Disruptive Innovation Model - HBR

I think Disruptive Innovation has become a main stream concept but it is also obvious that majority of the people using it are giving this concept and theory lip service without really understanding how disruption happens or why it happens. I was glad to see this article written a year back by Clayton Christensen, Michael E. Raynor and Rory McDonald in Harvard Business Review. Here is a primer on Disruptive Innovation

“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.

Startups are by design be disruptive, i.e startups have fewer resources, they need to appeal to a market neglected by the incumbent and they need to pay more attention to individual customer to get a deeper understanding of their value proposition. In addition to that you cannot be a startup and start with a huge profit margin, that usually is an exception and not a rule. High profit margin is only valid when the value from the startups product or service is tremendously useful to the early adopter. This was the case when we first used the Google Search Engine. It was dramatically better, I am pretty sure people who relied on search would have paid money to have the ability to get their answers quickly and accurately without having the scroll through a wall of results, but the market had not evolved to a point where Google could charge, hence they moved to the advertising model. Google and now Facebook, dominate the advertising model and I find it highly unlikely anyone will displace them in the near future.

The HBR Article clearly showcases why Uber or even Tesla is not a disruptive innovation.  I don’t believe Airbnb is a disruptive innovation. None of the sharing economy business models are disruptive, because all they have done is utilised technology to change the business model. They are innovative but they are not disruptive in any concrete sense. It does not take away from the innovations that has been achieved by these companies or the market displacements, value capture and changes that these companies have been able to create. I think startups or entrepreneurs who are looking to “disrupt” need to carefully think through the path, it is easy to say the words, but it is incredibly hard to disrupt an incumbent. It usually takes years or decades and very few founders have that kind of energy or stamina to ride through the challenges of building something truly disruptive.

Disruption for disruption sake is hubris or even foolish. Yes, technology has accelerated in a path that enables someone to utilise that to create tremendous value for their customers. However, I believe this is available to anyone, especially incumbents. All incumbents need to do is structure a separate team that starts fresh under the purview and support of the leadership of the incumbent company. The new team should not be measured on the same metrics as the traditional incumbent business units. The new team needs to be measured similar to a new startup. Startup metrics are dramatically different than traditional metrics like profit margin. Incumbent manager fall into the trap of looking at early stage companies and measuring their progress using a scale that does not apply to them.

Here is Dr.Clayton Christensen explaining this in detail