Understanding Disruptive Innovation

Companies are struggling with keeping themselves alive when new products disrupt the market. How does disruptive innovation occur and how can companies prepare for that?

How does disruptive innovation emerge, develop, grow and disrupt over time? This “process” of business disruption sounds straight forward and easy to comprehend. But the reality for companies is more complex than it sounds and they are struggling with managing a disruptive innovation, both from an entrant’s and an incumbent’s perspective.

So our interest is to dig into what happens before disruption occurs, and put together the bits and pieces of the process before the foothold, and between foothold and disruption. What happens in between and can companies prepare for it, or is it – as some say – random?

What is Disruptive Innovation?

First, let’s see what Disruptive Innovation is. The term was first coined in 1997 by Clayton M. Christensen from Harvard Business School, and since then the idea of a “disruptive innovation” has skyrocketed the business world. His book The Innovator’s Dilemma (Christensen, 1997) pushed Disruptive Innovation into the bookshelves and minds of all those who love or hate innovation, and turned into a theory and a new practice cliché. However, the dilemma is still standing as we simply don’t know how it occurs, and can only see the disruptive outcome. For example, we can only point at e.g. Spotify and say that it was disruptive. Similarly, some would point at Uber and say it was disruptive—some disagree.

What we do know is that a disruptive innovation needs a foothold at the low-end of the market, a vacuum—so to speak, that is left by the established companies in the mainstream market. Christensen has shown that the established companies have a tendency of overshooting the lower ends of a market by offering fancier and ever more complex performance attributes that the higher tiers of the market demand. People at the low-end are reluctant to buy and are looking for a simpler, more convenient and less expensive alternative. This is where innovations can start and grow in a disruptive way.

Once the foothold is gained, the company driving the disruptive innovation will, as all companies, gradually improve its offering until it is also appealing to the mainstream customers. And this is when disruption occurs.

The question that arises here is: why do the established companies fail to act upon this imminent threat? A partial answer is: they do not consider it as a threat and once the innovation appeals to the mainstream, it is too late and disruption is already happening. Why is this? The established companies focus on their most profitable customers and react too late or not at all to new developments, handicapped by their existing customers and market. In other words, existing it is the main customer that in the end kills the established company as it is unable to change its offers to new customers.

How Does it Happen?

From our research, we have identified that the synchonisation of technology developments, business model, and market factors during three critical phases (emergence, niche market and mainstream market) can shape the path towards disruption: when the potentially disruptive innovation emerges out of a technology and into a business model, when the potentially disruptive innovation is about to gain a foothold in a niche market and when the potentially disruptive innovation is about to be taken on by the mainstream customers. For example, Apple’s successful commercialization of iTunes and the iPod, eventually disrupted the music industry only when regulations changed and the Internet and MP3 players were sufficiently developed (Ansari and Krop, 2012). Without the alignment of these enabling technologies and factor markets, chances increase that the entrant runs out of resources and fails to commercialize its offering into the niche market in a timely enough manner to achieve disruption.

Additionally, we further found that the disruptive path is affected by the perception and expectation of the market players. The entrant needs to strategically manage the incumbent’s perception to minimize and survive any reactions from incumbents to disrupt the market. For example, TiVo is a company that changed from a disruptive to a cooperative strategy to gain the support of the market actors it stood to disrupt. This led to TiVo eventually introducing a sustaining innovation to a changed ecosystem (Ansari, Garud & Kumaraswamy, 2016).

Is there Anything Companies can do?

This is an initial picture of the process of disruptive innovation that will help new companies to identify how to shape the disruptive path, as well as the actions needed to manage the process, especially by the entrant. Entrants need to identify the strategic actions such as disclosing information about the innovation, removing information barriers, increasing compatibility according to current market requirements, and demonstrating the relative advantage over other solutions.

For incumbents, understanding the process of disruptive innovation sheds light onto the actions that might be needed to dissuade the entrant from continuing along a disruptive path. This could be achieved by offering to the low-end/ new markets through spin-offs, thereby closing the overshoot gap, or making technologies unavailable through patent protection to delay the entrant’s progression. However, this will not prevent innovative entrants from entering the market but may give the incumbent more time to establish spin-off companies with new values, supported by the incumbent’s resources and existing secondary processes.

As an initial approximation to how disruptive innovation happens, lots of questions remain open. We still need to explore the adaptability of strategic actions of the entrant and the incumbent at different stages of the process. Also, we need to explore the role of environmental conditions, such as governmental regulations or other types of institutional pressure and how entrants and incumbents manage these conditions within the disruption process (e.g. ignoring them, circuiting them, using them to influence timing). Further, we propose to differentiate between types of industries and the role that a digital environment or a physical environment plays for disruption.

References Ansari, S., & Krop, P. (2012). Incumbent performance in the face of a radical innovation: Towards a framework for incumbent challenger dynamics. Research Policy, 41(8), 1357–1374. https://doi.org/10.1016/j.respol.2012.03.024 Ansari, S. S., Garud, R., & Kumaraswamy, A. (2016). The disruptor’s dilemma: TiVo and the U.S. television ecosystem: The Disruptor’s Dilemma. Strategic Management Journal, 37(9), 1829–1853. https://doi.org/10.1002/smj.2442 Christensen, C. M. (1997). The innovator’s dilemma: when new technologies cause great firms to fail. Boston, Mass: Harvard Business School Press