What is it?
“Disruptive” has lost its original meaning, and is now a jargon word applied to a broad range of innovations.
A Disruptive innovation is one that changes the basis of competition in an industry – for example in low-tier watches, Swatch changes the basis of competition from accuracy to fashion. A sustaining innovation is one that perpetuates the current dimensions of performance – for example, Intel developing faster and faster chip speed.
Clayton Christiansen wrote a whole book about the fundamental differences between these two innovations. He defines disruptive innovation as an innovation that makes an expensive complicated product affordable and accessible. It grows not by targeting the most profitable customers of incumbents, instead growing through targeting non-users or very price sensitive users.
His theory states that incumbents win in sustaining innovations (valued by your best customers), because they are highly motivated to win these battles with innovations that appeal to their most valuable customers, tend to be higher margin, fit with their existing ‘value network’ and match the ‘mental model’ they have built about how their industry works.
On the other hand, good managements are likely to be tripped up by disruptive innovations, since none of the above apply.
It is useful to expand this narrow definition of disruption from the bottom end, to encompass any innovation that does not fit the company’s existing business model.
When is it useful?
This insight has extensive implications for anyone developing a strategy to attack an incumbent, or as an incumbent seeing a potentially disruptive technology on the horizon.
The classic example is from the steel minimills, who began by producing very low quality steel, at low cost, but over time their technology improved and they were able to complete in progressively higher margin products like rebar and sheet steel.
Another example is PC computers disrupting Mainframe computers
How do you do the analysis?
The key analysis is to compare the rate that substandard technologies are improving with the performance improvement rate that customers are willing to pay a premium for.
If the substandard technologies are improving performance faster than customer requirements are growing, it is only a matter of time before they penetrate higher and higher margin segments.
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How can you adapt this concept?