Disruptive Innovation – Intro, Definition and Meaning of being disruptive
What does it mean to have a disruptive innovation on the market?
Between buzzword and business term – Disruptive Innovation is all over and we show what disruptive and non-disruptive innovation is and why it matters to know the difference between those two.
Disruptive innovation is a form of completely new value creation for an existing market, which leads to the displacement of established companies, products, or even whole industries. The word itself means that something will be interrupted and there is a break of a current system. Therefore disruptive innovation only works in existing industries where new ideas, business models, and technologies interrupt the current market dynamics.
Disruptive innovation is one of the 4 types of innovation that need to be understood, in order to better categorize this type of innovation.
The concept – Disruptive Innovation
In the late 1990s, the term “disruptive innovation” was popularized by Clayton Christensen and his book “The Innovator’s Solution”. It quickly adopted due to the strong innovation-driven growth of the new tech-based industries. Since then it is also a kind of buzzword that made it into our daily lives and especially business talk.
The term disruptive stands now for many things but it is mostly used to describe the loose concept of any innovation that shakes up an existing system, industry, or market. While this might be partly true, we know that there are 4 different types of innovation that have the potential to shake up industries
- Incremental Innovation – An existing technology in an existing market can also be improved to capture more market share and give a company an edge over its competitors. (e.g. Smartphones)
- Architectural Innovation – An existing technology is being used to create a new market. This can be seen by integrating e.g. the Amazon ecosystem to also offer medical supplies instead of just goods and/or books.
- Radical Innovation – A new technology opens up a new market. This is the most common perception of “disruptive innovation” but indeed it is a radical innovation. The best example was the airplane, which opened up a new for of travel, created completely new markets around invented a whole industry.
- Disruptive Innovation – New Technology in an existing market. This is the real definition of a disruptive technology. It implies the use of new technologies, processes and even disruptive business models
Definition of Disruptive Innovation
As we have seen from the overview above it is a new technology in an existing market that drives the change. So disruptive innovation tackles existing markets with new types of processes, business models (9 disruptive business models) but also new technologies being used to create more value to the existing market.
The non-conventional business models, newly developed products, or further improved processes lead to a fast change in customer behavior and to a shift of the market towards the new market entrant. With steady improvements, this market share grows faster and the perceived value from customers gets bigger, giving the challenger a better edge over the competition.
But this also implies that companies can keep up with the industry and other competitors. The gradual improvement of this newly developed innovation is as crucial as the first disruptive idea. The challenge is especially persistent in the high-tech industry as steady growth in innovation is hard to sustain.
But disruptive innovation doesn’t need to be only in the technology field. It can be FMCG or also clothing industries where the fight for market share is also existent.
High-end vs. Low-End Disruptions
Disruptive ideas usually start from one side of the customer’s expectations. Either the high-end customer with very high standards who is very demanding or the low-end customer with little demands and low expectations of the product.
Example for Low-End Disruptions
Amazon.com in the early day made it possible to exhibit out-of-print books which were normally too much of a niche for brick-and-mortar bookstores like Barnes & Nobles. So, they offered a large selection of books that were normally inaccessible or hard to find. Due to the nature of an online store, it was not expensive to display these titles on the inventory, and therefore Amazon was able to offer a broader selection of books while classical bookstores were selling a limited (pre-selected) number of books that were optimized for high turn-arounds.
This low-end disruption led to a quick uptake of the customer segment and to a disruption of the whole industry as they were able to grow the customer base and also their inventory to be the most comprehensive bookstore in the world.
Example for High-end Disruptions
A simple example of high-end disruption was FedEx in the 1980s when they first introduced their overnight offering. It was priced considerably higher and met the standards of demanding businesses and corporate clients who were willing to pay extra, as the time was critical and important documents needed fast delivery.
Market Disruption vs. Product Disruption
Disruptions can be seen also on two different levels. We already learned that disruptive innovation is targeting the same market with new technology. So while product disruption seems more obvious (New service, new Product, better Technology, etc.) it is not really that easy to see why the same market can be also disrupted.
And it all boils down to the terms “non-customers” or “non-consumers”. These are the customers and consumers that are currently not consuming products and services on the market. They are either people who:
- Intestinally don’t use the current offering on the market, even they are aware of it
- Use a different solution to their problem from another industry
- Were never considered in the industry but the product could fit their needs
RIM back in the day was a good example of this. Due to their new offering with Blackberry smartphones, they offered the business segment a new option for mobile phones. This lead to a whole market segment within an existing market that could be served by RIM.
2 Examples – Disruptive
- Netflix and other streaming services
Video rental and also areas of the entertainment industry got a major shift in customer value generation. Most of the offerings nowadays are being pushed over streaming services like Netflix, Amazon Prime, Disniey+, and many others. This lead to the almost extinction of DVD rental companies (Blockbuster) and also the demand for cinema.
Wikipedia was the first platform to easily access research, information, and content that was for centuries only distributed by the publishing industry which was profit-oriented and created expensive and elite access to information. Due to constant updating and the free-for-everyone nature of Wikipedia, it quickly leads to the extinction of encyclopedias like Encyclopedia Britannica and others.
2 Examples – Non-Disruptive
Non-disruptive innovation happens when there was no market before (radical innovation) and so no displacement or market shift occurs. So some examples showcase that e.g. Google or Online-Dating which created a completely new market while not disrupting another market at the same time. It doesn’t necessarily mean that this type of innovation is more or less efficient/good, but it is by definition, not a disruptive innovation.
While most people would see Google as a major disruptor it is in fact no disruptor. They were one of the early movers but not a disruptor by definition as they created the market and due to the nature of the market, they were able to achieve market dominance.
- Online Dating e.g. Tinder
As there was no online dating and online matching at that time, it was also impossible for Tinder to disrupt a market. They literally created a new market and therefore they were not disruptive to the online dating market.
4 Tips to create disruptive products
1. Build on asymmetric value creation
It might seem obvious but try to build your solution around the strengths of what you have and on the weaknesses of your partner. It will get more difficult to compete on value creation factors where your competition is strong.
This means you constantly need to innovate on areas where the competition finds it hard to replicate. This can be a technology, a value proposition, a brand positioning but also on communication and process levels.
2. Spin off disruptive products early
Due to the nature of disruptive innovations, it can be also wise to create early a spin-off from the company to make sure that there are no misalignments and conflicts of interest within the company.
Important factors also include freedom, flat structures, and a good reward mix for the involved parties. A lot of spin-offs also struggle with a misaligned company culture due to the origin of their company – so take care about the right culture and employing the right people for the task.
3. Shape the industry – Build Networks
Start early in shaping your industry. Build good relationships with governments, important stakeholders, and also potential partners even when you don’t need them at the moment. This will give you an edge in the industry and you have the support of your network when you are needing them.
4. Price at a lower point than similar solutions
When it comes to pricing there are many variables to consider. First of all the current consumers and customers in the market know the current price-value relation. Therefore a new market entrant must be priced comparably lower than a similar solution.
This also means that when you are deciding the price, it must be also comparably lower than other solutions. When we look back at the FedEx example of the overnight service, then it needed also to be cheaper than taking a flight on their own. So higher than the normal postage fee but cheaper than a comparable solution for the customer. Disruption can not happen when customers find a better solution, also when it is outside their own market.
You can be too early, you can be too late, you can have the wrong partner, you can have supply issues or a pandemic is hitting your industry. These are all things you can not control and a pinch of luck is always needed.
Conclusion on Disruptive Innovation
Disruptive innovation is a trending topic but we can sum it up as an existing market that gets shaken up with new products, services, or business models. The disruptive innovation can also target non-customers who get first-time access through this innovation and it can also animate existing users to switch as the new unique value proposition (also USP) is more convincing than existing solutions in the market.
We also learned that non-disruptive innovation can be an incremental, architectural, or even radical innovation. This depends on the fact if the market is new (architectural and radical) or if the market is existing (incremental).