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L5. What is disruptive innovation? - Coggle Diagram
L5. What is disruptive innovation?
Is Uber a
Disruptive Innovation?
According to the theory,
the answer is no.
Disruptive innovations originate in low-end
or new-market footholds.
Disruptive innovations are made possible because they get started in two types of markets that incumbents overlook.
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.
A disruptive innovation, by definition, starts from one of those two footholds
New-market footholds
Disrupters create a market where none existed.
They find a way to turn nonconsumers into consumers.
Disruptive innovations don’t catch on with mainstream customers until quality catches up to their standards.
Disruption theory differentiates disruptive innovations from what are called “sustaining innovations.”
These improvements can be incremental advances or major breakthroughs, but they all enable firms to sell more products to their most profitable customers.
Typically, customers are not willing to switch to the new offering merely because it is less expensive. Instead, they wait until its quality rises enough to satisfy them. (This is how disruption drives prices down in a market).
Why Getting It
Right Matters
Applying the theory correctly is essential to realizing its benefits.
We’ve observed four important points that get overlooked or misunderstood:
Disrupters often build business models that are very different from those of incumbents.
“solution shop”business model.
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.
“process” business model
They follow standardized protocols to diagnose and treat a small but increasing number of disorders.
Some disruptive innovations succeed; some don’t.
For example, any number of internet-based retailers pursued disruptive paths in the late 1990s, but only a small number prospered. The failures are not evidence of the deficiencies of disruption theory; they are simply boundary markers for the theory’s application.
The theory says very little about how to win in the foothold market, other than to play the odds and avoid head-on competition with better-resourced incumbents.
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.
This creates a danger: Managers may mix and match behaviors that are very likely inconsistent with one another and thus unlikely to yield the hoped-for result.
Disruption is a process.
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.
Most every innovation—disruptive or not begins life as a small-scale experiment. Disrupters tend to focus on getting the business model, rather than merely the product, just right.
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.
The fact that disruption can take time helps to explain why incumbents frequently overlook disruptors.
When Netflix launched, its initial service wasn’t appealing to most of Blockbuster’s customers, who rented movies on impulse.
Netflix had an exclusively online interface and a large inventory of movies. The service appealed to only a few customer groups.
If Netflix had not eventually begun to serve a broader segment of the market, Blockbuster’s decision to ignore this competitor would not have been a strategic blunder:
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The mantra “Disrupt or be disrupted” can misguide us.
Incumbent companies do need to respond to disruption if it’s occurring, but they should not overreact by dismantling a still profitable business.
Instead, they should continue to strengthen relationships with core customers by investing in sustaining innovations.
What a Disruptive Innovation Lens Can Reveal
It is rare that a technology or product is inherently sustaining or disruptive. And when new technology is developed, disruption theory does not dictate what managers should do. Instead it helps them make a strategic choice between taking a sustaining path and taking a disruptive one.
Either they will beat back the entrant by offering even better services or products at comparable prices, or one of them will acquire the entrant.
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.
How Our Thinking About
Disruption Has Developed
Initially, the theory of disruptive innovation was simply a statement about correlation. Empirical findings showed that incumbents outperformed entrants in a sustaining innovation context but underperformed in a disruptive innovation context.
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.
Those two insights helped explain why incumbents rarely responded effectively (if at all) to disruptive innovations, but not why entrants eventually moved upmarket to challenge incumbents, over and over again. It turns out.
First, researchers realized that a company’s propensity for strategic change is profoundly affected by the interests of customers who provide the resources the firm needs to survive.
The disruptive effect drives every competitor incumbent and entrant upmarket.
The incumbents provide a de facto price umbrella, allowing many of the entrants to enjoy profitable growth within the foothold market.
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.
Making sense of anomalies.
Additional refinements to the theory have been made to address certain anomalies, or unexpected scenarios, that the theory could not explain.
For example, we originally assumed that any disruptive innovation took root in the lowest tiers of an established market yet sometimes new entrants seemed to be competing in entirely new markets.
We still have a lot to learn.
Universally effective responses to disruptive threats remain elusive.
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. Sometimes this works—and sometimes it doesn’t.
In certain cases, a failed response to a disruptive threat cannot be attributed to a lack of understanding, insufficient executive attention, or inadequate financial investment.
The challenges that arise from being an incumbent and an entrant simultaneously have yet to be fully specified; how best to meet those challenges is still to be discovered.