The great thinker Clayton Christensen coined the term ‘disruptive innovation’. In his book “The Innovator’s Dilemma”, he made a distinction between two different types of technology that affect business:
1. Sustaining technologies: technological developments that help organisations to make marginal improvements—making gradual changes but remaining the same.
Initially disruptive technologies may seem of limited value, however in time they completely overturn existing products and markets. For example: mobile phones changed the landscape for fixed-line operators; digital photography decimated camera sales; online retailing transformed high street retailing.
In his follow-up book, “The Innovator’s Solution”, Christensen changed the term from “disruptive technology” to “disruptive innovation”, stating that it was rarely the technology that was disruptive or sustaining but the use that companies made of it through their business model.
This distinction between the disruptive and the sustaining reflects the recognized dilemma of corporate decision makers. Do we go for the big bang change or shuffle along with business more or less as usual.
In the 1990s the slow shuffle was in favour, backed by concepts such as kaizen—the Japanese process of gradual improvement and business process re-engineering. But a disruptive innovation impatience kicked in after 2000.
Disruptive Innovation has since become an overused, overhyped business word. But what does it really mean for your business and does it matter?
Disruptive innovation is a term that conveys different meanings for different people. CEOs and businesses need to consider how disruptive innovation can help them transform their business, create new growth opportunities and develop a competitive advantage or alternatives to their business model.
Disruptive (definition wiki) : “disturbance or interruption of an event, activity or process”. Innovation: “the introduction of something new”.
Essentially it’s an innovation that breaks an existing process and creates a new one. We would expect it to be something new that shakes up a market, one that is threatening to the existing order of things.
Here’s an example of a disruptive innovation—Netflix: initially targeted a niche market, (one being neglected by incumbents).
10 years ago, Blockbuster ruled the film rental business. With 25,500 employees at 8,000 stores selling film rentals. It had $500 million in annual cash flow and was valued at $3 billion. In 2005 it was valued at $8 billion. Meanwhile, Netflix was using the postal service to distribute DVDs, and it didn’t seem to stand a chance. Founded in 1997 by Reed Hastings, its prospects of surviving battles against Blockbuster, Wal-Mart, Amazon, Google, Microsoft, and other competitors were so slim that a Wall Street analyst labeled its stock “worthless”.
Fast forward 10 years and Netflix now has over 40 millions customers and runs a well-executed operation. Stock soared. Why? The rapid rise of online film streaming offered by Netflix made Blockbuster’s video and DVD business model obsolete. Blockbuster filed for bankruptcy, while Netflix blossomed.
Netflix executives understood that an emerging technology was rapidly changing the delivery of film rentals. They created a disruptive business model as opposed to a disruptive product. As well as developing a strategy of internet streaming. They also their customer needs. To help customers give up DVDs, Netflix gave away streaming films and made it easy.
By operating online, they avoided the cost of retail outlets. With a few warehouses and offices, the company became a virtual organization with no retail stores and no sales employees. On resourcing, Netflix operate a “Freedom and Responsibility Culture.” Instead of authorized holidays, sick days, and fixed work hours, people work when they choose as long as their job gets done. Job titles and even compensation are up to the individual.
Netflix introduced a new pricing strategy. Blockbuster charged £3 fee for each film (DVD) and as customers hated the fees for late returns, Netflix introduced a monthly subscription that allows unlimited rentals and no late fees. Instead of renting films, the focus was on providing a convenience for their customers. Netflix set a new standard for the exploding market in films and video. The same way that Microsoft set the standard for desktops, Amazon gained dominance of book sales, and Google gained the majority of online searches.
What can be learned from Netflix?
Netflix illustrates the central role that emerging technology plays in transforming an industry. It’s not always about the product, it’s about the business model. For Netflix this included the value proposition, customer’s needs, the channels, the culture and the pricing proposition.
To summarize, rarely is it the product that disrupts an industry. It’s the business model that is disruptive as outlined above with Netflix. Hastings filled the gap in the market, which led to Netflix success. To be a disruptor, usually requires the broader business model to displace or replace an industry with something new that is better for customers and more economically efficient than what it replaced.
Disruptive innovation does matter to your business. To recognize it, design for it and profit from it, we need a clear understanding of what it is. If you think you are or could be a disruptor, it’s worth looking at your business model. If you don’t, you could be leaving a big opportunity or potential business behind. Or if you’re the incumbent being challenged by a disruptive innovator, it could be the difference between continuing success, or being made redundant in the market.
Is your business ready to become a disruptor?