Thoughts on Disruptive Innovation

Why is it always startups disrupting the business as usual and incumbents prefer to stick with the convention? Incumbents for sure have more capabilities and resources. So, that can not be the reason.

How can an established organization benefit from the idea of disruptive innovation?

Disruptive innovation, as described by Clayton Christensen, is  “ 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.” Disruptive innovation does not refer to breakthrough, mega changes in technology, it is rather an innovation in the current processes that make products and services more affordable, accessible especially for underserved customer segments. In order to answer “how can an establish organization benefit from the idea of disruptive innovation”, we should find out what the obstacles are and the ways to overcome these obstacles for the incumbents. Is it because incumbents are shortsighted or do not have resources and capabilities or can not see the value of disruptive innovation? No, the data shows that even though companies developed new products or services based on new technologies, customers did not find them attractive and resisted to changes (Shane, 2014, pp.37). According to Christensen, root cause of the problem that big companies can not adopt disruptive innovation is the main customers.

Mainstream customers of incumbents favored more incremental changes on top of existing technologies. Because they are the cash cows, companies need to satisfy their demands. But that does not prevent to ignore the underserved customer segments. Niches may seem not profitable in the short run, companies will get return on investments in the long term. The theory of S-curve suggests that performance shows slow growth initially, then accelerating and then decelerating as the market saturates. Companies should jump from one S-curve to another and do it in the right time.  Below picture demonstrates that there are 3 hidden S- curves(competition, capabilities and talent curves) that are the signs of trouble and they alert companies to jump to the new S-curve.  So, incumbents can take  advantage of disruptive innovation by knowing the right time to make the jump from one S-curve to another.

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Figure 1: Retrieved from http://www.accenture.com/sitecollectiondocuments/pdf/accenture_jumping_the_s_curve.pdf. Copyright 2011 by Accenture.

Lower profits, high investments are another obstacles for the incumbents when it comes to make the shift to the disruptive innovation. 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 (Clayton Christensen). An established firm can adopt a ‘wait & see’ approach as well. After successful entrants prove that potentially disruptive innovation is serving well and the profits are promising, the incumbent can acquire them. Due to the nature of disruptive innovation, it seems more favorable from startups point of view than for incumbents in the beginning. However, big established firms also have the power and resources to acquire the startups or licenses.

Historical data shows us that startups are the main drivers of such an innovation which disrupts the existing dominant design. For example, Cisco, once an innovative startup that outperformed every player in the telecommunications industry. Cisco entered to market for consumers underserved with circuit switched products instead of computing with incumbents such as Lucent or Nortel on Voice products. Entrants can play the disruptive innovation game with more flexibility as they do not need to consider cash cows, current processes, products or technology to be discarded. Startups can grow with finding niches, creating own market instead of competing in the red ocean with the big players. With a visionary approach, startups can define under-served consumers and the profitability in the short and long term. In order to benefit from disruptive innovation, startups can focus to reshape the prevailing business models that dominant market follows.The obstacle for a startup is being patient because R&D efforts will not pay off initially(refer to S-curve).

References:

Shane, Scott. Technology Strategy For Managers And Entrepreneurs. Upper Saddle River, NJ: Pearson/Prentice Hall, 2014. Print.

Accenture.com,. ‘Accenture | Strategy, Consulting, Digital, Technology And Operations’. N.p., 2015. Web. 21 Sept. 2015.

Clayton Christensen,. ‘Disruptive Innovation’. N.p., 2012. Web. 21 Sept. 2015.