The term disruptive innovation was coined by Harvard professor Clayton Christensen in his 1997 book, The Innovator’s Dilemma. It refers to the process whereby a smaller, often under-resourced company brings to market a simpler, cheaper, or more accessible product, which initially aims at a different, previously unserved or overlooked customer.
These low-end products get better and better over time, finally replacing the established industry leaders.
It’s important to remember that not all innovation is disruptive.
- Sustaining Innovation: When a business makes an improvement to an existing product, whether it be a better feature, improved design, or greater performance (such as a faster iPhone). This fortifies existing markets and provides highly profitable customers.
- Disruptive Innovation: When a business is aiming for customers that are being underserved or are not served at all by existing solutions, due to cost, complexity, or availability.
Disruption is a process, not a product. It cannot be measured by instant value; it is seen over time when a business model moves from the edge of a market to the middle.
The Process of Disruption
Disruptive innovation unfolds in a well-defined and predictable sequence within a market:
- Incumbents focus on high-end customers: Established companies engage in sustaining innovations to serve the top of the market, where they are most profitable.
- Lower-end customers are left behind: With the introduction of more features, incumbents start to “overshoot” the lower end of the market. Mainstream customers have to pay for things they don’t want or need.
- Disruptors enter the margins: A new firm comes in at the bottom of the market, with a “good enough”, easy-to-get-to, or cheap substitute.
- Incumbents ignore the threat: In many cases, the low-end products are the ones that the dominant companies ignore since they do not make a lot of profit. They like to let the disruptor have that market segment.
- Disruptor climbs the value chain: The new entrant slowly increases the quality of its product while still keeping its price advantage. When the disruptor starts winning the incumbent’s “good customers” in huge numbers, then disruption has taken place.
Types of Disruptive Innovation
Usually, disruption gets started in one of two places:
- Low-End Disruption: Attacks “overserved” customers at the lower end of an already existing market. The disruptor offers something good enough, but not quite as good, at a lower price point, leading incumbent players to pull back upstream to maintain their profit margins.
- New-Market Disruption: Focusing on “underserved” customers or “non-consumers. When this model works, you’re generating a whole new market by taking something that’s complicated and expensive and making it simple and cheap and available to a population that had no solution to begin with.
Key Lessons from Industry Disruptors
Business disruptors give insight to all management students and aspiring business leaders on how to deal with changing markets:
- Focus on the “Job to be Done”: Don’t try to make the product more complicated or include features that don’t appeal to the customer. Businesses must determine the exact, basic task the customer is trying to accomplish.
- Target Non-Consumers: Seek out underserved customers who are unable to afford or easily obtain existing products. Reducing the “barrier to entry” brings into existence a new market vector.
- Question Traditional Norms: Rethink established processes and question long-held assumptions to identify inefficiencies. Never take your business model for granted; always question its future relevance and longevity.
- Embrace Agile Teams: Encourage small, self-contained teams within your organization to try things out, learn from them, and repeat the process without being hindered by normal corporate procedures.
Characteristics of Disruptor Brands
Research from McKinsey and organizational behavior experts reveals that there are certain common characteristics of disruptor brands that enable them to grow at a faster rate and change competitive landscapes.
- Digital Fluency: A digital-first DNA underpins their operations. They use direct-to-consumer (D2C) methods, social media worlds, and the latest marketing automation tools to gain and keep customers.
- Speed and Agility (“Fail Fast”): Disruptors react rapidly to market signals. They develop minimum viable products, test them, and scale successful products and discard unsuccessful ones quickly.
- Consumer-Centric Purpose: They address a strong need from a mission that closely resonates with consumer values (e.g., sustainability, wellness, or transparency).
- Bold, Culturally Relevant Messaging: They communicate with consumers with fresh messaging, taking a stance on “in-trend” discussions and using social listening tools to remain relevant.
- Unique Physical Sales Strategy: Digital disruptors also develop immersive physical experiences, like a pop-up or a booth at an event, that seamlessly tie back to the digital purchase process.
Real-World Examples of Disruption
Disruption can only be understood by examining past business trends.
Netflix vs. Blockbuster
Netflix started out as a DVD-by-mail service. At first, it was not a threat to Blockbuster as it failed to meet the requirements of the customers who wanted a movie immediately. This model, however, took a niche market. Recognizing the changing consumer preferences and technology, Netflix adapted to become an on-demand streaming service. When Blockbuster tried to respond with a digital strategy, Netflix had already claimed the mainstream and played toward an upmarket strategy of original content.
Airbnb and the Hospitality Industry
Airbnb became a tech platform that matches homeowners who provide unique stays with travelers. It repurposed an ‘untapped resource’ (vacant rooms/empty homes) to make a new market: affordable and local accommodation. This threw a $600-billion conventional hotel industry into turmoil. Airbnb followed suit by expanding its value through Airbnb Experiences and long-term rentals.
Dollar Shave Club vs. Gillette
Dollar Shave Club had targeted the lower end of the grooming market. Dollar Shave Club was promoting a “good enough” razor with a very convenient, affordable subscription program, while Gillette was adding more blades and complex features to an expensive razor. By using viral, funny marketing, they neglected conventional retail and stole a large portion of the market from the incumbent, finally being bought by Unilever for $1 billion.
How Can Traditional Businesses Respond?
Ignoring disruption guarantees obsolescence. To survive, incumbent organizations must take proactive approaches:
- Invest in Separate Business Units: Develop distinct units to test out less profitable business models or new technologies without endangering the core business.
- Track Non-Consumers: Do not rely on feedback from your top-grossing clients. Monitor the fringes of your industry, as disruption almost always comes from outside the established market.
- Avoid the “Feature Trap”: Stop equating “better” with “more complex.” Putting in place features to attract the best customers can chase away the worst customers, and that can create opportunities for a disruptor.
- Invest in Adjacent Markets: Take advantage of emerging markets before it’s too late and a smaller, more agile firm does it for you.