By: Gunjan Bhardwaj
According to disruptive innovation theory, companies have the best chance of creating new growth through the introduction of disruptive innovations in the market. But what is it and how can firms be disruptive? And why do they fail to be disruptive? Learn more about disruptive innovation in this article by Gunjan Bhardwaj, head of Ernst & Young´s Global Business Performance Think-tank.
Disruptive innovations do not target high-end customers with better products, offering better performance than previous ones, like sustaining innovations do. Disruptive innovations do not try to offer better products to existing customers in existing markets. On the contrary, they introduce products that are not as good as products currently available, but that offer other advantages, such as simplicity, convenience, or lower price. These products, by nature, typically attract new or less-demanding customers.
The improvement phase of the product will only begin once the disruptive innovation will have gained a foothold in a new or low-end market (Christensen & Raynor, 2003: 34). Disruptive innovations also do not lead to the same level of profits, or through the same mechanisms as established products (Gilbert & Bower, 2002: 101), and must not be seen as an immediate phenomenon and can take several years before companies build a significant market share (Gilbert, 2003: 27).
Disruptive innovations introduce products that are not as good as products currently available, but that offer other advantages
“Disruptive Innovation Theory”
The disruptive innovation theory has been first introduced by Christensen in 1997. This theory says that companies have the best chance of creating new growth through the introduction of disruptive innovations in the market. A key argument is that firms tend to innovate faster than customers can absorb the new products available. Companies are very often overshooting customers, offering products that are too good, but also too expensive to customers who are not willing to pay a premium for them. Thus, leaving place for disruptive innovations (Anthony & Christensen, 2005: 38).
How to be disruptive
First of all, the company must identify the new market. The disruptive innovation must undershoot the established market, and at the same time must fight against non-consumption. Moreover it must allow customers to do things they were already trying to do with existing products, but without success. The important point is to look outside existing markets, since customers in a disruptive market cannot be served like existing customers (Gilbert, 2003). To do so, it is crucial to be close to the customers, but rather than listening to what they say, the company should look at what they do. Which “job” are they trying to get done by buying this product (Christensen, 2007)?
The important point is to look outside existing markets
To understand how to identify disruptive innovations before they become mainstream is essential to take advantage of this empty space in the market. It is of utmost importance to develop these skills (Gordon, 2006). Nevertheless, the perception of the firm also plays a significant role. In fact, firms’ responses are often influenced by their perception of the disruption. If the company sees the disruption as a threat, its reaction will be defensive, immediate, and aggressive.
If on the other hand the company sees the disruption as an opportunity, its response will tend do be more moderate and reasoned. Generally speaking, if a company considers a disruption as an opportunity, it will commit insufficient resources to it. Thus, it can be wise to frame the disruption as a threat, but only if the disruption does not bring along a need to change business routines and model. When a disruption calls for a new business model for instance, an opportunity approach is better (Gilbert & Bower, 2002).
Why do Companies fail to be disruptive?
Christensen, based on the example of Japanese companies, has identified some reasons why incumbent firms fail when facing disruption. First, disruptive innovations lead to new products with a market impact that can difficultly be measured. Second, firms tend to base their investments on returns, focusing where returns are the highest. However, disruptive innovations can often lead to lower profit margins at first. Finally, large companies tend to pursue large markets, but often the markets for disruptive innovations are much smaller (Christensen, 2001: 82-83).
It is hard for incumbents to recognise disruptions as business opportunities, since they are not in their existing base. Thus, incumbents may see a market emerging, but judge that it is out of their scope (Gilbert, 2003). This is why challengers usually beat incumbents when it comes to disruptive innovations, although incumbents usually win in sustaining innovations (Christensen, 2005: 38).
Canadair, with its inexpensively operated regional jets, disrupted established aircraft manufacturers. The regional passenger jet business has boomed and the capacity of the jets has constantly increased over the last fifteen years. However, as Boeing and Airbus were struggling to build bigger and faster jets, their growth reached a plateau. In fact, the growth potential was at the bottom of the regional jet market (Christensen, 2003: 59).
In the mid-1990s, when manufacturers such as Canadair started the development of new types of regional jets, the regional air transport business began to take off. These new jets were built using new turbofan technology, and were very inexpensively operated on a cost-per-mile basis. Thus, thanks to this new efficiency operators could easily expand their service to markets where the demand was low to moderate, and to increase the frequency of service between small towns and large airports (Dann, 2003).
Quickbooks has been so disruptive because it is easy to use
Intuit, a small business accounting software maker, disrupted mainstream software makers by introducing Quickbooks, and now has a 70% market share. Quickbooks has been so disruptive because it is easy to use, whereas previously available small business accounting packages required knowledge of accounting. Since 85% of U.S.-based businesses were too small to hire an accountant, the books were held by the owners or family members, who did not need or did not understand most of the reports available from mainstream accounting software. Based on this insight, Intuit came up with Quickbooks and disrupted mainstream software makers (Christensen, 1997: 193).
By using the disruptive innovation theory, companies can grow through a better use of their investments in innovation, and thus achieve new growth. This represents a great challenge for companies, because too often opportunities which seem to have a high probability to create new growth end up flopping (Anthony, 2004). Therefore, a more appropriate resource allocation system and evaluation of projects can help companies to become the disruptors and not the disruptees.
About the author
Gunjan Bhardwaj is coordinator of the Global Business Performance Think-tank of Ernst&Young. He is also the solution champion for Pricing strategy and effectiveness as well as Innovation management in the advisory services of Ernst & Young with a focus on Pharmaceutical and FMCG sector.
Gunjan is also a guest professor for Growth and Innovation management at European Business School (EBS) in Germany and a member of the scientific advisory board of Plexus Institute in the US which researches on complexity in health sciences
Gunjan Bhardwaj graduated from Indian Institute of Technology Bombay, India in Metallurgical Engineering and Material Sciences and then did his MBA in International Management and Marketing in Pforzheim University, Germany on a DAAD Scholarship.
Gunjan has published a number of papers and articles in various Journals and magazines and has been a frequent speaker in conferences on marketing and innovation related topics. He is also the chief editor of the quarterly journal of Ernst & Young’s advisory practice called Performance.
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