Disruptive Innovation Theory

Disruptive innovation, a term coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.

In Summary it means:

1) Away fro ma common notion, disruptive innovation is not a technological breakthrough, but it makes a product or service affordable and accessible. Like Uber or AriBnB. They didn`t invent mobile technology but they found out such a great use case which kind of exploded the personal transportation and renting business.

2) On one hand Experts/Scientists solve the big problems and come up with the new technology, On the other hand,   disruptions are the one who democratize those technologies which brings that particular product or service in hands of everyone. If in a lab stage, they take it to the masses. If only used by handful people, give a twist so that it can reach to all. Apple and MS did this and brought the computers on every desk in early 1980s..

3) When Disruptive innovation happens, most of the times,

 it`s not about how radical the new technology is,

 but it means the incumbent product or service is not based on the same markets and value networks which is already available in the new market. For example a company offers a very heavy loading service where as customer need a light weight, even lesser service for their purpose.

4) Most of the time, the disruption starts at low end of product and service with affordable pricing but reasonable quality, but slowly develops the portfolio to service all ranges of that line of services.

When the big companies fail due to disruption innovation,

it is more of a Management phenomenon, than the technology in itself.

The dilemma of the incumbent is to take action or not when this new segment is being created. Should the incumbent go for creating a low end product or should they improve the product to sell it to their existing set of customers for more attention are the questions which arise in this Dilemma.

Japanese car maker Toyota did disruptive innovation to US Car makers Ford and GM by offering cheaper sub compact cars. Korean car maker like Kia disrupted Toyota by offering cheaper cars even than Toyota. Chinese automakers are now disrupting Korean car makers. And the cycle continues.

The formal theory goes as follows;

As companies tend to innovate faster than their customers’ needs evolve, most organizations eventually end up producing products or services that are actually too sophisticated, too expensive, and too complicated for many customers in their market.

Companies pursue these “sustaining innovations” at the higher tiers of their markets because this is what has historically helped them succeed: by charging the highest prices to their most demanding and sophisticated customers at the top of the market, companies will achieve the greatest profitability.

However, by doing so, companies unwittingly open the door to “disruptive innovations” at the bottom of the market. An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.

Characteristics of disruptive businesses, at least in their initial stages, can include:  lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics.  Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge.