I've mentioned disruptive innovation a few times now, and many of us have an intuitive understanding of it.  Today, I'll talk more about the disruptive innovation model, and how you can make it work in your organization.

What is Disruptive Innovation?

Disruptive innovation is a concept made popular by Clayton Christensen in his 1997 book The Innovator's Dilemma.  In this article, I'll explain and elaborate on some of the ideas he introduced.  The graph below shows the key characteristics of a disruptive innovation.

A disruptive innovation is a technology whose performance does not currently meet the requirements of the mainstream market (point B in the diagram above).  However, it does meet the requirements of a lower-end market (point A), with customers that have lower performance requirements and are more sensitive to price.  Often, this lower-end market did not exist previously, and was created by the advent of the disruptive technology.

As time progresses, the performance requirements of both the mainstream and the lower-end markets grow, as we see on the diagram.  However, and this is key, the performance of the existing offering and of the disruptive offering grow more quickly.  At some point (point C in the diagram), the disruptive innovation’s performance meets the performance requirements of the existing market.  This existing offering still has better performance, but it now offers more than what the mainstream market needs.  At this point, mainstream customers begin to move, in large numbers, to the disruptive innovation, which meets their needs at a cheaper price.

One of the disruptive technologies that Christensen illustrates are new generations of disk drives.  Smaller, cheaper drives did not initially meet the capacity requirements of the market, so they targeted (and sometimes created) lower-end markets.  However, the capacity of the drives increased faster than the requirements of the market, and the smaller, cheaper drives were eventually able to enter the mainstream market, pulling most of the demand away from the existing established competitors.

In turn, we now see that several markets formerly serviced by disk drives have been supplanted by flash memory, with flash drives replacing floppy disks in our PCs and replacing CDs in our portable music players.

The advantage of disruptive innovation is clear: high growth, as customers move en masse to the disruptive technology, causing it to dominate mainstream markets.  Christensen found that companies, both incumbents and new entrants, who invested in disruptive innovations earned TWENTY times the revenue of companies who simply focused on delivering to the existing market.  Christensen also found that companies that entered disruptive markets within two years of their appearance were six times more likely to succeed (that is, survive) than those that entered later.  This was regardless of whether they entered with new or repackaged technologies.

If you encounter a technology that is advancing faster than the market requirements, you've found a possible opportunity for disruptive innovation.  So the next step is to figure out how to make it work...

How Do You Make Disruptive Innovations Succeed?

If you are a new entrant

As a new entrant, you are at an inherent advantage for disruptive innovations.  You are not constrained by the needs of the mainstream market, nor are you tempted away by projects with higher short-term returns.  New entrants can accept smaller markets and smaller deal sizes.  New entrants can also tolerate lower margins, because they tend to be more focused on their growth potential, rather than their short-term returns.  Targeting a niche, like a low-end segment, is also a traditional strength of small companies.  As well, the desire to grow up-market to win mainstream customers is a powerful motivator for small businesses.

If you identify a disruptive threat to your own market

In this case, following through on disruptive opportunities is more challenging.  Disruptive innovations are a very unattractive investment for mainstream businesses.  Initially, the only customers of the innovation are in the lower-end segments of a market, which means that sales are lower margin, the deals are smaller, and the return on investment is lower (at least in the near term).  It is very difficult for an existing company to move its resources from a higher margin project to a lower margin one, and harder still to convince its investors and customers that this is a reasonable approach.

However, even if you don't intend to pursue the disruptive opportunity as part of your growth strategy, you should still investigate the disruptive innovation defensively.  If you ignore a disruptive threat, you could end up being driven out of business in your own market.  Here are some key considerations to successfully implement disruptive innovations.

Avoid being a follower with disruptive innovations.  The problem repeatedly encountered by existing industry players is that, once a disruptive innovation meets the mainstream market requirements, the existing players have not developed the design expertise or the cost-effective manufacturing processes that the disruptive players have often perfected.  This puts the existing companies in a very weak position, and causes many of them to go out of business or become insignificant players.  Pursuing disruptive innovations early allows mainstream businesses to also perfect the offering, so that when the technology is capable of meeting the requirements of the mainstream market, the company is not displaced by its disruptive competitors.

Know when not to listen to your customers.  Mainstream customers are typically not interested in disruptive innovations.  At least, not initially.  The reason is simple: It doesn't meet their requirements (yet).  However, once the disruptive offering does meet mainstream requirements at a lower price than the existing offering, mainstream customers will begin moving to the disruptive technologies, even those customers who previously said that they were definitely not interested in it.  Companies that put too much weight in the short-term demands of their existing customers could eventually be driven out of the market by disruptive threats.  Instead, look for new markets and new customers who do find value in your disruptive technology, and target them.

Don't evaluate disruptive innovations using traditional business metrics.  The ROI of the disruptive offering will be lower, at least in the short term, than your non-disruptive investment opportunities.  Remember that the long term outcome is what matters with disruptive opportunities.  Understand the rate of increase in the disruptive technology's capabilities versus the increase in the mainstream market demands.  Will they converge?  (Refer again to the chart above.)  If so, and if the time horizon is acceptable for your business, then you must protect your disruptive investment from more short-sighted business goals.

Don’t compare the performance of the existing offering with the performance of the disruptive offering.  It is very possible that the disruptive innovation’s performance may never meet the performance of the existing offering.  However, the mainstream market doesn’t care, because what matters to the market is whether the performance of the innovation meets the market’s needs.  If a mainstream business wants to remain focused on its existing offerings, the best it can hope to do is be increasingly driven into further high-end markets, away from the mainstream, until the disruptive innovation eventually displaces it altogether.

Organize the disruptive investment into a separate business unit.  One way to make the disruptive investment attractive is to organize the disruptive innovation team in such a way that the low-end market is actually an attractive one for it.  You can establish different levels of separation, from creating a new line of business right up to spinning off a new company.  But the important thing here is that the new business targets the lower end customers, is tolerant of lower margin sales, is able to create the operational processes appropriate for its market, and is not measured against the standards of the parent organization.  Separating the investment into a different business unit also helps limit your risk exposure, as the unit now needs to survive on its own as a viable business, instead of receiving ongoing cash injections from the parent.

Lastly

I hope you're finding these articles to be helpful in strengthening your offerings.  There are a lot of ideas introduced here, and I'll expand on these in much greater depth in future articles.

Have you implemented a disruptive technology?  Or has your industry been affected by a disruptive competitor?  Do you have an example you'd like to share?  Maybe others can learn from your experiences.

Of course, if you have any questions, or if you would like more information on how to implement these or other software development processes in your organization, please feel free to contact me at Charles@CharlesConway.com.

If you know of someone who may find this article of interest, please forward it on!

Good luck!
Charles