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Understanding Disruptive Innovation

Disruptive innovation is a term that was coined by Harvard professor Clayton Christensen, and discussed in his book The Innovator’s Dilemma. You might think ‘disruptive innovation’ is about inventing something SO unique that it disrupts an industry. In reality, it has a much more concise definition, usually interpreted as a cheaper, simpler and more accessible version of a product or service for a completely different market share than the original, more expensive counterpart - which eventually overtakes the industry. Think Netflix, personal computers, transistor radios or even Wikipedia - suddenly allowing more people in on something that was at one point more of a luxury or too maybe complex for a big chunk of the market.

Netflix started their small movie subscription service around 1999 with just over a quarter million people signed up. It only cost a few dollars a month - meaning basically anyone could afford it, and the movies being delivered meant extra-easy access. It also peaked the interest of a new market - a group that wasn’t afraid to use technology and didn’t mind having to wait for the DVD to arrive in the mail instead of going to pick out a movie for that night. No more leaving the house to go to Blockbuster, no more late fees (ever), and you could get a lot of DVD’s every month. Fast forward to 2015, Netflix has over 60 million users all over the world and, according to CNN, is worth 28 billion dollars. During this time of growth for Netflix, Blockbuster was receiving less and less business, filing for bankruptcy in 2010. Instead of overhauling their business plan in response to the disruptive innovation that was sneaking up behind them, Blockbuster made what now seems like half hearted attempts to acquire a bit more money in the few transactions they still had. In the decade from Netflix starting to Blockbuster ending, Blockbuster didn’t do anything major to attempt innovation until about half of those 10 or so years were past (hint: by then it was too late).  

There will always be a group of consumers that will pay for higher-end products and services that follow traditional or ‘sustaining innovation’ (the ones that give the companies a nice profit margin). But there seems to have always been an even bigger but somehow less-visible group of consumers that will gladly accept a ‘less-fancy’ product as long as it basically accomplishes the goal and they can easily afford it. And once a disruptive innovation grabs a few consumers out of this group, it gains the means to get better in quality and keep acquiring customers. That is the sequence that allows them to overtake previous giants in the industry.

There’s a reason that Christensen called his book The Innovator’s Dilemma. It’s difficult enough to realize that there’s a little disruptor starting in your industry that may or may not begin to affect the big guys. It’s even more difficult to know what the right steps are to keep your business healthy and strong. Understanding what services and features the customer is willing to give up for a more easily accessible option is one important take-away. The most difficult part of this theory is the decision a company has to make between whether to hold tight to the same path, or attempt changing direction, with no promise of success either way. They can either keep making the same products and improving them for the share of customers they have now OR embrace simple new ideas and technology that will open the business up to different market shares. Keeping the traditional path is tempting because it’s usually had a history of stability, comfort, and sweet profit margins, but it has its own risks. Staying on the comfy path tends to produce products that are overly expensive and complex (full of unnecessary features) because of the continuing attempts to make the same products ‘better’, which then narrows the already specific and somewhat slim customer segment you’ve had. This is what opens you up to a disruptive innovator who takes a risk in creating a simple new technology, with probable lower revenue but with the ability to grab large groups of lower paying customers… allowing them a chance to take market share.

A misconception is that a businesses can easily avoid being overtaken by a disrupter just by knowing this theory. This is not necessarily true. While the big shot incumbent is making a better profit, they are usually blind to an upcoming disruptive innovation until it’s almost too late. And then when they do realize they have a chance of being overtaken, what are they to do? They can’t suddenly make their products as inexpensive as the little guy, at the risk of cannibalizing their own company. Should they follow the lead of the small disruptive innovator, and try to beat them to the punch? We all know that most startups fail within a few years - so should the big guys risk forging a new path when they’re not even sure if the little guys are going to survive long enough to make a dent in their business?

The goal, after understanding these two separate business styles, is being able to predict to the best of your ability the option with the most opportunity for success. Is there a foolproof formula to figure this out? Not really. Every big business out there is trying to navigate the same decisions, some with success, some without. What’s important is that leaders are aware of those tiny disruptors sneaking up underneath them and are willing to look at new methods of acquiring and keeping customers.

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