Disruptive Innovation

The process by which a new development significantly alters the way the existing businesses operate

What is Disruptive Innovation?

Disruptive innovation is a term that describes how a new product or firm starting initially with simple applications or offerings moves up the market relentlessly, replacing established firms, alliances, or products. Disruptive innovation alters the way existing companies do business and negatively impacts the companies that fail to adapt.

 

Disruptive Innovation

 

The established companies do innovate; however, the innovation is directed towards their most sophisticated and demanding market segments. The companies earn the highest profits by charging high prices to such segments. However, it generates opportunities for disruptive innovation at the market bottom. Disruptive innovation makes the products or services, which were historically available to wealthy or skilled consumers only, accessible to a considerable number of people.

 

Summary

  • Disruptive innovation is a term describing the process by which a new development significantly alters the way the existing businesses operate.
  • Disruptive innovation makes a certain product or service available to a large population at the market bottom who were overlooked by the leading companies.
  • Start-ups and smaller companies often produce disruptive innovation to disrupt the existing business models and create conditions for a new one.

 

Understanding Disruptive Innovation

Even a smaller company with few resources can displace a successful and established company. It may happen when the smaller company targets the market segments that have been neglected by the established companies because these segments may not be as profitable as other segments.

Thus, as the larger and established companies continue to improve products and services for their profitable segments, the smaller company gains a foothold at the market bottom or taps a new market segment that the established companies have failed to notice.

Generally, smaller companies or start-ups make an entry into the market with innovative or new technologies. They use these technologies to supply products and services specifically designed for the market segments that have been overlooked by the leading companies.

Disruption occurs when the established companies’ typical customers start using the products and services of the smaller companies in considerable volume. While established companies focus on sustained innovation, start-ups and smaller companies focus on disruptive innovation.

 

Disruptive Innovation - Performance vs Time

 

When disruptive innovation enters the typical market, the leading companies adapt to the new technology in response to the competition. However, at this point, the smaller company has already established itself in the market, and it had ample time to refine the business model and the product or service offered.

Hence, reacting to the competition with the new technology only will not be sufficient for the established company. Moreover, it takes time and multiple iterations to develop products; hence, catching up becomes difficult.

Disruptive companies exploit technologies to provide products in different ways. For example, Netflix shifted its business model from providing customers rental DVDs to on-demand video streaming. Companies with disruptive innovation usually have initial offerings that are sub-standard to those of the leading companies.

Hence, customers hesitate to switch despite the lesser price until the product or service quality is improved. And when the product or service quality improves, a considerable number of customers start using them, which ultimately drives down the market prices.

 

Examples of Disruptive Innovation

Airbnb disrupted the hospitability industry by combining technology and innovation in the business model. It all started when the founders decided to allow people that had come for a conference to stay at their residence. The number of listings began to increase gradually and eventually reached the mainstream. It targeted high-value customers with premium-level services such as Luxe and Airbnb Plus concepts. It allows travelers to stay at a place like the locals.

The platform facilitates the transaction between the travelers and the hosts. The platform allows user-generated content on individual homes, rooms, and destination locations. Compared to traditional hotels, Airbnb has a competitive advantage of low cost and accommodation options. It provides travelers a cheaper alternative to traditional hotels and various unique listings to choose from. Travelers can choose from several options, such as villas, boats, and tents, while the stay experience in traditional hotels remains almost the same.

Another example of a major disruptive innovation is Netflix. Initially, it offered a DVD rental service by mail and later shifted to an online movie streaming service that is subscription-based. During the 1990s, the video rental industry was dominated by Blockbuster. However, in the 2000s, Netflix entered the market and targeted the segments ignored by Blockbuster, and thus Blockbuster began to lose substantial revenue.

Even when Netflix changed its business model to an online streaming service, Blockbuster was earning billions. With its accessible and more flexible online service, Netflix began to attract non-customers as well. In response to the competition, Blockbuster launched its equivalent services. However, at this point, Netflix had already established itself in the market.

 

Additional Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Customer Profitability Analysis
  • Disruptive Technology
  • Knowledge Capital
  • Intersegment Sales

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