What Is Disruptive Innovation?

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In business theory, disruptive innovation is an innovation that creates a new market and value network or enters at the bottom of an existing market structure and eventually replaces established market-leading firms, products, and alliances. 

The concept was created by the American academic Clayton Christensen and his collaborators beginning in 1995 and has been called the most influential business idea of the early 21st century

This article clearly defines disruptive innovation with clear examples to aid understanding.

What Is Disruptive Innovation?

Investopedia defines disruptive innovation as the invention that transforms expensive or highly sophisticated products or services—previously accessible to a high-end or more-skilled segment of consumers—into those that are more affordable and accessible to a broader population.

The process begins with a small company entering the low end of a market, or creating a new market segment, claiming the least profitable portion of the market as its own. Because the established, incumbent companies own the most profitable market segments, they most likely won’t fight the entrant for that market share.

By displacing seasoned, well-established competitors, this transition causes market disruption. It refers to innovations and technologies that make expensive or sophisticated products and services accessible and more affordable to a broader market.

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Disruptive Innovation Theory

The disruptive innovation theory, which was first presented in these pages in 1995, has proven to be an effective framework for considering innovation-driven growth. Numerous CEOs of huge, well-known corporations including Intel, Southern New Hampshire University, and Salesforce.com, as well as many leaders of tiny, entrepreneurial businesses, laud it as their compass.

Sadly, the success of the disruption theory could turn it into a failure. Despite widespread use, the theory’s fundamental ideas have been extensively misunderstood and frequently misapplied. Furthermore, the popularity of the original formulation seems to have overshadowed important improvements made to the theory during the previous 20 years. As a result, the theory occasionally receives criticism for issues that have previously been resolved.

In a case of disruptive innovation, the smaller company continues to expand its offering and eventually sells something with better functionality at a cheaper price that appeals to a huge number of customers, even though the new product or service isn’t necessarily better than the competition at first. As a result, a sizable portion of the general public replaces the smaller company’s initial niche consumers as the target market for its product or service.

A common example of a disruptive innovator is Netflix. When Netflix was first established in 1997 as a mail-order movie rental service, it first targeted a select group of customers willing to wait for their desired movies to arrive in the mail. As the business honed its business strategy and subsequently transitioned to a streaming service, its clientele grew, and these strategic measures ultimately led to the demise of sector titan Blockbuster.

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Characteristics of Disruptive Innovation

According to ontheside.co.nz, if you call yourself innovative, chances are you’re not. Here are a few characteristics of disruptive innovation.

  • Lower margins, at least in the beginning
  • Higher risks
  • You either disrupt an existing market or create a new market segment in the existing one
  • Sales arguments and measures of value are usually fundamentally changed
  • Often involves new technology and/or a new business model
  • Happens slowly at first until reaches the mainstream after which grows exponentially

Why Is Disruptive Innovation Important?

Disruptive innovation may be crucial for a variety of reasons. One reason is that it can help markets in developing nations create innovative solutions that make goods that would be difficult to obtain or use more accessible to their people.

By revealing various areas of need or interest that customers have based on the products they buy, disruptive innovation can also be crucial for predicting impending market developments that may have an impact on the creation of future products.

Additionally, disruptive innovation is beneficial to companies as well as consumers by offering new products that might have improved quality and a lower price than similar products in the same market.

What Are The Requirements For Disruptive Innovation?

Disruptive innovation requires access to ignored or overlooked markets and advanced technology that can transform a product into a more accessible and affordable one. Here are the key elements that disruptive innovation requires to take place and be effective:

1. Enabling Technology

The element of a new product that enables a business to sell it at a competitive price and make it available to a wide number of customers is known as the enabling technology in disruptive innovation.

The rate at which disruptive innovation can happen largely depends on how quickly the related enabling technology can be developed, tested, and improved until it reaches the best possible quality while maintaining a low price and remaining easy to use.

Enabling technologies that take a while to reach the market might yield useful new goods that can succeed once they are made available to customers, leading to successful disruptive innovation.

Technology and new items that can enhance how individuals carry out a certain task or procedure are included in the category of enabling technology.

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2. Innovative business model

The innovative business model is a type of business strategy that targets untapped or low-status markets. Since they either could not afford them or the products were too complex for use, these sectors typically do not generate profits for established businesses or purchase their goods.

An innovative business model aims to offer simple, affordable solutions.

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3. Clear value network

A clear value network is created when all business partners in a company benefit from the disruptive innovation that takes place. This can include partners in the upstream, or processes that prepare for production, such as distributors, suppliers, or vendors who play a role in the production of a new product.

Additionally, it also includes partners in the downstream, or actions to produce and distribute a new product to the public, such as marketing and sales teams. When all parties involved in innovation can commit to the new business model and benefit from the result, they can achieve successful disruptive innovation.

Disruptive Innovation Examples

One of the best ways to comprehend disruptive innovation in practice is to take a look at real-time examples of disruptive technologies and business models that have transformed industries during the past decades.

Here are a few examples of disruptive innovation:

1. The Netflix Story

Netflix disrupted the market using a new business strategy and technology, a prime example of disruptive innovation. It began by providing a DVD rental by mail service and later introduced its online, paid movie streaming service. Over 150 million individuals utilize its on-demand all-you-can-watch movie program today.

Things changed throughout the 1990s as Blockbuster rapidly expanded and dominated the video rental sector. The multi-billion dollar business employed close to 85,000 employees worldwide and operated over 9,000 video rental locations.

In 2000s when Blockbuster started to lose significant revenue, Netflix took advantage of the situation and targeted segments that had been overlooked by Blockbuster.

When Netflix started its mail-in-movie subscription service, it wasn’t appealing to Blockbuster mainstream customers who didn’t fancy the pattern.

In fact, Netflix did not reach the mainstream until after disrupting itself from its DVD mail service to online streaming services. This gave rise to access to movies from the comfort of your home or office by just paying a subscription fee.

When Netflix eventually started to gain market dominance with its more flexible and accessible online service, Blockbuster reacted to the competition by launching its corresponding services.

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2. Amazon

Books were sold in traditional bookstores like Barnes & Nobles and the now-defunct Borders before internet shopping became quite popular.

The transformation of the bookselling sector is a prime illustration of the disruptive innovation unleashed by the internet. Because Amazon (AMZN) could showcase its inventory without needing to have a physical store in every town and delivery the book to the buyer’s house, the major book chains suffered as a result.

With increasing sales and market share, Amazon’s popularity forced many independent bookshops to close their doors or move to the back of the line.

Since its founding, Amazon has been successful in utilizing the internet to develop an online marketplace where most items sold in physical stores—including groceries—can be purchased. And it all started with a small, garage-based business harnessing the internet’s ability to serve the demands of an online niche market of book enthusiasts.

3. AirBnb

AirBnb is also a good example of a major disruptor in the hospitality industry that combines business model innovation and technology.

It gives travelers the opportunity to live like locals and the platform works as a transaction facilitator between them and the hosts. 

The story of AirBnb started when the founders were compelled to think of ways to cover their rent. 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.

Due to the situation of the economy at that time and the opportunity before them, the guys decided to give people the opportunity to stay at their place and sleep on an air mattress. After securing their first bookings and gaining a few positive experiences as hosts, they chose to share the idea with others and target some other upcoming conferences in other cities.

However, the idea wasn’t a success from the get-go as they were lacking proper funding and the business idea was so different from the norm.

During that time, the economic situation was still on their side as people needed extra income and they kept raising more money to make Airbnb a legitimate business.

At first, AirBnb concentrated on connecting guests looking for a less expensive lodging option with hosts who might offer them the chance to live like locals while earning a little more money. By luring more users to sign up and engage, the business began to take off and experience favorable network effects amongst the community of hosts and guests after getting its first premium listing.

Since then, AirBnb has widened its offers by focusing on high-value consumer categories with Airbnb Plus and Luxe concepts, which are additional premium tiers of services on its platform, after obtaining more and more listings and finally breaking into the mainstream.

Moving on, the company 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.

The range of lodging choices that AirBnb may offer is one of its competitive advantages over the conventional hotel sector. While staying at any of the major hotels, guests can choose from a limited number of distinctive listings, such as boats, tents, tree houses, and villas, which offer different experiences.

Another competitive advantage is the price. Because of AirBnb, people have more opportunities to travel without having to break the bank. In most apartments, there’s a washing machine for doing your laundry and a kitchen for cooking your own food. Large groups can share one big apartment instead of having to book multiple hotel rooms.

FAQs On Disruptive Innovation

What is the meaning of disruptive innovation?

Disruptive innovation is the process of transforming an expensive or highly sophisticated product, offering, or service into one that is simpler, more affordable, and accessible to a broader population. 

What are the advantages of disruptive innovation?

Disruptive innovation changes how a business examines its processes and determines how to adapt to them, aids in the delivery of better services, and affects the industry. Many business procedures will be enhanced and modernized as a result, which will be extremely beneficial to the business.

Is Netflix an example of disruptive innovation?

Netflix is a good example of disruptive innovation that employed a new business model and technology to disrupt an existing market. It started out as a DVD-by-mail rental service and later launched its online, subscription-based movie streaming service.

Conclusion

The ability to disrupt the current operating paradigm and foster the formation of a new one is the key to disruptive innovation.

It takes a fresh approach and a conscious decision to try to alter the prevalent beliefs in the sector to cause disruption. Even if it isn’t the most profitable option now, you still need to build new types of value and commit to them.

References

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