Understanding Disruptive Innovation

The term disruptive innovation describes the journey of a company that targets overlooked customer segments with products or services that better meet their needs for a lower investment, eventually moving upmarket and displacing established incumbent organizations.

A classic example of disruptive innovation is Ford’s Model T, an affordable, mass-produced car that changed the transportation industry by enabling new segments to become automobile consumers.

Disruptive innovation has the power to reshape industry landscapes, so organizations must develop capabilities to recognize emerging disruptors, and ensure appropriate strategies are developed and implemented to protect long-term survival. But adapting to disruptive market changes and driving disruptive innovation within established organizations presents complex challenges, such as:

• Recognizing the need to pivot in face of new competitors.
• Justifying the risky investment to stakeholders.
• Establishing the new operation.
• Potentially cannibalizing the existing business.

Those challenges can lead to many businesses failing not due to poor operations, or lack of talent and resources, but because they fail to recognize and adapt in the face of disruptive innovations. The Nokia acquisition by Microsoft is the perfect example of this reality.

Recognizing Disruptive Innovation

The term “disruptive innovation” has been widely misused and applied in any scenario where the position of the incumbent firms is compromised. The underlying problem of erroneous application of this terminology is that it clouds executive’s ability to recognize the changes in the competitive landscape and apply effective strategic approaches in response.

Tools such as Michael Porter’s Five Forces Model can help leaders identify early signals of market changes and design strategies to adapt and thrive in the future. However, organisations tend to scan direct competitors often, but lack discipline in analyzing fringe competitors that are entering the low-margin of the market.

To assess the possible impact of disruptive new-entrants and develop a suitable responsive strategy to protect your firm’s position, Christensen and Wessel (2012) suggest a systematic assessment of the landscape, using the following five areas of analysis:

1. The momentum barrier: your competitor’s need to overcome customer’s existing habits that might lead to implementation failure.
2. The technology implementation barrier: your competitor’s need to implement new technology, that might be less stable and trustworthy than existing technology.
3. The ecosystem barrier: your competitor’s need to change the current market structure (supply chain, sales channels etc) in order to operate successfully.
4. The new technology barrier: your competitor’s need to develop brand new technologies in order to deliver on the value proposition.
5. The business model barrier: your competitor’s likelihood to adopt the existing cost framework due to customers, suppliers and partners expectations, therefore, impacting their ability to compete on the basis of price.

The result of this analysis should be a strategy on how to effectively respond to the disruptive competitor. But an organization should not wait for new disruptive competitors to enter the market to create its own disruptive innovations.

Developing Disruptive Innovation

Bertolini, Duncan and Waldeck’s  “Fault Line Framework” suggests a proactive approach to spotting areas where organizations are likely to be disrupted in the future.

It looks at the where customers are being over-served or choosing a rudimentary solution over the existing offer, challenges the performance metrics currently in use, and tests the current business model in the context of the more relevant metrics to determine if a firm’s position in the industry is at risk. Their framework also looks at the current organizational structure and resources to understand the firm’s ability to deliver to the low end of the market.

Besides using the framework above as an analytical exercise, executives can also use it as a tool to build a business case to secure new investment for disruptive innovation, as existing resources are usually constrained to existing processes and utilisation metrics.

To effectively develop and manage disruptive innovation, executives must:

1. Proactively recognise disruption areas in the organisation (“Fault Line Framework” is a great exercise).
2. Systematically assess the threat disruptive competition by assessing key barriers to disruption (Use Christensen and Wessel assessment).
3. In face of a disruptive competitor, avoid the trap of solely moving upmarket by creating compelling strategies to protect the organisations market share in the long-term.
4. Constantly invest in research and development of disruptive innovation, even if in a small capacity.
5. Create a culture of self-disruption.
6. Manage disruptive innovation projects as a separate business unit to ensure freedom of processes, tools, resources, technology and metrics of success.

 

Stakeholders might fear strategic change and cannibalization of the existing business, but it is important for executives to build the long-term strategy of self-disruption in order to maintain a leadership position in the market. Apple is the typical example of successful self-disruption, but it isn’t just in technology where this strategy is crucial.

An Example of Successful Disruptive Innovation

Nestlé is an example of a firm that recognized the need to self-disrupt, built an effective business case to gain the buy-in of its stakeholders, successfully established the new operation, and allowed for sustainable cannibalization the existing business.

In the early 2000’s 70% of Nestlé’s revenue derived from milk products and chocolate confectionery. But Nestlé’s R&D could sense a change in the market and a growth in health trends that would likely disrupt its leadership position.

Nestlé executives developed a strategy to adapt to the market changes and become a “healthy company”. The strategy was effectively communicated to stakeholders, Nestlé invested heavily in R&D and started to create food lines that were more in line with the future demand.

Almost two decades later, Nestlé’s original core segments are being cannibalized by the new business units and now represents less than half of the revenue.

 

Is your organisation prepared to recognise, manage and develop disruptive innovation?