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This is the 5th part of a series of article on innovation. You will find links to the earlier posts at the end of this blog.
Disruptive innovations are game-changers. They bring new customers and jobs. They also seem to be happening with a distinct pattern; disruptive innovations are less likely from the industry leaders. Established players seem to be so ensconced with their position that they are rarely disrupting their industry themselves. This despite the well-known quote “If you don’t disrupt your industry, someone else will”. Google this phrase and you will find that so many CEO’s and speakers have used it. Yet when it comes to practice, organizations seldom seem to follow the message.
Clay Christiansen describes the concept of disruptive innovation in his book The Innovators Dilemma (Christensen, C. (2003). The innovator's dilemma. New York, NY: Harper Business.) and identifies two categories of innovation, sustaining innovation and disruptive innovations. He postulates that entrenched players will always win the sustaining innovation contest (producing better products that can be sold more profitably to the most demanding customers), while disruptive innovation contests are always won by the outsider.
Christiansen postulates that disruptive innovations happen when a disrupter focuses on the low-end market or new market.
"New market" disruption is likely to succeed when you are able to identify a set of customers with a specific need and willingness to pay for it. Usually, this tends to be a niche market with few customers. When mobile phones were introduced, they appealed to a small market of customers who were willing to pay a significant fee for being able to stay connected with their business or family. As the technology keeps improving, prices come down and a wider audience comes into play, creating a large market, as has happened in the mobile communication industry.
Disruptions that start as a new market disruption usually tend to be technology “push innovations”. They start as technology disruptions and overtime, more types of innovations; business model, network, process, customer experience, channel innovations, etc., get added.
On the other hand, disruptions that start at the low end of the market start as “pull innovations”. These disruptions are a result of the disruptors' ability to identify a market segment that is unable to buy or access the incumbent’s existing products. This usually happens as a result of the existing products being over-designed / engineered and as a result is too good for these “low end” customers. Toyota and Honda emergence as automotive giants is attributed to this type of innovation (Christensen, C. (2003). The innovator's dilemma. New York, NY: Harper Business.)
How does an organization know if their ideas are disruptive in nature? Christiansen and Raynor suggest 3 questions (Christensen, C. and Raynor, M. (2003). The innovator's solution. HBR Press.) to confirm the idea as disruptive. Note that I have used Indian examples, there are plenty of global examples as well.
1. Is there a potential for a new market?
Is there a large population that can’t afford to buy/own the product or service themselves? A good example is the product category of shampoo; a very large population in India didn’t use shampoo’s because they couldn’t afford to buy the pack sizes in which they were sold. The introduction of sachet packs changed it and the shampoo market exploded.
Is there a large population that finds the task/use of product too complex and hence avoids it? Urban India today consists of plenty of young office goers, many of whom can’t cook; they lack the facilities, time and skill to prepare their own meals. This has given rise to the dramatic growth of food delivery companies such as Swiggy and Zomato. This is a market that didn’t exist a decade ago and still not something the rural localities relate with.
2. Is it profitable?
Is there a large population that will buy the cheap version with lower functionality of a product that the incumbent doesn’t want to sell? The key obviously is that incumbent doesn’t want to sell the cheap product and that is why there are only a few cases of such disruptions. However, like in the airline industry, you will discover an opportunity to tap a market though large, considered unprofitable by incumbents. Shrewd low-cost airlines have disrupted the airline industry this way.
Is it possible to develop a business model to sell at low prices and still make a profit? While many business have tried this route of disruption, the jury is still out on their long term success. However, in the financial sector, IT solutions and platforms are enabling banks to offer products and services at much lower prices than ever before, bringing to new retail customers financial investment products that were available to only the wealthy clients.
3. Are there competition barriers?
Can incumbents duplicate this disruption? Despite coming up with disruptive ideas and concepts, many disrupters make a cardinal sin; compete with the incumbent for the same market. For the disrupter to succeed, the idea or concept must be unique in a way that the incumbent can’t compete or doesn’t want to compete. While Indigo airlines is a good example of a disrupter picking a concept that the existing incumbents couldn’t duplicate, the food FMCG space is full of examples of disrupters launching concepts that the incumbent large players quickly latched on to build a much larger business.
Are there legal barriers to the disruption? Very often disruptions get derailed due to legal barriers or the competitors ability to lobby for legal barriers. It could take a long while for organizations to overcome legal barriers to disruptions like the one Walmart and Ikea are facing in India.
How does one plan for disruptive innovation? In their research paper, Magnus Penker and Soo Beng Khoh (Cultivating Growth and Radical Innovation Success in the Fourth Industrial Revolution with Big Data Analytics - IEEE Conference Publication. [online] Available at: https://ieeexplore.ieee.org/document/8607313/authors) found that radical innovators, whose efforts result in disruptive changes, tend to do things very differently from incremental innovators. They analyzed data collected from 2900 companies over 52 months using InnoSurvey® (https://innovation360.com/innovation-assessment/) and among others, found that
They are more systematic with the innovation process. When compared to incremental innovators, radical innovators are seen to be better organized with idea generation, selection, development, and commercialization
They use a wider variety of leadership skills and deliberate in the application of the leadership styles defined by Loewe, et al (“Five Styles of Strategy Innovation and How to use Them” by Pierre Loewe, Peter Williamson, and Robert Chapman Wood. European Journal of Management 19(2) pp. 115–125. (2001). European Management Journal, 19(5), p.570.)
Radical innovators apply multiple types of innovation (products, process, organization structures, management system, production, business model and services)
Magnus Penker set out to identify why some companies are more successful with innovation than others and developed a 360 degree framework to assess the innovation capability of an organization to carry out both incremental and radical innovation (bit.ly/i360frmwrk). Using this methodology, one is able to correlate the ambition with capabilities that include processes, leadership style, culture and organization personas. You will find the entire framework and process described in detail in his book "How to Assess and Measure Business Innovation"( Penker, Magnus., Junermark, Peter. and Jacobson, Sten. (2017), How to Assess and Measure Business Innovation)
In summary, we observe four key steps that companies adopt for disruptive innovations
Use a robust innovation process – ensure that the organization has a good technology-driven and need seeker strategy to process disruptive innovation ideas. Ensure a systematic innovation management process is working.
Navigate the market opportunity systematically – adopt a systematic process to evaluate the potential applications and customer segment combinations and select an agile focus strategy
Build the disruption applying multiple types of innovation – combine multiple innovation types; configuration innovations, offering innovations and experience innovations.
Develop the business model for success – the existing business model may not be able to deliver the disruption. Develop a business model that will enable the disruption to succeed.
Disruptive innovations aren’t the result of fortunately being in the right place at the right time and with the right product. You need to
Find the right place to be in (markets and customer segment)
Be there at the right time before incumbents and competitors to break the barriers and erecting your own barriers
Have the right product that the customers are willing to buy and which can generate profits.
Krishnan Naganathan
Krishnan is a consultant with more than 25 years of experience. His purpose is to help India and it's entrepreneurs be global leaders in innovation