Not all innovation is the same. Disruptive Innovation is an area which I would monitor and not be complacent about. It has put made a number of established, multimillion businesses disappear.
What is disruptive innovation?
This is a term from Harvard Professor Clayton Christensen, who describes a process by which a product or service starts with simple applications at the bottom of a market and then continuously moves “up market”, eventually displacing established competitors. A disruptive innovation initially offers lower performance or features than what the mainstream market demands but it does have some new attributes that allow it to prosper in a different market. It continues to improve and meet/exceed the requirements of the mainstream market until it eventually replaces the former existing technology.
Most larger, established companies practice “sustaining innovation” which is to add more features and “bells and whistles” for their existing customer base. The lower customer segment remains un-served and mainstream customers will stop valuing enhancements at some point - which forces many companies to think of adding more “bells and whistles” to maintain their customer base or maintain their more profitable customers. A vicious circle has started which opens the door to disruptive innovators who can serve the lower customer segment and those who don’t care for all the “sustaining innovation”.
Disruptive innovation is Darwinism applied to free market business. There are many everyday examples of this process. More and more people are abandoning landline telephones and just use their mobile phone. My family bought our first flat panel LCD TV seven years ago. We opted for a small LCD TV because they were very expensive ($1200 US for a 21 inch). I could have bought a much larger 40 inch CRT TV for under $300 but my wife was enamored with the design and weight of the new LCD screens. We recently replaced that 21 inch LCD with a 37 inch version for $330! Today LCD screens are the only TVs available and come with better resolution, internet, HDMI, etc.
Christenson has the ultimate case study of media storage where we started with large disk drives, moving to 5.25 inch and 3.5 inch discs. Flash drives started with only a few megabytes but can now store as much as some hard drives. In each case, the storage performance was relatively small, expensive, and served a niche…but they ultimately grew in features, performance, and value to eventually obsolete the previous storage technology.
Now why would an established company let this happen? Christensen talks about the value network, described as “the context within which a firm identifies and responds to customers’ needs, solve problems, procure inputs, react to competitors and strive for profits”. This is partly where the company listens too closely to its existing customers. Most established companies can see the disruptive innovation and have the means to react or adapt but choose not to. Characteristics of disruptive businesses, e.g. lower gross margins, smaller target markets, and simpler products and services are simply not as attractive for companies doing sustaining innovations when compared against traditional performance metrics (especially with short term thinking). I would use the analogy of a frog sitting in a pot of water under a fire. It doesn’t realize that the water is slowly being heated because it keeps adjusting and eventually becomes a cooked frog.
What’s the solution?
One possible solution according to Christensen is to create a separate business to react to a disruptive innovation. Old-time phone companies eventually did this, e.g. Verizon and AT&T eventually created wireless businesses. You can also maintain your business as a niche or try to find another segment to create a niche.
Disruptive Technology is a double-edged sword. Eventually, the disruptive technology becomes the established technolgy and the new companies start behaving like thir predecessors and start employing sustaining innovations...which opens the door to new disruptive innovators. A fascinating video on this is embedded below: