Chapter Case: Disruptive Innovation EVERY so often a management idea escapes fro
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Question
Chapter Case: Disruptive Innovation
EVERY so often a management idea escapes from the pages of the Harvard Business Review and becomes part of the zeitgeist. In the 1990s it was “re-engineering”. Today it is “disruptive innovation”. TechCrunch, a technology-news website, holds an annual “festival of disruption”. CNBC, a cable-news channel, produces an annual “disruptor list” of the most disruptive companies. Mentioning “disruptive innovation” adds a veneer of sophistication to bread-and-butter speeches about education or health care. But just what is disruptive innovation?
The theory of disruptive innovation was invented by Clayton Christensen, of Harvard Business School, in his book “The Innovator’s Dilemma”. Mr Christensen used the term to describe innovations that create new markets by discovering new categories of customers. They do this partly by harnessing new technologies but also by developing new business models and exploiting old technologies in new ways. He contrasted disruptive innovation with sustaining innovation, which simply improves existing products. Personal computers, for example, were disruptive innovations because they created a new mass market for computers; previously, expensive mainframe computers had been sold only to big companies and research universities.
The “innovator’s dilemma” is the difficult choice an established company faces when it has to choose between holding onto an existing market by doing the same thing a bit better, or capturing new markets by embracing new technologies and adopting new business models. IBM dealt with this dilemma by launching a new business unit to make PCs, while continuing to make mainframe computers. Netflix took a more radical move, switching away from its old business model (sending out rental DVDs by post) to a new one (streaming on-demand video to its customers). Disruptive innovations usually find their first customers at the bottom of the market: as unproved, often unpolished, products, they cannot command a high price. Incumbents are often complacent, slow to recognise the threat that their inferior competitors pose. But as successive refinements improve them to the point that they start to steal customers, they may end up reshaping entire industries: classified ads (Craigslist), long distance calls (Skype), record stores (iTunes), research libraries (Google), local stores (eBay), taxis (Uber) and newspapers (Twitter).
Partly because of disruptive innovation, the average job tenure for the CEO of a Fortune 500 company has halved from ten years in 2000 to less than five years today. There is good reason to think that the pace of change will increase, as computer power increases and more things are attached to the internet, expanding its disruptive influence into new realms. Google promises to reinvent cars as autonomous vehicles; Amazon promises to reinvent shopping (again) using drones; 3D printing could disrupt manufacturing. But perhaps the most surprising disruptive innovations will come from bottom-of-the-pyramid entrepreneurs who are inventing new ways of delivering education and health-care for a fraction of the cost of current market leaders.
Can you name another technology product that failed? Why did it fail? What could the company have done differently for it to succeed?
Explanation / Answer
Ans:
Disruptive Innovation:
Disruptive Innovation refers to a technology whose application significantly affects the way a market or industry functions. An example of a modern disruptive innovation is the internet, which significantly altered the way companies did business and which negatively impacted companies that were unwilling to adopt it. A disruptive innovation is differentiated from a disruptive technology in that it focuses on the use of the technology rather than the technology itself.
The theory goes that a smaller company with fewer resources can unseat an established, successful business by targeting segments of the market that have been neglected by the incumbent, typically because it is focusing on more profitable areas.
As the larger business concentrates on improving products and services for its most demanding customers, the small company is gaining a foothold at the bottom end of the market, or tapping a new market the incumbent had failed to notice.
This type of start-up usually enters the market with new or innovative technologies that it uses to deliver products or services better suited to the incumbent’s overlooked customers – at a lower price. Then it moves steadily upmarket until it is delivering the performance that the established business’s mainstream customers expect, while keeping intact the advantages that drove its early success.
Disruption happens when the incumbent’s mainstream customers start taking up the start-up’s products or services in volume. Think Blockbuster and Netflix.
Uber:
Uber has not moved up from the low end of the market: it targets customers who already use cabs. Nor is it primarily going after people who take public transport or drive themselves. And the service, while competitively priced or slightly cheaper than traditional taxis, is not generally regarded as inferior.
“Disrupters start by appealing to low-end or unserved consumers and then migrate to the mainstream market. Uber has gone in exactly the opposite direction: building a position in the mainstream market first and subsequently appealing to historically overlooked segments,”