What is Disruptive Innovation?

Disrupt rethink reinvent repositionIt’s a very good question.  There are a number of buzz phrases from digital transformation, to digital disruption, technological innovation and disruptive innovation, but what does it all mean?

There is always a danger with buzz words that they come to be synonymous with the lowest common denominator. For example, 'digital disruption' for some may be little more than digital marketing.

The phrase “Disruptive Innovation” is ascribed to the scholar Clayton Christensen from his seminal book The innovator's dilemma: when new technologies cause great firms to fail’.  It’s hard to believe that this was written nearly 20 years ago, and yet is only just becoming part of the common business lexicon.

“Disruption describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.”(Christensen ,2015)

According to Christensen disruptive new entrants succeed by targeting segments in two

  • They target segments previously ignored by incumbents or
  • Enter into an existing market with a lower priced product.

Disruptive Innovation Theory

According to the theory:

  1. Disruption happens by new entrants tackling low-end footholds with cheaper products or new footholds where no market currently exists.
  2. Disruptive innovators are typically considered inferior by an incumbent’s current customers.
  3. Incumbents’ customers only swap when the new entrant’s product rises in quality. 
  4. Over time the new entrants then go up market and in turn become the incumbents

It’s a kind of Darwinian theory.

But this isn’t really what we are seeing happen any more. If we take the favourite examples of AirBnB and Uber, neither were tackling a niche that doesn’t exist.  The market for short stay accommodation and for taxi services is quite clear.  Neither are considered inferior, but instead a different type of experience.  Both have seen consumers swapping quite happily from the incumbents, such as black taxi’s and hotels.  Quality is not an issue, it is the experience that counts.  Neither has focused on the quality-price equation in order to take a strong foothold in a relatively short period of time.

In our minds disruptive innovation comes from any factor that seriously changes market structures, and business models.   It is not just about price or quality.  The pricing of products and services is more fluid.  It isn’t about cheaper, but it is about supply and demand.  Just as a Google ad is purchased on a price that goes up and down depending on who is bidding for the clicks, Uber prices go up when demand is high.  Surge pricing we call it.  This is a whole new ball game.

Consumer as Producer

The Uber’s of this world have not so much brought in a lower quality, lower priced product, but a completely different way of doing business.  Uber and AirBnB have brought us a business model that involves the consumer as a producer.  Anyone can drive an Uber taxi, no licence required.  Anyone can offer up a room or a house on AirBnB.   Anyone can invest in a good idea on Kickstarter – no need for a bank loan.  It is enabled by technology, but it isn’t just about technology either. 

This new model is about peers selling to peers. It’s also a cultural shift in the nature of production and consumption.  And it is about a different experience. AirBnB recently announced that it is aiming to widen the consumer experience by encouraging hosts to do that little bit extra such as taking their guests for a tour around the local area (Marketing Week, 2016).  AirBnB readily admit that they can't control the experience, they can only facilitate it.  So no control there on either price or quality!

These new business models are enabled very much by technology, and in particular the cloud based digital marketing model.  But cloud based computing is not the only technology that will facilitate such change.  And technology is not the only environmental factor, but trust and the willingness of peers to do business with peers, are also forcing corporates to re-imagine their role.

So What About Digital Disruption?

Whilst Christensen has outlined what disruptive innovation is, it is very difficult to find a reliable definition of digital disruption.  The term is used wisely, but the definition is inferred.  It is widely used in the context of companies using digital technologies to disrupt established business sectors.  But just as often it is used to refer to the digitisation of marketing and of processes.

Whilst it is true that digitised companies are outstripping other companies in terms of profitability and growth (McKinsey, 2016), this does not necessarily mean those companies are disrupting their industries, but perhaps becoming more efficient, or simply “keeping up with the programme”.

Digital Disruption is not the next big thing.  It is the here and now thing.

In many places I see the internet and smartphones touted as the biggest disruptive technologies of recent years.  Then of course there is all the excitement over connected devices in the Internet of Things.  However, really, the internet, and the digitisation of our world is really quite old hat now.  If you aren’t digitised you are in trouble, but if you want to be disruptive you need to be looking further ahead at other emerging technologies and how they might impact on competitive advantage.

It is time to start thinking of artificial intelligence, block-chain technology, robotics, machine learning, and 3D printing in the same way we used to think about harnessing the digital environment.

This won’t necessarily be easy, there’s a lot to learn.  And corporates won’t have all the tools or knowledge at their fingertips by any stretch of the imagination.  That’s why we believe in Ecosystems as the way in which you inject the knowledge and verve of a start-up into the veins of the corporation.  It takes a lot of resource, skill, knowledge and insight to look at the cultural factors and tie them together with the technological possibilities in order to re-imagine a business model.  We really can’t rely on the old business models or corporate thinking to take us there.

Chrsitensen, C.M., (1997) ‘The innovator's dilemma: when new technologies cause great firms to fail’,  Harvard Business School Press: Boston

Christensen, C., Rayner, M., McDonald, R., What is Disruptive Innovation? Harvard Business Review December 2015

Denning , S.,, (2016),"Christensen updates disruption theory", Strategy & Leadership, Vol. 44 Iss 2 pp. 10 – 16

Marketing Week (2016) Air BnB Wants Ownership of the Whole Travel Experience 

McKinsey (2016) ‘Which Industires are most Digital (And Why)?’ 

 

Caroline WrightCaroline is PathFinder4's Marketing Director and Senior Lecturer at the University of Hertfordshire in Digital Business and Innovation.  She believes that progressive leaders play a key role in creating an abundant world, through innovative social and technological approaches.  Caroline has innovated at many corporates including BT, O2 and Epson UK.  

 

Comments

I am interested in the concepts however currently, probably like many small entrepreneurial businesses the time element is a significant constraint as is that entrenched human unwillingness to change.
I expect that Pathfinder4 will continue to address these types of issues to assist this roadblocks to be overcome
regards

Malcolm Watts
Comment by Malcolm Watts - 9 Jan 2017
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