netflix gccdb61642 1280 What Is Disruptive Innovation?

What Is Disruptive Innovation?

What Is Disruptive Innovation?


Disruptive innovation is a type of innovation that creates a new market which eventually disrupts an existing market thereby displacing established market leaders.

Disruptive innovation is a phrase popularised by Clayton Christensen in his iconic book, "The Innovator’s Dilemma," published in 1997. He used the phrase to describe a form of innovation that allowed smaller startups to outcompete and eventually destroy their bigger rivals. Established market leaders are usually displaced by disruptive innovation because some seemingly fruitless innovations eventually end up being disruptive.

Christensen explained that there are two types of technologies a business deals with:

  • Sustainable technologies which allow a business to predictably and incrementally improve its operations to remain competitive.
  • Disruptive technologies which are less easy to plan for and at the same very devastating to businesses that fail to pay enough attention to them.

Understanding disruptive innovation

Not all innovation is disruptive and there is a lot of confusion as to which innovations are truly disruptive. Let me make this clear, disruptive innovation is not the process of improving or enhancing products or services for the same market.

Disruptive innovation involves targeting previously non targeted markets to take down an existing market. A good example of disruptive innovation is what occurred in the transportation industry. In the early 19th century horse-drawn vehicles commanded a huge chunk of the transport business.

The first automobiles created in the late 19th century are considered a revolutionary innovation but not a disruptive one. That is because early automobiles were viewed as expensive luxury items that would not disrupt the market for inexpensive and well trusted horse-drawn vehicles. Therefore, the market share for horse-drawn vehicles remained intact at the time. That is until the introduction of the budget Ford Model T in 1908. Due to mass production offsetting the production costs the Ford Model T came out as a relatively cheaper method of transportation.

However, the Model T is not considered a classic example of disruptive innovation. The reason is because it was an just improvement of the existing automobile technology which never disrupted anything on its release. The disruption was caused by mass production bringing the prices down and thereby moving the entire transportation system from hooves to wheels. Therefore, mass production was the disruptive innovation.

How market leaders are blindsided by disruptive innovation

Disruptive innovations are generally not profitable or sustainable when they first arise. A disruptive innovation can require more time, effort and resources to develop than a conventional approach. This does not give market leaders the luxury of pursuing disruptive innovations without risking the development of sustaining innovations which are needed to keep existing products competitive.

As such, disruptive innovations are usually produced by entrepreneurs and startups that have nothing to lose and much to gain. Market leaders usually notice innovations that are most likely to become disruptive but do not follow them due to their initial tight profit margins and high risk nature.

According to Joseph Bower, "… established companies typically see it as unattractive: it’s not something their mainstream customers want, and its projected profit margins aren’t sufficient to cover big company cost structure. As a result, the new technology tends to get ignored in favor of what’s currently popular with the best customers. But then another company steps in to bring the innovation to a new market. Once the disruptive technology becomes established there, smaller scale innovation rapidly raise the technology’s
performance on attributes that mainstream customer’s value."

According to Christensen, disruptive innovations can take down any company no matter how successful and well established the company is. Well established companies tend to focus on serving the needs of their existing customers and ignore the market segments that are most susceptible to disruptive innovations. As a result these untapped market segments become the breading grounds for disruptive innovations.


How major technological development are eventually disruptive

Technology is dynamic and almost every major technological development is eventually disruptive to the existing technology. Every piece of technology has a finite life cycle that follows the following stages:

  • creation
  • development
  • persistence
  • mutation
  • death.

Whenever a higher technology emerges it challenges an existing technology, forcing it mutate and keep up to the challenge. However the two technologies end up co-evolving until the higher technology becomes regular, trustable and efficient. This forces the death of the existing technology, causing a disruption.

When the first automobiles where invented, they couldn’t compete with horse-drawn carriages for decades and they were not considered disruptive. The two technologies then coexisted for a time, until mass production of automobiles forced the death of horse-drawn carriages.

Practical example of disruptive innovation – Netflix vs Blockbuster

Netflix is an American entertainment company that was founded by Reed Hastings and Marc Randolph in 1997. It is now a popular streaming platform that changed the way people watch movie series and movies. Its initial business model revolved around DVD sales and movie rental. DVD sales business was then abandoned a year later to focus on the DVD rental by mail business.

Blockbuster was a household name when it comes to DVD rentals and at one moment operated 10,000 stores. That was before Netflix happened. Netflix was just a small startup that relied mainly on mailing DVDs to customers through the low-cost U.S. postal service.

In 2007, Netflix expanded its business to include streaming services and became an innovator offering better and cheaper goods than Blockbuster. For example, Netflix user would just pay a monthly fee and get access to the all the movies and television programs they want, whenever they want, in the comfort of their homes without having to rent any physical media.

Meanwhile, Blockbuster’s core business still revolved around its retail stores. As Neflix’s streaming service expanded, Blockbuster’s retail stores became an obsolete but expensive liability. By the time Blockbuster tried to introduce its own streaming service to compete with Netflix it was too late. By 2010, the former market leader declared bankruptcy.

Here is how Netflix became disruptive. When Netflix was launched, its business model revolved around DVD rental by mail but it did not focus on the core market of competitors like Blockbuster. Netflix targeted market segments that had not been targeted by its competitors and created a new service that is a better alternative but at a lower price. Suddenly there was no reason for Blockbuster to survive anymore. The users that Blockbuster lured with their content had now shifted to Netflix for better content and on-demand services.

Netflix continued to expanded internationally. As of 2017 its streaming services were available in almost 200 countries with more than 100 million subscribers worldwide. Due to its cheaper prices, HD quality and flexible viewing options, many entertainment seekers abandoned the usual TV channels and DVD movies rental services. Netflix revolutionised the way people access TV shows and movies by implementing a subscription plan that allowed its users to instantly access more content than any other competing cable provider.

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