Disruptive innovation

Definition

Disruptive innovation refers to a process where a smaller company with fewer resources is able to successfully challenge established businesses. This typically involves introducing a new product or service that initially takes root in simple applications at the bottom of the market and then moves up, displacing established competitors. Understanding this concept is crucial because it highlights how companies can create new markets and value networks, ultimately leading to significant shifts in industry dynamics.

5 Must Know Facts For Your Next Test

1. Disruptive innovations often start in niche markets that are overlooked by incumbents, allowing them to grow without direct competition.
2. Examples of disruptive innovation include the rise of digital cameras displacing film cameras and streaming services overtaking traditional cable TV.
3. The impact of disruptive innovation can lead to major shifts in industry standards, changing consumer expectations and business practices.
4. Established companies often struggle to adapt to disruptive innovations due to their focus on sustaining existing products and their customer base.
5. Successful disruptive innovations require not only new technology but also innovative business models that cater to previously unmet customer needs.

Review Questions

• How do disruptive innovations create new market opportunities for smaller companies?
  • Disruptive innovations allow smaller companies to enter markets by targeting underserved segments or creating entirely new ones. These companies can introduce simpler, more affordable products that initially appeal to lower-end customers. As these products improve over time, they can attract mainstream consumers, enabling these smaller firms to challenge and eventually displace established competitors who may be focused on their higher-end offerings.
• In what ways can established companies respond to the challenges posed by disruptive innovations?
  • Established companies can respond by fostering a culture of innovation and being open to change. This may involve creating separate units focused on disruptive technologies or collaborating with startups to gain insights into emerging trends. Companies must also be willing to invest in research and development for new ideas while continuously monitoring market changes to pivot their strategies accordingly. By staying flexible and proactive, they can mitigate the risks associated with being disrupted.
• Evaluate the long-term implications of ignoring disruptive innovation for established businesses and their industries.
  • Ignoring disruptive innovation can have severe long-term consequences for established businesses, including loss of market share, declining revenues, and ultimately business failure. As new entrants capture customer attention and market demand shifts towards their innovative offerings, established companies risk becoming obsolete. This failure not only affects the individual businesses but can also lead to broader industry changes, such as diminished competition and a stifling of further innovation, which impacts consumers and economic growth overall.

Related terms

Sustaining Innovation: Sustaining innovation involves improvements to existing products or services that enhance performance, catering to the needs of higher-end customers rather than addressing new markets.

Market Disruption: Market disruption occurs when a new entrant significantly alters the competitive landscape by offering products or services that are cheaper, more accessible, or superior in some way.

Innovator's Dilemma: The innovator's dilemma describes the challenge established companies face when they must choose between investing in disruptive innovations or continuing to focus on their existing profitable products.