In today’s world, consumers have endless choices. As the rate of technological change accelerates, these choices grow year-on-year, with competition intensifying across virtually every industry. Disruptive innovation is at the forefront of this evolution.
According to Forbes, innovation could wipe out $8 trillion worth of U.S. public company equity. Therefore, if long-established titans of industry are at risk of succumbing to the impact of digital disruption, then so is every company.
There is no option anymore—every company must have an effective strategy to either engage in or counteract disruptive innovation in its industry.
In this article, we'll discuss disruptive innovation in detail—what it is, its challenges, and how to implement it to grow your organization and your bottom line.
What Is Disruptive Innovation?
Disruptive innovation is when a new business model, concept, product, or service creates a new market segment and value drivers. A smaller firm enters the bottom of the market, leveraging the benefits of lower costs and scarce competition to gain traction, then rapidly surges upmarket to displace established market leaders and products.
Clayton Christensen first coined the disruptive innovation theory in a Harvard Business School paper to refer to companies who meet market demands with a simpler, cheaper solution. Contrary to what many people may think, the larger incumbents were not standing still—they were actively innovating but typically focused on the practice of sustaining innovation to improve existing services.
Disruptive vs. Sustaining Innovation
A simpler disruptive innovation definition labels it as the creation of dynamic, new solutions to cater to unsatisfied market demand. This practice often results in game-changing products that are fundamentally different from any current choice on the market.
By comparison, sustaining innovation seeks only to improve upon existing concepts or products. Therefore, these innovations are merely slight variations of what the market has already seen.
It is common to see industry newcomers engage in more disruptive forms of innovation because otherwise, it is almost impossible to compete with incumbents who have a larger reputation and can afford to offer their products and services at lower rates to create barriers to entry.
Types of Disruptive Innovation Models
Not all disruptive innovation occurs the same way, as disruptors can use a variety of strategies. However, two primary models dominate disruption. Depending on the model they use, up-and-coming firms usually fit the category of either "New Market Disruptors" or "Low-End Market Disruptors."
New-market disruptors create products or solutions that are so much more affordable or convenient than existing options that entirely new segments of the population can begin using them.
These new-market disruptors create new value networks that are different from existing competitors. Instead of competing with the incumbents in the industry, new-market disruptors are competing with “nonconsumption.”
They are attracting new people to become customers when they would never have used any competing products beforehand. As such, the only existing direct competitor is apathy or non-action.
Low-End Market Disruptors
Low-end market disruption occurs at the “low end” of existing value networks. Unlike new-market disruption, it does not launch a groundbreaking alternative.
Instead, low-end market disruptors create a more attractive offer for customers of existing competitors. Low-end market disruptors often fend off attacks from incumbents because low-end disruption entails lower profit margins that might not be worth the time or investment from incumbents.
An example of this is discount retailers, who offer a lower-cost option than incumbents. By doing this, they can pick off the customers with smaller budgets, who may offer a lower customer lifetime value (CLV) to larger firms.
The retailer Wal-Mart successfully executed low-end market disruption by accepting 23% profit margins instead of the industry-standard 40%.
Defining Characteristics of Disruptive Innovation
There are several defining characteristics of innovation that qualify it as genuinely disruptive:
Lower margins - All things being equal, most businesses want to focus on higher profit margins, as it offers more room for error and enables greater spending on marketing and development. Disruptors accept lower margins and often focus on systemization and high volume to maintain profitability.
Higher risks - Disruptors often undertake higher risks. This risk is essential because they are not riding a wave of proven customer demand or a well-trodden path. They are an evangelist for an entirely new category.
Disrupts an existing market or creates a new one - As its name implies, this form of innovation disrupts existing value networks or creates entirely new market segments. This approach is different from merely creating new iterations of current solutions.
Involves new technology and a new business model - Disruptors need to have a vision for new technologies or new models to profit from their inventions. One example is taking a technology concept that is generally reserved for enterprise companies and making it available or affordable for consumers.
It happens slowly at first - Disruptive innovation starts slow until it hits the mainstream. At this point, it grows exponentially. For example, when Amazon disrupted booksellers by allowing customers to order books online.
New innovation is often ignored at the outset - At the beginning, current providers ignore the newcomer, dismissing it as a fad. They don't feel threatened until it is too late.
It seems obvious only after the fact - Many consumers and competitors will think your solution is obvious. However, this realization often happens after you have achieved mainstream success.
The Innovator’s Dilemma
Once you understand the differences between disruptive innovation and sustainable innovation, you have a choice to make, which presents a challenge commonly known as “the Innovator’s Dilemma.”
There is often a higher upside to innovating in a disruptive manner. However, there is also much more risk, time, and money involved. Because of these potential costs, innovating in a disruptive fashion may be ill-suited for organizations that do not wish to commit these resources.
With sustainable innovation, you may not achieve such heights in terms of exponential growth or profit. However, you can usually produce an incremental increase in profits or market share with less risk.
It is important to note that you don't have to choose only one type of innovation at the other's expense. You can employ a strategy that borrows from both innovation types. In this way, innovation categories are actually complementary and not necessarily combative.
Examples of Disruptive Innovation
The disrupting business is not limited to a narrow set of skill sets or markets—it can happen across all industries in a myriad of ways. Let's take a look at some different disruptive innovation examples:
Netflix is an excellent example of disruptive innovation in the realm of video streaming. It incorporates all of the qualities of disruption. Netflix started small by serving a niche portion of the video streaming market—those who didn't mind waiting a few days or weeks to see their movies.
At the time, Blockbuster was the king of video rentals. But like many incumbents, it was focused on their current most profitable customers instead of new markets.
Streaming video became extremely popular due to its cost and convenience, and Netflix quickly became the first choice for video watchers. Blockbuster executives were dismissing Netflix in 2008, but by 2010, Blockbuster was bankrupt.
The iPhone is an example of disruptive innovation. It owns the idea of the smartphone category because when Steve Jobs stood on the stage in 2007 and unveiled this phone, it ushered in an entirely new category of devices.
It didn’t just improve on existing phones like the Blackberry. Instead, it created an entirely new way for consumers to access the internet and enjoy digital experiences.
While there are many smartphone models today, none carry the reputation or prestige of Apple's iPhone. Innovating by disrupting a category or creating your own often means that you enjoy the first-mover advantage. In Apple's case, they held that advantage in the market for at least a decade.
Before laptops and personal computers, there were mainframe computers. While powerful, they required certain skills to operate, space to contain, and money to acquire.
Therefore, the customers only consisted of large companies or universities who could bypass these barriers to usage. Minicomputers came along and disrupted the industry, followed soon by home desktop computers.
Incumbents weren’t focused on these initially smaller markets. As such, the newcomers to the industry eventually came to dominate it. Today you hear a lot about Dell, HP, Apple, and Toshiba. But try to think of the last time you saw a computer made by IBM, which was disrupted by the internet revolution.
For years, incandescent bulbs were practically the only option for lighting homes and offices. LEDs hit the market as a disruptive technology but didn’t get much attention from existing light makers due to their unreliable nature and reputation for low quality.
However, rapid innovation happened, and now: LEDs use less electricity and last longer. Almost every big lightbulb maker today now offers LEDs. And in fact, many local governments require LED bulbs to promote energy conservation.
Artificial Intelligence (AI)
AI has been another massively disruptive technology, as it helps enterprises collect and analyze vast amounts of data with incredible speed and accuracy. As AI technology uses advanced machine learning processes, including language pattern recognition and image analysis, there is simply no way for traditional tools or humans to compete.
One of the many areas where AI has changed consumer habits is in cloud storage. Nowadays, anyone can pay an affordable monthly subscription to store data in the cloud.
Uber started a ride-sharing revolution with the launch of its peer-to-peer (P2P) app. Traditional taxis were more unreliable, costly, and offered little in regards to customer service or recourse for a bad experience.
Now, you don’t need to wander out to the street with the hopes of waving down a cab. You can simply press a few buttons on your phone and arrange for a driver to pick you up in a relatively short time frame. Even the payment is completely digital.
Software as a Service (SaaS)
Most business software of the past was clunky, expensive, and required computers with sufficient processing power and capacity to download and run the programs without a hitch. But as internet speed and connectivity became more reliable, and computers became more affordable, the SaaS industry began to rise.
Today, a company doesn't need to pay tens of thousands of dollars for enterprise software. Instead, the SaaS model allows small businesses to pay a monthly fee for a cloud service that they can cancel anytime to avoid a high upfront investment.
Peer to Peer Accommodation
The P2P model allows two individuals to sell, buy, or communicate directly with each other without a third-party provider. Just like Uber is P2P for transportation, Airbnb is a P2P disruptor for accommodation.
Before, you had to pay a hotel or other company for a place to stay. Airbnb transformed the accommodation sector by allowing individuals to open up their homes for unique experiences, and quite often, lower prices than hotels.
Hotel chains like Wyatt and Hilton have had to adjust their business models, changing their pricing, and even investing in these P2P accommodation companies to remain competitive. In a world where you don’t need the middle man, people don’t want to pay more or deal with the extra hassle.
No longer are people limited to transferring funds through legacy providers such as banks or even PayPal. Instead, cryptocurrencies like Bitcoin, BitGold, and Ethereum offer an encrypted, free (or low cost) way to exchange value digitally.
Financial institutions initially downplayed and even outright ignored cryptocurrencies, seeing them as flash in the pan. However, when Bitcoin’s value skyrocketed in 2017, these same organizations took note. Many even began to invest in their own crypto solutions.
Obstacles to Innovation
Innovating in theory and putting it into practice in your organization are two very different things. Just looking at disruptive innovation examples won’t get you the results you want. When dealing with real people (both your team and the market you target), you will have some obstacles to overcome:
Lack of Talent
Coming up with new ideas relies on people within your organization with the right skillset. You can’t expect to innovate within technology, for instance, if you only maintain sales and customer service personnel. That being said, you can’t innovate within technology with pure technologists either.
It's best to have a mix of empathy, design, and technology to innovate at a high level in today's world. This reality means hiring the right people and letting them do what they do best.
Lack of Leadership
Innovating at such a powerful level that you disrupt an entire market involves high-risk tolerance. Not all managers are cut out for this high-risk activity. Some leaders are more suited for sustaining the status quo — and that's perfectly fine.
At the end of the day, you need various leaders to perform unique roles. If you feel that your current leadership is not well prepared for disruptive undertakings, don’t hesitate to look outside of your organization for the right personnel.
Lack of Culture
Understanding that you have a lack of innovative culture is often hard to diagnose. This problem happens because an organization's culture is so ingrained into everyday operations that you may not notice that innovations are happening at a slow pace or are out of line with market demands.
Great companies make culture a priority, evaluating it on an ongoing basis. Sometimes, this means bringing in third-party experts to see what you can't see. This attitude is particularly beneficial if the consultants have direct experience with innovative projects.
How to Prepare for Disruptive Innovation
Here’s the truth:
Disruptive innovation is inevitable. Sooner or later, your market is going to face a newcomer with a never-seen-before idea or business model. You must seek out ways of doing it first or else brace for the impact.
Here are three steps to prepare your business for disruptive innovation:
Listen To Your Customers
Each target market is unique. In fact, each consumer within a market is also unique. Because of this, it is highly unlikely that you will predict exactly what your target market wants on your first guess. You need to listen first and act second.
The best way to gauge consumer demand today is by using analytics and existing data platforms. You can do this by tracking online behavior such as keyword searches and interaction with your website. From this information, you can craft a custom marketing plan that speaks to your market’s needs.
Focus On Your Business Model
Your disruption business model is crucial to ensuring that you start on the right foot with your innovation.
The right business model can provide a structure that offers a greater chance of disruption and profits, whereas the wrong one will have you running in circles. There are two primary models you can use:
Business Model Innovation involves adapting your business model in a way that drives more value for your customers. This strategy seeks to change the underlying value proposition (the one main thing you do for your market better than anyone else can).
Leverage Existing Business Model does not radically change your underlying value proposition. Instead, you focus on making continual improvements to your core business offering.
If you are already experiencing rapid growth within your organization, then perhaps you should simply make incremental changes. However, if you’re starting from scratch, or pivoting, then a complete business model innovation is most likely the right choice.
Find an Innovation Partner
Innovation is a challenge for any organization, regardless of its resources, budget, or how long it has been in business.
A partner can help you speed up the innovation process and offer new perspectives, expertise, and ideas that your organization may not have access to otherwise.
Through initiatives like corporate accelerators, innovation labs, and incubators, you can forge partnerships with individuals that “speak the language” of innovation, and together, devise viable concepts and models that can disrupt a market.
Join the MassChallenge Corporate Innovation Accelerator
Choosing the right innovation partner can be tricky. You need to embrace the concept of open innovation to look outside your organization. By considering both respected experts and new talent alike, you can identify prospective business partners that share your vision for how the existing market could evolve.
MassChallenge offers corporations a platform and a ready-made network of innovation partners to connect with and start working on groundbreaking ideas.
Join the MassChallenge today, so you can find the ideal innovation partner to create new concepts and disrupt marketplaces, ultimately, to offer customers better products, services, and experiences.