The 5 principles of Disruptive Innovation
Why established companies fall prey to disruptors
After preparing to talk to customers about Innovation, I thought I would share some notes on the Principles of Disruptive Innovation from “The Innovators Dilemma.”
What is Disruptive Innovation
In my last post, I wanted to define the term Innovation. As with many other hyped, over-used and misused words, it is in danger of losing its meaning, and clarity is helpful.
Now let’s talk about Disruptive Innovation. We’ve all heard about disruptors and disruptive technologies. We hold them in high regard and aim to emulate their success, but what does it mean to be a disruptor? The definition is more precise than you would imagine.
To understand Disruptive Innovation, you first need to understand its opposite - Sustaining Innovations.
Companies addressing a market with a solution will add features and new benefits to their product over time. It is a natural consequence of having customers that use your product and demand new capabilities. Adding features to an existing product is Sustaining Innovation. They respond to customer demand and allow the company to charge a higher price point for the product.
“The Innovators Dilemma” describes a situation where well managed, organised companies that respond to customer demand are precisely the ones that their competitors typically disrupt.
As companies add features by way of Sustaining Innovation, they “overshoot” the performance expectations of customers or a segment of customers.
Think about your smartphone. Do you use all of its features regularly? Many people don’t. Has the company that supplies your device overshot your ability to use the elements, and could a cheaper, more straightforward device meet your needs?
As a product feature set overshoots their customers’ ability to utilise those features, they are open to Disruptive Innovation, creating a space in the market and losing market share.
Important to note: Disruptive Innovations nearly always provide a smaller feature set when compared to their incumbents - but at a cheaper price point. Often they don’t appear to be a credible competitor to the incumbent until an end where the disruptor has enough market share to be credible. At which point, it is often too late for the incumbent to respond.
The Principles of Disruptive Innovation
In his book, Clayton Christensen describes some principles of this pattern. He defines a framework for leaders that want to defend against disruption and for those entrepreneurs that want to find disruption opportunities. It is essential reading.
Principle #1: Companies depend on customers and investors for resources
Incumbents embark on a routine of creating sustaining innovations because their customers and investors demand it. It’s precisely the well-run companies that respond to customer demand that overshoot performance, making the space for a disruptor to operate.
Established companies find it hard to divert resources from established product lines into disruption opportunities. There are many examples of organisations that have been driven by their customers to a point where they become overly complex and expensive.
Principle #2: Small Markets don’t solve the growth needs of large companies
Disruption often creates new markets to address. Large incumbent companies usually do not take these smaller markets seriously until the disruptor has become more established. To find growth, they instead focus on larger, more lucrative markets.
This problem becomes compounded as an incumbent gets bigger, and it needs to serve large markets with complicated feature sets. Focussing on large markets at the expense of smaller, less lucrative ones creates the space for disruptors to operate.
Principle #3: Markets that don’t exist cannot be analysed
Well managed incumbent companies often wait for complete and accurate information before deciding where to invest resources. As such, they are unprepared to address emerging markets that offer opportunities for disruptors.
Principle #4: An organisation’s capabilities define its disabilities
This principle is my favourite. An organisation’s capabilities are defined by its people and the process within which the people operate. Whilst people can be flexible and open to change, the same is not true of an organisations processes and values. Often established companies are not able to adjust to confront a disruptive threat.
Principle #5: Technology supply may not equal market demand
Disruptive technologies always enter the market with smaller features and then overshoot their customer’s ability to utilise the capabilities. Incumbents often do not realise at the rate they are moving up-market through sustaining innovations - raising the price point for their products and creating space for disruptors.
Disruptive Innovation is a fascinating subject because it is about competition between market entrants and established incumbents. I’m intrigued by the idea that it is precisely well-managed companies that are responsive to customer demands that are vulnerable to being disrupted.
Did the definition of Disruptive Innovation make sense to you?