Disruptive innovation

Definition

Disruptive innovation refers to a process where a smaller company with fewer resources successfully challenges established businesses, often by targeting overlooked segments or creating new markets. This type of innovation typically starts at the bottom of a market and eventually moves up, displacing established competitors. It can lead to significant shifts in industry dynamics, impacting how companies operate and prompting them to adapt or fail.

5 Must Know Facts For Your Next Test

1. Disruptive innovations often start by serving niche markets that established players overlook, allowing newcomers to build a customer base.
2. These innovations typically improve over time, eventually meeting the needs of mainstream customers and capturing market share from established companies.
3. Examples of disruptive innovation include digital photography disrupting film photography and streaming services transforming the entertainment industry.
4. Established firms often struggle to adapt to disruptive innovations because they are focused on sustaining innovations that serve their existing customer base.
5. Tax incentives and startup ecosystem support can foster an environment conducive to disruptive innovations by providing resources and motivation for new entrants.

Review Questions

• How does disruptive innovation differ from sustaining innovation in terms of market impact and company strategy?
  • Disruptive innovation differs from sustaining innovation primarily in its approach to market impact and strategy. While sustaining innovation focuses on improving existing products for current customers, disruptive innovation targets overlooked segments or creates entirely new markets. This often allows smaller companies with fewer resources to challenge established firms, forcing them to adapt their strategies or risk losing their competitive edge.
• In what ways can a supportive startup ecosystem enhance the potential for disruptive innovations to emerge?
  • A supportive startup ecosystem enhances the potential for disruptive innovations by providing entrepreneurs with access to resources such as mentorship, funding, and networking opportunities. Such ecosystems create an environment where innovative ideas can flourish and be tested in the market. When startups receive support through incubators or accelerators, they are better positioned to experiment with novel business models and technologies that can disrupt established industries.
• Evaluate the role of tax incentives in promoting disruptive innovations and how they can influence the strategies of both startups and established firms.
  • Tax incentives play a significant role in promoting disruptive innovations by lowering the financial barriers for startups and encouraging them to take risks with new ideas. These incentives can motivate established firms to invest in research and development as they seek to protect their market position against emerging competitors. As startups leverage tax benefits to experiment with innovative solutions, they can disrupt traditional business models, prompting established firms to reevaluate their strategies in response to this shifting landscape.

Related terms

Sustaining Innovation: Improvements made by established companies to enhance their products or services, often catering to higher-end customers without displacing existing markets.

Market Penetration: The strategy of entering and capturing a share of an existing market, usually through competitive pricing or better features.

Business Model Innovation: Creating new ways of capturing value within a business, often by rethinking how products or services are delivered to customers.