Disruptive Innovation

The concept of the disrupter was introduced in 1995 by Clayton Christensen in an article in Harvard Business Review entitled Disruptive Technologies: Catching The Wave.

A disrupter is a new entrant to a market who sees a gap left by the large incumbent suppliers. Usually the disrupter is small and eager to win business from anywhere. The smaller customers that are eschewed by the oligopolists are easy pickings for the disrupter.  Indeed, the oligopolists do not notice or do not care when, in the first instance, small crumbs are taken from underneath their table. The disrupter does things differently. They find ways of meeting the needs of the mass market, usually by producing a product or service in a more cost-effective way.

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Large incumbent suppliers are loath to change for fear of losing their privileged position. New entrants to a market, especially those who have little to lose, can shake up the market by offering cheaper, better, faster products that still meet market needs. It should be noted that true disruption of a market occurs only when a significant share is won, otherwise the new supplier has simply occupied a niche.  Attacking the mass market usually means having a new, very cost competitive product that performs well against the more expensive incumbents.

In order to disrupt a market it is necessary to answer three questions:

1. Is there anything in the products or services within the current market that could be removed without any serious effect on customer demand? If yes, there could be an opportunity to remove elements of the offer, lower costs and prices and so be successful with the disruption.

2. Do current suppliers to the market bend over backwards to serve the needs of customers? If yes, it may be difficult to persuade customers to move to a new supplier as they will fear they may not get the product or service they currently receive.

3. Are incumbent suppliers making full use of all the channels to market? If no, there may be an opportunity to exploit one of the channels (particularly online) to reach customers more efficiently.

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As Clayton Christensen puts it:  What jobs are customers hiring products and services to get done? If you can understand this, you will be closer to working out whether your new idea will be disruptive.

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The lack of interest that the incumbent supplier has at the bottom end of the market means that the new entrant’s disruption will hardly be noticed and it will be tolerated in the first instance. The product offered by the new entrant might be of lower performance than existing products which may themselves be over-specified for the needs of this bottom end segment. This is dashed line 1 in the diagram. The disrupter’s products win sales because they are good enough and significantly cheaper. This allows the new entrant to gain traction and rapidly build up sales because it is addressing a significant part of the market. In a short space of time the disrupter can move from the low end of the market into the mainstream by which time it is too late and too difficult for the incumbent to take sufficient retaliatory action.

The dilemma for the incumbent is holding on to their profitable business. They are driven by the need to maintain profit margins and find easy pickings at the high-end of the market rather than competing in the mainstream or the aggressive low end. It is for this reason that large companies set up separate business units to attack and disrupt the market. It would be hard for them to do so within the traditional setup which hates to rock the profitable boat.

There is a distinction between the disruption that takes part at the low end of the market by a more efficient supplier and one that better meets the needs than the products served by incumbents.  A new importer offering cars with a better build quality or superior fittings is not a disruptor, it is simply a better supplier.

There are many examples of disruption:

• Traditional encyclopedias have been disrupted by Wikipedia.

• Traditional telephone companies are being disrupted by Skype.

• Personal computers are being disrupted by smart phones.

• Lightbulbs have been disrupted by light emitting diodes (LEDs).

• Metal, wood and glass have been disrupted by plastic.

• CDs have been disrupted by digital media.

• Traditional film has been disrupted by digital photography.

• Typewriters have been disrupted by word processors and computers.

• Short distance flights have been disrupted by high-speed rail.

Disruptive innovation can in theory be the brainchild of any company. However, the drive to disrupt a market is much greater by someone who is not an incumbent. It is understandable that an incumbent will fear disruption because it threatens its position in the profitable market. An entrepreneur, a small company and a new entrant has less to lose. Their ability to invest in order to exploit their innovation may be limited but this need not matter. They are looking for a small number of people who will embrace the innovation – these are the innovators and early adopters in the diffusion of innovation model described by Rogers. The diffusion of innovation identifies hurdles that have to be overcome early in the life-cycle of the product launch. These “chasms” that need to be jumped between the innovators and early adopters and the early adopters and the early majority can be sticking points for a disrupter.

For many years steel was produced in large integrated steelworks using the Bessemer process. These huge mills had a high energy cost associated with heating the blast furnace. Blast furnaces need to operate continuously and this can be a problem during periods of low steel demand because the furnace must be kept hot. At times of full production these steelworks are highly efficient. However, demand is seldom steady as it pulses around the world. This opened an opportunity for a new form of steel production – the minimill. Minimills use scrap steel as their raw material. The electric arc furnace used in a minimill is much more flexible and can easily be started and stopped on a regular basis. They do not need to produce the massive volumes of the integrated mill. Minimills can be located close to a point where there is a high demand for steel.  Integrated steel mills are under pressure to locate close to supplies of energy and raw materials.

The mini-mill disrupted the traditional market for steel production. It began producing simple products such as reinforcing bar and, since the late 1980s, has produced steel strip. This enabled companies such as Nucor in the US to quickly rise from nowhere in 1968 to be one of the world’s largest steel producers.

Large corporations know the threat of disruptive innovation. They nearly all have research and development programmes that are aimed at discovering a profitable disruption. We can imagine the difficulty that a large manufacturer of lightbulbs would face if its research and development department invented the everlasting bulb. Would it hide the technology or would it launch it and disrupt its own profitable business?

Companies such as Google have business units aimed at launching disruptive technologies. They are big enough and rich enough to do so and they still maintain an entrepreneurial spirit. More traditional companies find it difficult and may deal with the disruptive innovation threat by making acquisitions of small companies that offer promising innovations that could gain traction in the market.

Some things to think about:

• To be a successful disrupter you need to have a low cost solution that can attack the bottom end of the market. Disruptors offer cheaper products and they also offer innovative products. The Dollar Shave Club is not only cheaper, it is delivered by mail.

• An incumbent company can best protect itself by setting up a stand-alone separate unit. Dow Corning protected itself in the silicone market by launching an online source of silicones called Xiameter.

• Disrupters look for some blue ocean into which they can move. This is discussed on https://www.b2bframeworks.com/frameworks/blue-ocean-strategy.

• Once the disrupter becomes established their product will move through a growth curve as described in the three horizons of innovation - https://www.b2bframeworks.com/frameworks/three-horizons-of-innovation