Disruptive Innovation - Misunderstood?
A term common in today’s digital lexicon is disruptive innovation – a term that has fallen victim to much misunderstanding. Too many people speak of disruption using the term loosely to invoke the concept of innovation, and disruptive innovation to describe any situation in which the industry is shaken and previous bearers of success succumb. Uber would be such an example of where many commentators have gone wrong in their use of the term, or at least according to the father of disruptive innovation himself.
The concept was first introduced – and phenomenon analyzed – in 1995 by Harvard professor Clayton M. Christensen, who defined it as an innovation that transforms a historically expensive and complicated product accessed by a few people only, to something more affordable and accessible to a much larger population. Clayton replaced the term disruptive technology with disruptive innovation, recognizing that few technologies are essentially disruptive; it is the business model enabled by the technology which is disruptive.
The theory was aimed at well-managed companies and managing executives who overlooked researching the community. Clayton believed that disruptive innovation companies had the power to hurt successful companies by better focusing on the customer, hence tapping into markets highly ignored. Clayton distinguished between low-end disruption that targets customers who are in no need of the full performance expected by high-end customers, and new-market disruption which targets a previously unserved customer base.
A classic example of low-end disruption is the personal computer. Prior to personal computers, minicomputers and mainframes were the dominant products in the computing industry, and they required engineering experience to operate. In the late 1970s, Apple began selling computers as toys for children. These products were nowhere near competing with minicomputers in terms of quality, but since the mass could not afford or knew very little as to how to operate the expensive minicomputers, people shifted to purchasing Apple computers as they were better alternatives. Gradually, Apple improved on their innovation and within a few years, their computers were set to do the work of the much more expensive minicomputers. Apple managed to create a huge new market, making personal computers usable by the mass and ultimately changing the existing industry.
An example of new-market disruption is the introduction by Ford of Model T in 1908, changing the transportation market. Prior to Ford’s Model T, automobiles were expensive and considered a luxury item, and hence did not disrupt the horse-drawn vehicles market. Thanks to Ford’s innovative approach which led to the development of the assembly line technique of mass production, the company was able to produce cheaper automobiles that inevitably replaced horse-drawn vehicles.
A product need not necessarily eliminate industries, but can well improve on existing markets and entail adoption of new business models. For instance, Netflix is a case of a “classically” disruptive model, whose initial service of offering online movie rentals was not as appealing to Blockbuster’s mainstream customers, who were looking for instant gratification as they chose movies. Netflix later adapted by changing their business model and offering streaming on-demand video to customers, which became more appealing to Blockbuster’s customers who eventually transitioned in high numbers, forcing Blockbuster into bankruptcy in 2010.
Customers of most disruptive innovations tend to reside at the lower bottom of the market with unrefined products that those on top often fail to recognize as a threat. The disruptive innovation companies then develop their products and start stealing customers or reshaping industries, such as Skype did with respect to telecommunications. As technology advances and knowledge becomes accessible to all, there is fertile ground for many new disruptive innovations to rise. We may see 3D printing disrupting manufacturing industries, or flying vehicles disrupting transportation as we know it. Automakers are staking their claims in the ride-sharing world, which may have a huge role to play in shaping the future of mobility. The horizon is endless, and we are in for a ride.
In conclusion and for this article to be fair, let us go back and elaborate further on Clayton’s statement regarding Uber. Now, according to his theory, a disruptive business has to either originate in a low-end market and move upstream, to higher value markets, or it has to create a new market where none existed; Clayton says Uber meets neither of these criteria. Others argue however that Uber did in fact take off from a low-market foothold, with UberX unlocking an entirely new source of supply by allowing anyone who owns a car to drive without certification, and creating a new market within for-hire transportation.
The misunderstanding may lie in the fact that Uber, just like Apple, does not follow a linear approach – which is demand-based and with a distinct customer group - but behaves as a platform business. This difference appears to have important implications while some are calling for the theory of disruptive innovation to start accounting for platforms, given they are the dominant business model of the 21st century.