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The Disruptive Innovation Theory: Concepts, Usefulness, and Tips
The disruptive innovation theory has been referred to as the 21st century's most influential business idea. The business world has always been competitive, and this theory helped describe the phenomenon where new entrants in a market manage to push out incumbents by targeting neglected or underserved customers in existing market segments.
What are the primary concepts of disruptive innovation theory, and how useful is the theory in your business strategy?
Is it worth your time to challenge every new entrant in your market for fear that they will successfully disrupt it, or is it a mistake to direct your resources in this way?
Let's look at everything you need to know about disruptive innovation theory to sustain and grow your organization.
What Is Disruptive Innovation Theory?
Coined in the 1990s by Clayton Christensen, the term disruptive innovation refers to innovation that either:
- Enters at the bottom of a market that already exists and displaces the leading products, firms, and alliances in the market over time; or
- Creates a new market and value network.
Even if an innovation is revolutionary, it isn't necessarily disruptive according to this concept.
For example, the invention of the automobile in the late 1800s wasn't disruptive because they were an expensive luxury that didn't take the place of the everyday use of horse-drawn vehicles. What was a disruptive innovation, though, was the introduction of the mass-produced automobile in the form of the more affordable Ford Model T in 1908.
Who Are Disruptive Innovators?
It is common for disruptive innovations to be created by entrepreneurs and outsiders rather than higher-ups in a market's leading companies. That is because market leaders often don't have the time or space to pursue disruptive innovations, even if the idea does occur to them. On top of that, they might find that the business environment is too stiff to be accepting of them, that they don't appear to be profitable enough from the get-go, and that they take resources away from the sustaining innovations that must be developed to remain competitive in the current market.
Additionally, disruptive innovations often take longer to develop and come with higher risks than more sustained innovations. That said, when disruptive innovation is released into the market, they often have a much larger impact on the existing markets and penetrate the market much more quickly.
Are you looking to learn more about impactful theories in the business world? Learn about motivating your employees with Maslow's Hierarchy of Needs theory in this post.
What Are Its Key Concepts?
Now that we have a better understanding of the disruptive innovation theory and who disruptive innovators are, let's dive into some of the key concepts of this theory.
1. The Two Varieties of Disruption: New-Market and Low-End
When discussing disruptive innovation, it's essential to understand that there are two key types: new market disruption and low-end disruption.
New market disruption focuses on underserved customers. That is when a company creates a new segment in an already existing market and then claims it. They do this by appealing to a customer base they have identified as underserved and slowly improving the product's quality until they displace the dominant businesses in the market.
Low-end disruption focuses on overserved customers. These businesses slide into the bottom of a market and ultimately capture their competitors' customers by offering a lower-priced product that performs acceptably well.
2. Innovation Isn't Inherently Disruptive
As mentioned in the above example about the invention of the automobile, it's essential to understand that not all innovation is disruptive innovation.
Disruptive innovation occurs when incumbent businesses are so focused on the needs of their most profitable customers that they misjudge the needs of or neglect the other segments of their customer base. At this point, a new company can move in and serve the customers that the existing companies had put on the back burner.
3. Disruptive Innovation Isn't a Product; It's a Process
When we think of innovations, we often think of physical inventions. The printing press, the telephone, the computer, and the iPhone are a few.
According to Christensen, the thing to keep an eye on when determining if something will break through as a disruptive innovation is the process, not the product.
4. Not All New Entrants Are Worthy Adversaries
If you are a part of an incumbent business, the notion of disruptive innovation can be anxiety-inducing. You might constantly look over your shoulder at every small company that crops up with the fear that they will kick you out of your top spot in the market.
It is, of course, always essential to keep an eye on the market and never get too comfortable, even (or perhaps especially) when you're at the top of the ladder.
That said, it's important to remember that not every new company that emerges into your market will be disruptive.
Trying to fight every new market entrant will likely create a waste of vital, finite resources in your company. You'll instead want to pinpoint the new players that are a problem for you and focus your energies in that direction when necessary.
What Are the Requirements for Disruptive Innovation?
For companies looking to utilize the potential advantages of disruptive innovation, there are several requirements to be aware of.
- Innovative business model: Incumbent companies don't typically adopt an innovative business model because it offers low profit margins at first. New companies that use an innovative business model to target neglected customers can create economical, easy-to-use solutions to problems of the customer base.
- Enabling technology: Enabling technology in business are the innovations and technologies that create a substantial improvement or change to how people do things. When talking about disruptive innovation, enabling technologies are the innovations or technologies that make it possible for a broader market to have access to a more affordable product.
- Coherent value network: To successfully create a disruptive innovation in a market, a business needs to have business partners both upstream and downstream that will benefit from a new, disruptive innovation. These suppliers, vendors, and distributors might have to change their organization or process to adopt a new business model that suits disruptive innovation. Without buy-in from a company's network, it is difficult, if not impossible, to succeed in creating a disruptive innovation.
Is Disruptive Innovation Theory Useful?
Clayton M. Christensen's theory of disruptive innovation has tremendously influenced the business world. There has been a lot of conversation surrounding the topic since it was first brought to the forefront, with some arguing that the theory is more valuable than others.
According to the MIT Sloan Management Review, the theory is more a useful warning of something that incumbent companies should keep an eye on rather than a prescription for something that will definitely happen in any given industry. The theory basically hasn't been tested in academic literature, so how common this theory is and its validity is ultimately still up in the air.
There have been countless examples of disruptive innovation, including Amazon, Xerox, Best Buy, and Wi-Fi. There is no question that companies have emerged to push out incumbent companies in drastic and revolutionary ways, and disruptive innovation theory can provide a helpful warning to companies of all sizes. That said, it's essential to realize that your resources might not be well spent trying to challenge every new market entrant.
Comparing Disruptive and Sustaining Innovation
According to a survey from McKinsey Global, 84% of executives believe that innovation is "extremely or very important" to their companies' growth strategies. Understanding the different kinds of innovation can be essential when creating a business strategy.
In addition to disruptive innovation, the other type of innovation is sustaining innovation. Let's take a look at each one to help you recognize them when they crop up and understand the importance of each.
When a company creates products that are better performing to sell them to their best customers for higher profits, sustaining innovation occurs. This strategy is usually used by companies that are already big players in their industry.
An example of sustaining innovation in recent history is the introduction of laptops as the innovation that came after the desktop computer. While there weren't many new abilities or qualities to laptops when compared to desktops, the portability laptops afforded was novel and catered to customers that were willing to pay more for something that had similar capabilities.
There is nothing wrong with sustaining innovation; relying on it can sometimes be a perfectly suitable strategy.
However, you have to watch out for new entrants into the market that can be disruptive to this strategy. Let's talk about disruptive innovation for a minute in contrast to sustaining innovation.
Plenty of big companies have had sustaining innovation strategies for decades and maintained dominance in their market. Generally, it is difficult for companies to sustain their success over time, even when they are comprised of intelligent, capable, engaged people.
One of the reasons this happens is because of the second type of innovation: disruptive innovation. When a new market entrant emerges and poses a challenge to a more prominent company that currently dominates the industry, it can shake things up both in the business world and the world of consumers.
What does it look like when disruptive innovation occurs?
When a new market entrant engages in low-end or new market disruption, the existing market giant almost always retreats upmarket rather than trying to fight the new entrant for lower-end clients or a new market segment. That is because, at least for a moment, the profit margins are on the lower end.
The incumbent company, therefore, will often pull out of the segment that is being challenged because its innovation strategy is driven by higher profit margins.
Over time, the new entrant can improve what they offer to the customer and make their way into the higher profit margin market segments. The incumbent company continues moving to higher-end clients instead of trying to challenge the new entrant for the market segments with lower profit margins.
As the incumbent keeps moving up the market, the new entrant eventually pushes them out entirely. That is because they were able to increasingly improve their offering in a way that it has dominance in all of the market segments or even makes it so the products once created by the incumbent are now entirely obsolete.
Cultivating Innovation in the Workplace
Disruptive innovation theory shook up the business world when it was first introduced, and it's been a major topic of conversation for decades now. One of the fascinating things about this theory is that it can be exhilarating or terrifying depending on where you find yourself in the market hierarchy. For new startups, it creates the promise of dominating a market, while for incumbent companies, it outlines the potential threat of being pushed out of the market entirely.
This theory is perhaps most useful as a warning to big companies and as a guide for new companies, but it's crucial to understand that it isn't a prescription for what will definitely happen in any given industry. For example, a new company might try and follow the general timeline of the disruptive innovation strategy only to find that a larger company picks up on its idea and focuses on the market segment that the startup was aiming towards. In this situation, the incumbent company dominates the segment because they already have the brand awareness, distribution networks, and infrastructure to produce the new product or service.
Maybe the most valuable lesson to be learned from the disruptive innovation theory is to recognize that the business world is an ever-changing, ever-evolving landscape. No matter how large or dominant a company is, there is no certainty that its success will be self-sustaining without the maintenance of an innovative mindset.
To help your business succeed in the changing business environment, helping your managers and employees cultivate creativity and innovative thinking is one of the best things you can do. If you're looking to uncover creative talents in your workplace and encourage creativity, check out our Breakthrough Creativity Profile.
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