The innovators dilemma is the tough choice any company faces when it has to choose between holding onto an existing market by doing the same, yet slightly better (sustaining innovation), or capturing new markets by embracing new technologies and adopting new business models (disruptive innovation). The first step towards creating disruptive innovation is to understand what it’s all about. The purpose of the guide is to help you understand how you can diversify your innovation portfolio and prioritize the areas that need the most improvement. In addition to explaining what disruption means and how you can prepare for it, we’ll also introduce some of the most significant examples of disruptive innovation for you to see how disruption works in the real world. Many businesses today use the SaaS (software as a service) revenue model to achieve that. We’ve observed four important points that get overlooked or misunderstood: The term “disruptive innovation” is misleading when it is used to refer to a product or service at one fixed point, rather than to the evolution of that product or service over time. At that time, they lived in San Francisco and had heard there was a big conference coming to town, due to which, all of the hotel rooms were sold out. Higher education in the United States is one of these. One might be tempted to say the company is disruptive. The theory of disruption predicts that when an entrant tackles incumbent competitors head-on, offering better products or services, the incumbents will accelerate their innovations to defend their business. Understand the characteristics of disruptive technologies: – Exponential growth and the 6 D’s 2. Founded in 2009, the company has enjoyed fantastic growth (it operates in hundreds of cities in 60 countries and is still expanding). In contrast, the digital technologies that allowed personal computers to disrupt minicomputers improved much more quickly; Compaq was able to increase revenue more than tenfold and reach parity with the industry leader, DEC, in only 12 years. But disrupters start by appealing to low-end or unserved consumers and then migrate to the mainstream market. The disruptive effect drives every competitor—incumbent and entrant—upmarket. When previously people had to go to the store to rent a movie as well as to return it, they could now access a variety of films and TV shows with fixed monthly subscription fee without having to leave their homes. They start by clarifying what classic disruption entails—a small enterprise targeting overlooked customers with a novel but modest offering and gradually moving upmarket to challenge the industry leaders. The key elements of that theory have been tested and validated through studies of many industries, including retail, computers, printing, motorcycles, cars, semiconductors, cardiovascular surgery, management education, financial services, management consulting, cameras, communications, and computer-aided design software. When Netflix eventually started to turn non-customers into customers with its more flexible and accessible online service, Blockbuster responded to the competition by launching its corresponding services. The concept of disruptive innovation was first defined by Harvard Business School professor Clayton Christensen in a HBR article and introduced in more detail later in his book called Innovator’s Dilemma. According to Strategic Readiness and Transformation Survey, executives in general may be overconfident in their ability to respond to disruption. And when new technology is developed, disruption theory does not dictate what managers should do. The theory of disruptive innovation, introduced in these pages in 1995, has proved to be a powerful way of thinking about innovation-driven growth. The multi-billion-dollar company had over 9 000 video rental stores globally and it employed nearly 85 000 people worldwide. There’s another troubling concern: In our experience, too many people who speak of “disruption” have not read a serious book or article on the subject. This opens the door to a disrupter focused (at first) on providing those low-end customers with a “good enough” product. Disruptive innovations cannot be defined by unidimensional characteristics. According to Merriam Webster, disruption is "to cause (something) … If we call every business success a “disruption,” then companies that rise to the top in very different ways will be seen as sources of insight into a common strategy for succeeding. Too frequently, they use the term loosely to invoke the concept of innovation in support of whatever it is they wish to do. Some entrants will founder, but the smart ones—the true disrupters—will improve their products and drive upmarket, where, once again, they can compete at the margin against higher-cost established competitors. The failures are not evidence of the deficiencies of disruption theory; they are simply boundary markers for the theory’s application. People can choose between a number of unique listings, such as boats, tents, tree houses, and villas whereas when staying at any of the major hotels, the experience is more or less the same. The story of AirnBnb started when the founders were forced to think of ways to cover their rent. Once the disruptive innovation enters the mainstream, the established companies typically pick up on the new concept or technology to respond to the competition. Compared to traditional operators, the total cost of ownership is typically significantly higher on SaaS. Disruptive Innovation Attributes: 1. Our current belief is that companies should create a separate division that operates under the protection of senior leadership to explore and exploit a new disruptive model. Instead, they want to maintain their share prices and focus on the most profitable customer segments. In other words, disruptive in… It is difficult to claim that the company found a low-end opportunity: That would have meant taxi service providers had overshot the needs of a material number of customers by making cabs too plentiful, too easy to use, and too clean. LO4. Creating disruptive innovation involves bigger risks and incumbents don’t necessarily have a plan for failure. For example, interviews with managers of established companies in the disk drive industry revealed that resource allocation processes prioritized sustaining innovations (which had high margins and targeted large markets with well-known customers) while inadvertently starving disruptive innovations (meant for smaller markets with poorly defined customers). Most of the elements of Uber’s strategy seem to be sustaining innovations. Far too many other forces are in play, each of which will reward further study. Disruptive innovations are made possible because they get started in two types of markets that incumbents overlook. Today, its on-demand all-you-can-watch movie platform is used by over 150 million people globally. Researchers then arrived at a second insight: Incumbents’ focus on their existing customers becomes institutionalized in internal processes that make it difficult for even senior managers to shift investment to disruptive innovations. Market disruption doesn’t happen overnight and even the greatest growth opportunities are often discovered through smaller, incremental improvements. In addition, it enables user generated content on the destination locations as well as the individual homes and rooms. Unfortunately, the theory has also been widely misunderstood, and the “disruptive” label has been applied too carelessly anytime a market newcomer shakes up well-established incumbents. It turns out, however, that the same forces leading incumbents to ignore early-stage disruptions also compel disrupters ultimately to disrupt. Being too confident about your abilities to transform and overlooking others’ potential to succeed is a sure way to get blindsided in the ongoing process of innovation. "Success breeds complacency. The answer, according to Zeleny, is the support network of high technology. Of course, as the disruptive stand-alone business grows, it may eventually steal customers from the core. It is rare that a technology or product is inherently sustaining or disruptive. Salesforce is considered a pioneer of the SaaS business model – a licensing and delivery model in which software is licensed on a subscription basis. The solution could also be integrated with other applications and platforms. Identify and differentiate the concepts related to sustaining innovation, incremental innovation, radical innovation and disruptive innovation. A third common mistake is to focus on the results achieved—to claim that a company is disruptive by virtue of its success. Instead, they wait until its quality rises enough to satisfy them. The study aims to conduct a systematic review to characterise the spread and use of the concept of ‘disruptive innovation’ within the healthcare sector. This type of innovation not only requires looking at the new technology curve but also at markets that are typically ignored by the large companies and analysts. Low-end footholds exist because incumbents typically try to provide their most profitable and demanding customers with ever-improving products and services, and they pay less attention to less-demanding customers. No. In this post, we’ll help you take advantage of these changes and prepare for the future. Many leaders of small, entrepreneurial companies praise it as their guiding star; so do many executives at large, well-established organizations, including Intel, Southern New Hampshire University, and Salesforce.com. Disruptive innovations drive consumption from non-consumers. Based on what people do, not what they say they do. But success is not built into the definition of disruption: Not every disruptive path leads to a triumph, and not every triumphant newcomer follows a disruptive path. This often means that the best performing companies have well-developed systems for killing ideas their most profitable customers aren’t willing to pay extra for. Before surveying and interviewing experts on each of the 77 cases, we identified four key elements of the theory of disruption: (1) that incumbents in a market are improving along a trajectory of sustaining innovation, (2) that they overshoot customer needs, (3) that they possess the capability to respond to disruptive threats, and (4) that incumbents end up floundering as a result of the disruption. The Digital Revolution, Market Development and Disruptive Innovation of News Media Industry LO2. The value of disruptive innovation to the mainstream and high-end customer segments is minimal at this point, at the bottom of the S-curve. We go on to trace major turning points in the evolution of our thinking and make the case that what we have learned allows us to more accurately predict which businesses will grow. We call this a “solution shop” business model. Although these new entrants might be targeting a different customer segments at the moment, you don't want to miss potential growth opportunities by only focusing on what's working at the moment for your current customer base.To keep up with the ongoing change, it's critical to ask the right questions and keep the customer at the core so you're up-to-date on what they actually want and need. The question now is whether there is a novel technology or business model that allows new entrants to move upmarket without emulating the incumbents’ high costs—that is, to follow a disruptive path. Although the company has faced a lot of legal resistance, it has managed to build a business that has 5 million lodging options across 81,000 cities in the world, having more rooms available than any other major hotel chain. Smart disrupters improve their products and drive upmarket. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. It provides travellers with an opportunity to live like locals and the platform works as a transaction facilitator between them and the hosts. The characteristics of discontinuous or disruptive innovation have been previously delineated by academic researchers including James Utterback and Clayton Christenson. And it got there via a classically disruptive path. Most leaders were said to underestimate the sources of future competition and instead of considering new market entrants a threat, the biggest competition was seen to come from existing players in the market. Over the course of about a decade, Tesla has carried out each step of its Master Plan one by one. Uber is clearly transforming the taxi business in the United States. If disruption theory is correct, Tesla’s future holds either acquisition by a much larger incumbent or a years-long and hard-fought battle for market significance. Disruptive: It is the technology or the new model of the business that disrupts the entire existing market. Common mistakes, the authors say, include failing to view disruption as a gradual process (which may lead incumbents to ignore significant threats) and blindly accepting the “Disrupt or be disrupted” mantra (which may lead incumbents to jeopardize their core business as they try to defend against disruptive competitors). Think of companies that did HW GPS devices missing the need to shift to SW only/Apps until Waze came along and ate their lunch. Most every innovation—disruptive or not—begins life as a small-scale experiment. Consider the health care industry. And if so, when? This was achieved not merely through product improvements but also through the introduction of a new business model. Land-grant universities, teachers’ colleges, two-year colleges, and so on were initially launched to serve those for whom a traditional four-year liberal arts education was out of reach or unnecessary. The rarer type is a disruptive innovation. The first step towards creating disruptive innovation is to understand what it’s all about. The iPhone’s subsequent growth is better explained by disruption—not of other smartphones but of the laptop as the primary access point to the internet. This led to the distinction we discussed earlier between low-end and new-market footholds. Radical: It is the technological breakthrough that transfers or creates new markets or industries. Incumbent companies do need to respond to disruption if it’s occurring, but they should not overreact by dismantling a still-profitable business. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. It initially offered a DVD-by-mail rental service and later launched its online, subscription-based movie streaming service. Let’s consider Uber, the much-feted transportation company whose mobile application connects consumers who need rides with drivers who are willing to provide them. As the guys were looking for a quick way to make a little extra money, they decided to give people the opportunity to stay at their place and sleep on an air mattress. With the help of the The Business Model Canvas, you can define, and map nine key strategic areas related to external and internal factors to understand what is required to make your idea a real business. As the example of Uber shows, identifying true disruptive innovation is tricky. The authors acknowledge that disruption theory has certain limitations. Consequently, this offering from Uber appeals to the low end of the limousine service market: customers willing to sacrifice a measure of convenience for monetary savings. Disruptive innovation refers to a concept, product, or a service that either disrupts an existing market or creates a completely new market segment. Complacency breeds failure. Despite the fact that creating disruptive innovation can be a challenge, it doesn’t mean there’s nothing you can do to prepare for it – you just have to approach it differently. CHARACTERISTICS OF DISRUPTIVE INNOVATIONS. 6. Apple, on the other hand, has followed a disruptive path by building its ecosystem of app developers so as to make the iPhone more like a personal computer. For example, when Netflix launched, in 1997, its initial service wasn’t appealing to most of Blockbuster’s customers, who rented movies (typically new releases) on impulse. The data supports the theory’s prediction that entrants pursuing a sustaining strategy for a stand-alone business will face steep odds: In Christensen’s seminal study of the disk drive industry, only 6% of sustaining entrants managed to succeed. What we’ve realized is that, very often, low-end and new-market footholds are populated not by a lone would-be disrupter, but by several comparable entrant firms whose products are simpler, more convenient, or less costly than those sold by incumbents. Put simply, they find a way to turn nonconsumers into consumers. Privacy Policy & Terms of Use. Innovators are making inroads into the mainstream market at a stunning pace. When new technology arises, disruption theory can guide strategic choices. In practice, disruption happens when traditional value drivers in an existing market are significantly changed. Many of these new entrants strived to improve over time, compelled by analogues of the pursuit of profitability: a desire for growth, prestige, and the capacity to do greater good. When disruptive innovation first enters the market, it initially caters only to a small and typically not very profitable customer segment, while established organizations are focused on serving more demanding, high-end customers. These improvements can be incremental advances or major breakthroughs, but they all enable firms to sell more products to their most profitable customers. Because both incumbents and newcomers are seemingly following the same game plan, it is perhaps no surprise that incumbents are able to maintain their positions. Characteristics of Disruptive Innovation: School librarians, bowling-league operators, and other small customers, priced out of the market, made do with carbon paper or mimeograph machines. But that’s much too broad a usage. If Netflix (like Uber) had begun by launching a service targeted at a larger competitor’s core market, Blockbuster’s response would very likely have been a vigorous and perhaps successful counterattack. Uber’s financial and strategic achievements do not qualify the company as genuinely disruptive—although the company is almost always described that way. According to Christensen, one of the reasons why building disruptive innovation is challenging for large organizations is because these companies depend on customers and investors for resources. Incremental: Gradual and continuous improvements on the manufacturing products and services is seen. Today, basically all modern technology companies use SaaS revenue model to drive scalable growth in their companies. positive network effects between the community of hosts and guests, by enticing more users to join and participate. At this point, however, Netflix was already on the exponential part of the curve and despite Blockbuster’s brand and resources, Netflix had already established its position in the market. The categorization of a "disruptive" innovation was made when a given technology altered the value proposition for treating a disease, relative to incumbent technology. In Uber’s case, we believe that the regulated nature of the taxi business is a large part of the answer. Netflix had an exclusively online interface and a large inventory of movies, but delivery through the U.S. mail meant selections took several days to arrive. Disrupters tend to focus on getting the business model, rather than merely the product, just right. The theory of disruptive innovation, introduced in these pages in 1995, has proved to be a powerful way of thinking about innovation-driven growth. For example, more than 50 years after the first discount department store was opened, mainstream retail companies still operate their traditional department-store formats. Disruptive Innovation – What is It and How Does It Work? One way to make sure you're on the right track is to create a concrete roadmap to guide you to the desired direction. General practitioners operating out of their offices often rely on their years of experience and on test results to interpret patients’ symptoms, make diagnoses, and prescribe treatment. 4 5 In the case of Dr. Utterback's work, the proposed model of innovation rests upon a foundation of analysis with a primary For example, any number of internet-based retailers pursued disruptive paths in the late 1990s, but only a small number prospered. From this relatively modest beginning, personal photocopier makers gradually built a major position in the mainstream photocopier market that Xerox valued. 1. Uber has quite arguably been increasing total demand—that’s what happens when you develop a better, less-expensive solution to a widespread customer need. What’s interesting about Netflix is that if you want to disrupt an industry, you must be willing to disrupt yourself. But is it disrupting the taxi business? Business model innovation can be used to change how your company delivers value to the customers or captures it from the market. Additional refinements to the theory have been made to address certain anomalies, or unexpected scenarios, that the theory could not explain. The first minicomputers were disruptive not merely because they were low-end upstarts when they appeared on the scene, nor because they were later heralded as superior to mainframes in many markets; they were disruptive by virtue of the path they followed from the fringe to the mainstream. As a result, the theory is sometimes criticized for shortcomings that have already been addressed. This means that there’s a new, even bigger wave of innovation ahead of us and virtually every industry will be affected by this change – one way or another. When SaaS business model was first introduced in the beginning of 2000, it wasn’t very successful as it was a lot more complex compared to traditional businesses and the performance couldn’t be measured with traditional value metrics. Complexity or simplicity refers to how difficult it is for adopters to learn to … Then we point out some common pitfalls in the theory’s application, how these arise, and why correctly using the theory matters. Applying the theory correctly is essential to realizing its benefits. Tap into consumer’s latent desire. In addition, product development takes time and requires multiple iterations, which makes catching up quite unlikely, even with the additional resources the incumbent has at its disposal. Initially, the theory of disruptive innovation was simply a statement about correlation. 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