What is Disruptive Innovation?
Disruptive innovation is the introduction of a product or service into an established industry that performs better and, generally, at a lower cost than existing offerings, thereby displacing the market leaders in that particular market space and transforming the industry.
Disruption happens when a smaller company successfully challenges “established incumbent businesses” by first providing products or services that appeal to a niche part of the market; that niche could be overlooked by customers or customers new to the market.
Netflix is often cited as an example of a disruptive innovator. Launched in 1997 as a mail-order movie rental company, Netflix first focused on a niche group of consumers willing to wait for the mail to get the movie they wanted. The company’s customer base broadened as it perfected its business model and then moved into a streaming service — business moves that eventually brought down industry giant Blockbuster.
How and When Disruptive Innovation Occurs?
Incumbent businesses themselves help create the circumstances that allow disruption to occur. The established businesses focus on improving their products to meet the needs of their biggest (and most profitable) customers and, as a result, deliver products that do not match the needs of its other, smaller customers.
This provides an opportunity for newer companies to come into the space and gain market share that they can then build upon.
Broader meanings for disruptive innovation
Unfortunately, disruption theory is in danger of becoming a victim of its own success. Despite broad dissemination, the theory’s core concepts have been widely misunderstood and its basic tenets frequently misapplied. Many researchers, writers, and consultants use “disruptive innovation” to describe any situation in which an industry is shaken up and previously successful incumbents stumble. But that’s much too broad a usage.
Is Uber a Disruptive Innovation?
Let’s consider Uber, the much-feted transportation company whose mobile application connects consumers who need rides with drivers who are willing to provide them. Founded in 2009, the company has enjoyed fantastic growth (it operates in hundreds of cities in 60 countries and is still expanding). It has reported tremendous financial success (the most recent funding round implies an enterprise value in the vicinity of $50 billion). And it has spawned a slew of imitators (other start-ups are trying to emulate its “market-making” business model). Uber is clearly transforming the taxi business in the United States. But is it disrupting the taxi business?
According to the theory, the answer is no. Uber’s financial and strategic achievements do not qualify the company as genuinely disruptive—although the company is almost always described that way. Here are two reasons why the label doesn’t fit.
It is difficult to claim that the Uber found a low-end opportunity: That would have meant taxi service providers had overshot the needs of a material number of customers by making cabs too plentiful, too easy to use, and too clean. Neither did Uber primarily target nonconsumers—people who found the existing alternatives so expensive or inconvenient that they took public transit or drove themselves instead: Uber was launched in San Francisco (a well-served taxi market), and Uber’s customers were generally people already in the habit of hiring rides.
Uber has quite arguably been increasing total demand—that’s what happens when you develop a better, less-expensive solution to a widespread customer need. But 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.
Most of the elements of Uber’s strategy seem to be sustaining innovations. Uber’s service has rarely been described as inferior to existing taxis; in fact, many would say it is better. Booking a ride requires just a few taps on a smartphone; payment is cashless and convenient; and passengers can rate their rides afterward, which helps ensure high standards. Furthermore, Uber delivers service reliably and punctually, and its pricing is usually competitive with (or lower than) that of established taxi services. And as is typical when incumbents face threats from sustaining innovations, many of the taxi companies are motivated to respond. They are deploying competitive technologies, such as hailing apps, and contesting the legality of some of Uber’s services.
Disruption means Game changers?
What turns a company from an also-ran to a real game changer?
Disruption works both ways – as your business moves towards the top, you need to be aware of potential disruptors and disruptions which could affect your success. Keeping an eye on innovations in other industries can give you an idea of how technology can force change.
Disruptive innovation is a particular type of innovation that occurs when an innovator brings to a market an innovation that is simple, that is convenient, that’s accessible, that’s affordable. Changing the game. Contrast this to sustaining innovations, innovations that take what exists and make it better. A disruptive innovator transforms existing markets and creates new ones by playing the innovation game in a fundamentally different way.Disruptive innovations will result in major changes, but they don’t often rely on technological breakthroughs.
The main game changers it’s the business model, the way a company organizes and acts that drives disruption.When Walmart opens its first discount retailer in 1962, it’s not selling goods that are different than its competitors. But what it’s done is created a new way to organize an act that allows it to make money at low price points. Drives change in that organization. It’s oftentimes not the technology, it’s the business model.