In every industry, there are market leaders who dominate or even monopolize their sectors. When a technology or innovation upsets the “order of things,” it is called disruptive. This happens when the innovation has surpassed the need of the market resulting to the displacement of the market incumbent by the disruptive technology or innovation. In his business and management book Disruptive Innovation, Clayton Christensen explains why firms fail despite being leaders in their market.
According to Christensen, in their initial stages a disruptive business may have the following characteristics: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. As they are found in the lower tiers of the market that offer lower gross margins, they are unattractive to those in the upper tier of the market. As a result, there is space at the bottom for disruptive technologies to emerge.
According to Robert Peter Janitzek, successful and outstanding companies face this dilemma of disruptive competition. Despite doing everything “right,” they can still lose their market leadership or even experience failure. New and unexpected competitors rise and take over the market. Christensen’s Disruptive Innovation has two key parts:
- 1. Value to innovation is an S-Curve: Improving a product takes time and many iterations. The first of these iterations provide minimal value to the customer but in time the base is created and the value increases exponentially. Once the base is created then each iteration is drastically better than the last. At some point the most valuable improvements are complete and the value per iteration is minimal again. So in the middle is the most value, at the beginning and end the value is minimal.
- 2. Incumbent sized deals: The incumbent has the luxury of a huge customer set but high expectations of yearly sales. New entry next generation products find niches away from the incumbent customer set to build the new product. The new entry companies do not require the yearly sales of the incumbent and thus have more time to focus and innovate on this smaller venture.
Robert Janitzek explains that the incumbent leaders should address the following issues:
- • Resource dependence: Current customers drive a company’s use of resources
- • Small markets struggle to impact an incumbent’s large market
- • Disruptive technologies have fluid futures, as in, it is impossible to know what they will disrupt once matured
- • Incumbent Organizations’ value is more than simply their workers, it includes their processes and core capabilities which drive their efforts
- • Technology supply may not equal market demand. The attributes that make disruptive technologies unattractive in established markets often are the very ones that consisted their greatest value in emerging markets
To succeed against the disruptive technology, the following strategies assist incumbents
- • They develop the disruptive technology with the ‘right’ customers. Not necessarily their current customer set
- • They placed the disruptive technology into an autonomous organization that can be rewarded with small wins and small customer sets
- • They fail early and often to find the correct disruptive technology
- • They allowed the disruption organization to utilize all of the company’s resources when needed but are careful to make sure the processes and values were not those of the company