Editor’s Note: Dr. Lucell Larawan is a seasoned business mentor and entrepreneur, as well as Flevy author. On Flevy, he recently published a framework, Sculpting Quality and Performance Excellence.
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This is now a strategic management buzz: disruptive innovation. But what does the buzz really mean? Here is an expert opinion:
Disruptive innovation describes a process by which a product or service takes root in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors or completely removing competition – Matt Christensen, Journal of Applied IT in Investment Management, January 2015
Some investment companies apply disruptive innovation in the following approaches:
- a) search for product opportunities in areas that are repulsive for mainstream investors;
- b) invest resources in product development and research in business areas in flux such as on risk exposure and technology; and
- c) use an avant-garde approach to product development; start small, prepare for rapid scaling.
Though the strategy buzz mentioned has gained more popularity, the idea’s main tenets have been widely misconceived and frequently misapplied. Many consultants and researchers use “disruptive innovation” to describe any condition in which businesses are shaken up and previously fruitful incumbents falter. But this is much too broad a usage.
What then constitutes disruptive innovation? Consider: first, disruptive innovations originate in low-end or new market grounds. They shake because incumbents pay less attention to less-demanding clients and typically try to provide ever-improving products to their demanding customers.
Disrupters create a market that did not exist before. They turn non-consumers to consumers. To illustrate: Xerox targeted big corporations and exact high prices. Then later, new entrants introduced personal copiers and a new market was born.
Aside from starting from low-end or the new market foundation, disruptive innovations do not try to flourish with the mainstream’s customers until quality levels up to their standards. Disruptive innovation differs from “sustaining innovation”: the latter merely transforms the good into better in the eyes of existing clients. The known approaches: the fifth blade in a razor, the clearer TV picture, the faster internet connection. These upgrades can be incremental enhancements or major developments, but they all are aimed at increasing revenue from the most profitable clients. Disruptive innovation, on the other hand, is temporarily looked down as second-rate by most of the incumbents’ customers. Customers, usually, are not inclined to switch to the new service or product merely because of its lower price. They rather wait until its quality peaks enough to satisfy them. If this happens, they adopt the new innovation and accept its lower price.
Looking at the business model of Uber taxi, is it disruptive? Uber is an on-demand transportation service which has brought a dramatic alteration in the taxi industry in many parts of the world. Uber has made it possible for passengers to simply tap their smartphone and have a cab arrive at their location in the minimum possible time. Some experts, however, do not consider it “disruptive” enough because of the two conditions mentioned above. Rather, it is just an improvement on the traditional idea of a taxi service.