The Best Strategies for Dealing with Disruptive Innovation

By: Jeffrey Baumgartner

What lessons can you learn about handling disruptive innovation? Author Jeffrey Baumgartner uses several examples from the photography market to highlight successful strategies for dealing with this increasingly common phenomenon.

Disruptive innovation is a term coined by Clayton Christensen that describes a new product or service that is so innovative, it disrupts the market and forces businesses in that market to radically change their business or suffer serious consequences.

A good example of a disruptive innovation is digital imagery. Until a very few years ago, virtual all photography was film-based. An instant photographic image was often called a “Polaroid” – after the world’s leading manufacturer of instant film and camera products. And instant meant waiting a minute or two.

My children (7 and 10) years have no concept of a film camera and expect to be able to look at every picture I take immediately after it’s been taken.

Digital imagery vs. film

When the first digital cameras were introduced, camera and film manufacturers should have realized that the sector was about to undergo profound change. Admittedly, those early cameras produced low resolution, poor quality images. But, in view of the rate of improvement in computer technology, it was clearly only a matter of time before digital cameras became the norm and film cameras became obsolete. Which, of course, is precisely what has happened.

Film manufacturers have seen their incomes disintegrate. Polaroid filed for bankruptcy in 2001. And its assets were sold to Bank One which attempted to maintain the business. They were not successful (at least with film) and Polaroid recently announced it would cease making instant film products. Ironically, Polaroid was an early developer of digital imagery products. But they failed to envision the market potential.

Many other famous names in the industry also nearly went bankrupt. Leica, makers of arguably the world’s finest quality 35mm film cameras, were slow to jump on the bandwagon and introduce a comparatively high quality digital camera, forcing their dedicated customers to look elsewhere for top end digital cameras.

Kodak, a name synonymous with film photography in the early to mid 1900s in the USA, suffered financially in the early years of this millennium, having to lay off over 12,000 employees and close many factories in order to stay in business. Only by changing focus from film based photography to digital photography has Kodak managed to survive. Today, the company makes and markets a number of digital cameras and other complementary products.

The options when disruptive innovation hits your markets

When a disruptive innovation threatens your market there are two productive approaches you can take and one non-productive approach. Sadly, all too many organizations opt for the non productive approach, which is to deny that the disruptive innovation will affect you market at all and continue business as usual. And that usually does not work.

Option 1: Chase the market

Far-sighted companies, upon realizing that their market is likely to change radically as a result of disruptive innovation, most typically change their products in order to continue selling to the same marketplace. Consider Kodak and Leica, above, as well as Canon, Nikon, Hasselblad and many other well established names from the world of photography. They have all developed and now market digital cameras and related products. Most of these companies, however, suffered during the transition.

Option 2: Find new markets based on your expertise

In the days when photography meant film, Kodak’s number one competitor was Fuji, a Japanese manufacturer of films, cameras and other products. When it became clear that digital imagery would forever change the photography market, Fuji did two things. Firstly, like Kodak and others, they began producing digital imagery products.

The other thing that they did was probably more innovative. Their far-thinking CEO, Shigetaka Komori, effectively asked his employees: “In what other ways and to what other industries might we apply our photographic chemicals knowledge?” As a result of this innovation challenge, Fuji identified numerous opportunities. And through innovation they have diversified into a number of profitable activities. Moreover, this diversity will better protect them against future disruptive innovations in any one of those industries.

As an example of using their expertise to develop new products, Fuji realized that the cellulose triacetate which forms the basis for film can also be used as a protective coating on flat panel displays – a growing business based on another disruptive innovation. It was a small operational step to modify their production to manufacture this protective coating.

As a result, Fuji generated an operating income of nearly US$1 billion for the fiscal year ending in March 2007, a 60.5% increase over the previous year.

It is clear that Fuji’s two-prong approach to surviving disruptive innovation was better than that of most of their competitors’.

Of course this was not entirely without pain. Fuji suffered financially from the introduction of digital imagery and was force to lay off some 5,000 employees. And part of the reason that their 2007 increase was so high was because 2006 was not a particularly strong year (as a result of disruptive innovation). Nevertheless, it is clear that Fuji’s two-prong approach to surviving disruptive innovation was better than that of most of their competitors’

Two lessons to learn here

There are two lessons to learn here. First, you should always be prepared for disruptive innovations coming from outside your organization. Indeed, some of my favorite innovation challenges for ideas campaigns, brainstorming and thought exercises are:

• “What actions might our competitors take tomorrow that would keep me awake at night (in fear)?”
• “What new technology could potentially destroy our business model?”
• “What new legislation could potentially destroy our business model?”

Once ideas are generated, you should follow up with additional campaigns to generate ideas for reactions to the worst case scenarios identified in the first campaigns. Not only does this exercise prepare you for the worst, but it may offer you ideas for a disruptive innovation which your firm could launch!

The second lesson is: when you learn of a radical new invention that threatens to disrupt your market, do not ignore it. Horse buggy makers made this mistake when cars came on the market; telegraph service providers made this mistake when the telephone was invented and photography suppliers made this mistake at the advent of the digital camera.