How disruptive innovation affects the existing markets

The reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business models that make them good at the existing business actually make them bad at competing for disruption.

Clayton M. Christensen

Disruption Innovation is the introduction of a new product or service into an established industry that performs better and generally, at lower cost than existing offerings, thereby displacing the market leaders in that particular market space and transforming the industry.

There are always winners and losers, and usually the large, established companies are the ones that have to give way to newly emerging competition. For the moment we refer to innovation as being about doing the same things but better, and disruptively.

Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others.

Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.

Disruptive innovation, as introduced by Professor Clayton M. Christensen, has become a powerful way of thinking about innovation-driven growth. Disruptive innovation and technology are now part of almost every business lexicon, experiencing an exponential growth in use since its incarnation in 1997. From the world of multinational conglomerates to small, entrepreneurial companies—disruptive innovations have extreme consequences for every business and its interconnected systems.

 Classification of Disruptive Technologies

How could we classify this type of product disruption and displacement from the market? Would it be defined and seen as a sustaining, incremental, radical, breakthrough or maybe even disruptive innovation? According to Christensen’s definition of sustaining and disruptive technologies stated above, this example would not perfectly fit into any of these categories. Christensen however introduces a new type of disruptive change, called it “low end disruption”

This term would come close to accurately describing the nature of this kind of business problem. His definition applies to products targeting customers who do not need the full performance valued by the high-end market. However, the difference is that the disruption we describe here is happening within the same industry. We will resolve the mystery a bit later on what name would therefore be even more clarifying.

Why is disruptive innovation so hard to grasp, and why do we tend to fall into the same trap over time?If we know that maintaining a competitive advantage is important, how can one miss the signals that something dangerous is coming?

 Why do great companies that seem to do everything right, fail?

The following questions naturally lead to others such as what are the warning signals that a disruption is on the way?

What different types of disruption are there? And finally, in an increasingly complex business environment, how does one know what is going to become a disruption and what is just a trend?

How can institutions make new things that will make the old obsolete?

Is our disruptive technology worsening and leading the company into failure or improving the product?

Imagine the following: your customers love the products, services and performance you deliver, and your competitors are years behind you in terms of performance. You seem invincible, which sales numbers only seem to confirm because your company is breaking one growth record after the other. It truly seems that you are riding on a wave of continuous luck and success, with your teams over-performing

and customers valuing your offering. There are just no sign anywhere that something could go wrong! Or at least you think so. This assured mindset of thinking you are the best can have fatal consequences.

The problem is that things can change unexpectedly—disruptively, almost overnight. Imagine you are now replaced in your core market and there is nothing you can do but watch the “ship sink”. Hit by gigantic disruptive waves, it is too late to change course or do anything that could restore your business to original heights of glory.

Before, truly being prepared, you are replaced or “killed” by someone who has never been taken serious as potential competitor, but now they are a true threat to you because they simply changed the rules of the game within the industry. Although so much weaker and less experienced than your established business, the newcomer managed to make you obsolete by bringing in a game-changing technology or a radically different, more effective way of meeting customer needs; to Frustrate you, to be able to catch up with the new competition, re-learn and adapt to the new circumstances.

You begin to ponder and ask yourself, how could all of these happened?

Behaviours and mindsets linked to knowing better or pure hubris manifest in actions and organizational forms that precisely allow for the phenomena of “David conquering Goliath” to occur. In modern usage, this ancient story is used to describe how an underdog (i.e. weaker, smaller opponent) can succeed in the face adversity; against all odds, the newcomer conquers over an “invincible”, old and quite arrogant giant.

King James Version Translation,David said, “what have i now done? is there not a cause? Is there no plan, is there no strategy? is there no way? Is there no reason?”

This means no matter how Goliath a company is, is there not a cause, there is always a plan to disrupt Goliath companies to give way for new entrant gain market share.

Unusual and surprising with ingenuity, the new approach taken by the entrant leads the new way forward by taking a route no one even expected to be a smart tactics. In the natural fight for survival, the competitor never sleeps nor stops to adapt and evolve.

The consequences of the competitor coming up with radically different ways to better meet basic customer requirements can be so drastic that they lead to the downfall of your carefully created business “empire”. Thus executives whose companies are currently highly profitable should not think about whether the power of their companies’ earnings that attract profits will shift.

How radical technological innovations can lead to the downfall of even the most successful companies

Most new technologies foster improved product performance. I call these sustaining technologies. Some sustaining technologies can be discontinuous or radical in character, while others are of an incremental nature. What all sustaining technologies have in common is that they improve the performance of established products along the dimension of performance that mainstream customers in major markets have historically valued.

Is our Disruptive technologies bringing a very different value proposition in the market than had been available?

Is our disruptive technology cheaper, simpler, smaller and frequently, more convenient to use?

It is not that uncommon to find situations where managers and those involved in the product development process do not fully grasp and face the dramatic situation that they are currently in, namely that they are in the process of being disrupted. It seems that in practice and in our daily business definitions, their implications are not always well understood.

With a missing understanding for how severe and dangerous the current situation is, igniting radical change and successfully leading a business turn-around becomes almost impossible. The non-clarity around what disruptive innovation is and what it is not, has led to the need to clarify it. The issue is that if you miss the urgency and severity of what it means to be disrupted, taking appropriate action to steer against it becomes increasingly difficult!

So what different kinds of disruptive change are there? Businesses face many kinds of threats and risks. The diagrame  shows different kinds of “deaths” that can be fatal to a business, from slow to fast. Some types of deaths are similar to smoking.

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.

Disruptive innovations originate in low-end or new-market footholds.

Disruptive innovations are made possible because they get started in two types of markets that incumbents overlook. Low-end footholds exist because incumbents typically try to provide their most profitable and demanding customers with ever-improving products and services, and they pay less attention to less-demanding customers. In fact, incumbents’ offerings often overshoot the performance requirements of the latter. This opens the door to a disrupter focused (at first) on providing those low-end customers with a “good enough” product.

In the case of new-market footholds, disrupters create a market where none existed. Put simply, they find a way to turn nonconsumers into consumers. For example, in the early days of photocopying technology, Xerox targeted large corporations and charged high prices in order to provide the performance that those customers required. School librarians, bowling-league operators, and other small customers, priced out of the market, made do with carbon paper or mimeograph machines.

Then in the late 1970s, new challengers introduced personal copiers, offering an affordable solution to individuals and small organizations—and a new market was created. From this relatively modest beginning, personal photocopier makers gradually built a major position in the mainstream photocopier market that Xerox valued.

A disruptive innovation, by definition, starts from one of those two footholds. But Uber did not originate in either one. It is difficult to claim that the company 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.

Example 1

Imagine the following product: a train consisting of six wagons (.) The company producing the train has successfully sold them for many consecutive years . Yet “all of a sudden” the product has a cost gap of about 30% in comparison to its main competitor.

The need to regain price competitiveness usually invites for standard problem solving approaches. A typical go-to solution is thinking of initiating radical cost reduction programs. However, thinking that cost reduction alone could sustainably fix the core problem faced here is often an illusion .(T)o accurately depict the depth and severity of the faced challenge, we have to acknowledge the real trouble that this company is in. What does a 30% cost gap reduction imply? A 30% cost reduction of the product entails maintaining customer satisfaction by producing and delivering a six wagon train, yet having to save the production costs of two complete wagons.

What has been the (cause) of low productivity?

The product in trouble has been disrupted by competitors’ products which have a significantly better cost positioning, and therefore can be offered cheaper yet offer an equivalent (or even lower) value proposition to the market.

The competitors’ products do not introduce any new performance features nor do they create or transform any new market segments; rather, they are disrupting the business within the same industry.

What the competitors’ products are doing is that they offer more perceived value to their customer(s) by offering a product with same or even less performance, but at a significantly lower price. The disruption is thus due to a significantly lower price point and not better product performance per se. It is important to point out that performance decrease is only viable or visible until hitting the point of minimum customer requirements.

As with the train example above, competitor products do not improve on any performance features. Rather, these products have obviously made cost innovations which often result from better product architectures. (B)building the product in a radically different way, the competitor, therefore, became more efficient in satisfying customer needs and expectations towards the products.

Example 2

Imagine that two companies are battling for market dominance in terms of product innovation. Until 2020, their speed of innovation was parallel, Their respective market share was about equal. In 2020, company A suddenly doubled its innovation speed. At that point in time, the market share almost exponentially increased for company A, while the market share of company B dropped dramatically.

Company B was basically disrupted by company A. The competitor literally shot off by doubling its speed of innovation. The upper diagram illustrates the drastic increase in speed of innovation by company A, as measured by the number of new products introduced in the different market segments. The lower diagram shows the respective market share of both company A and B.

What could enable such game-changing speed of innovation? One major enabler for doubling the speed of innovation in this case was that company A introduced modular architectures. This allowed company A (it) to fundamentally re-align its product portfolio to customers yet also drastically  (reducing) the time to market of its products. It also allowed company A to introduce new product variations faster, whilst also delivering orders to customers at a significantly reduced time to the market.

The crux is that instead of competing through superior performance, modular products compete through speed, flexibility, customization and price. The customer value in this example varies on the newly introduced products .  It might be better performance, better customization, better price or even a combination of those factors.

As seen here, as soon as performance is not the only criteria for creating customer value, modular architectures typically disrupt products that have fixed, integral architectures.  The modular approach allowed company A to meet diverse needs more effectively than company B could, and thus fundamentally carve out and take on a competitive market advantage. This effect of modular architectures is also described by Christensen and Verlinden in their paper “Disruption, Disintegration, and the Dissipation of Differentiability”.

The point am aiming makes it modularization than just a methodology, that can be used to manage internal production and external market complexity. As we can see here, it should be associated with innovation and disruption, because it can actually be a way to innovate and disrupt entire markets, especially those that are already quite mature! So the question again arises if the introduction of modular architecture with its incremental innovations in different independent modules can already be considered an innovation. If so, would it then be considered a sustaining, incremental, radical, breakthrough or disruptive type of innovation?

Both examples show how Christensen’s original definitions in regards to disruptive innovation would not really apply to the two different categories and types of business problems explored here.

In recent years Christensen however offers new terms and theories to explain and solve this mismatch: his theory of modularization helps us to understand the second example, and the idea of low cost disruption helps to explain the train example and its respective drivers of innovation and disruption.

Conclusion

This Article  aims to answer two overarching questions: How can we enable an innovation process and create an environment that is conducive  (for) successful product desig . And if our products fundamentally fail to delight customers, how we can create a major, necessary turn-around with regard(s) to product developme. In order to live long and flourish, individuals and companies alike strive to make progress.

Progress means growth through continuous learning and development. Optimal processes and environments are key, as growth comes through evolving. True magic comes with acquiring the skill, experience, mindset, understanding and above all intuition to connect the right dots in the right place at the right time according to the unique circumstances of a business challenge and why  company fail.

I believe businesses would adopt the Disruptive innovative Technology modules to stay and even overtake their competitors to become market leaders instead of followers on the market.

About the Author:

Reuben  is a Banker, and a Theologian. He has 14 years experience in banking and insurance. He is a theologian.  He is currently Sales Manager Mobile Branches At Izwe Savings and Loans.

He is the Author of the book “The Position Of The Believer In Christ”. He uses his rich practical experience to train and couch young bankers and insurers in sales and markerting operations, mastering disruption and innovation in product management.

Contact email: reubeng.mensah@izweghana.com and r0mensah82@gmail.com

Tel: 0501456526

Reference

The Innovators solution:creating and sustaining successful growth

By Clayton Christensen & Michael E Raynor, Havard Business School publishisg corporation 2003).

Olivier L. de Weck Ph. D

Professor of Aeronautics and Astronautics and Engineering Systems Editor-in-Chief Systems Engineering Massachusetts Institute of Technology Cambridge, MA, USA

Michael E. Raynor is a director at Deloitte Consulting LLP. He is the coauthor, with Mumtaz Ahmed, of The Three Rules: How Exceptional Companies Think (New York: Penguin Books, 2013

Rory McDonald is the Thai-Hi T. Lee (MBA 1985) Associate Professor of Business Administration in the Technology and Operations Management unit at Harvard Business School

Dean Niewolny Trade Up How to move from just making money to making a Difference(Published by Baker Books Box6287,Grand Rapids,MI49516-6287,c2017)

Matthew Verlinden, Skate to where the money will be  is a manager at international strategy consulting firm integral, in cambridge,Massachusetts 2001)

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