sustaining Innovation: Sustaining innovation involves improvements to existing products or services that enhance performance and maintain market share, typically favored by established companies.

Market Disruption: Market disruption occurs when new entrants change the competitive landscape, often leading to a decline in market share for established firms due to innovative offerings.

Innovation Diffusion: Innovation diffusion is the process by which new ideas, products, or practices spread within and across markets, influencing consumer behavior and industry standards.