When it comes to innovations and new technologies, disruptive innovation is on everyone’s lips right now. Hardly any other word is used as inflationarily to describe innovations. That makes it all the more important to understand what disruptive innovation actually is – and to be able to assess possible disruptive innovations correctly. So what exactly defines disruptive innovation? And what makes a company like Netflix disruptive?

What is a disruptive innovation?

In short, a disruptive innovation is a technology or a new business model that completely turns an existing market upside down. What is special about disruptive innovation is how it emerges: at the outset, the disruptor’s product is inferior to the market leader’s product and only addresses a specific customer segment. Only later does the innovation move into other segments and revolutionize the entire market.

Disruptive innovations: 3 concrete examples

One very well-known example is Kodak: in 1991 the company posted record revenues of USD 19.4 billion. In the 1990s, the hype around digital photography took off. Although Kodak had developed the first digital camera back in 1975, the company underestimated the potential of the new technology and missed the leap.

Kodak did not expect photo enthusiasts to accept the lower quality of digital photography or to be interested in the initially expensive devices. Yet, thanks to the exponential development of the technology and increasingly cheaper image sensors, digital photography ultimately prevailed in the market. In 2012, Kodak filed for insolvency and is today specialized in digital printing. Something similar happened to Blockbuster. Blockbuster’s business model was based on renting out the latest films through its franchise chains. Netflix, by contrast, appealed to customers who placed no particular value on the latest releases and already owned a DVD player – early adopters in this field who ordered online.

By introducing a subscription model and the mainstream adoption of DVD players, Netflix’s business model became a breakthrough innovation. Netflix did exactly what a disruptive innovator stands for: focusing on a niche customer segment with a specific offering at a lower price – and ultimately reshaping the entire market. But disruption does not always have to mean destruction for the market leaders. The music industry’s business model was also revolutionized in the 2000s and 2010s by on-demand streaming. After demand declined for many years, the licensing- and copyright-based business model had to be completely rethought.

The shift went from owning music to a subscription model. A pioneer was the online music service Rhapsody, which was the first to partner with the major record labels to license their music and make it available online as a subscription. Today’s heavyweights such as Spotify and Apple Music followed, perfecting on-demand streaming and fundamentally shaping the market. These new market entrants created enormous pressure to adapt across the music industry. Many of the large record labels, publishers, artists and songwriters nevertheless made the transformation. They recognized the innovation’s potential and reworked their business models. Many entered into partnerships to open up new sources of revenue.

How do disruptive innovations differ from other forms of innovation?

According to the "Innovator’s Dilemma" theory of Harvard professor Clayton M. Christensen, there are fundamentally two different types of innovation: incremental innovation, which focuses on improving existing products. This approach is usually pursued by established companies that already hold a large market share in their product category. By contrast, there is disruptive innovation. It usually comes from smaller companies that restrict themselves to a niche segment or want to address consumers who do not yet use the product.

With their innovation, these smaller companies build up a customer base in their chosen segment by offering a more specific product at a lower price. The product provides a particular advantage to that segment, even though it is, at first, inferior to the established offerings. If the innovation succeeds in this specific customer segment, the company can over time move into other segments and win them over with the advantage of its innovation. As soon as the innovation is also taken up by mainstream customers and starts to threaten the established companies, it is referred to as a disruptive innovation.

Disruption is a process

Disruptive innovations are always a process. The exponential success of small companies often appears so sudden that it seems as if the radical change came overnight. The truth, however, is that the small companies shaking up the market have been around for some time and were simply not perceived as a threat. This is exactly where established companies must start: keeping an eye on potential disruptive competitors and anticipating possible strong market shifts. History shows that many established companies are not practiced at this. TRENDMANAGER

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How to disrupt: How to foster disruptive innovation

To recognize and create disruptive innovations yourself, you need to build a strong innovation culture. The following capabilities are essential:

1. Leave your comfort zone

Leaders must initiate the change. They must model leaving the comfort zone for their employees in order to become innovative. It also pays off to look at other industries and sectors. There you will find helpful and inspiring best practices that you can apply to your own business model.

2. An agile mindset

Fundamentally, an agile mindset is needed. The examples above show that what matters is not the market position (see the Kodak example), but who can anticipate major shifts and adapt fastest (see the music industry example).

3. Cultivate a willingness to make mistakes

Without mistakes and experimentation, there is no disruptive innovation. The more you test, the higher the probability of innovating successfully. The key is a short trial-and-error process, in which you constantly evaluate so you can quickly spot mistakes and save costs.

Anyone who has never made a mistake has never tried anything new.

Albert Einstein

Increasing your innovation capability

Increasing the innovation capability of your own organization is no easy task. Where do you begin, and how exactly do you go about it? The first step is to develop a clear innovation strategy that you can use to bring your employees along. If you want to spot disruptive innovations early and anticipate important shifts, you should build structured trend and innovation management.

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The TRENDONE whitepaper on trend and innovation management shows you how to successfully establish trend management in your company and how to professionalize innovation processes for the long term.

Sources

Anthony, Scott D. (2016), Kodak’s downfall wasn’t about technology, accessed on 23 April 2021, https://hbr.org/2016/07/kodaks-downfall-wasnt-about-technology. Christensen, Clayton M. et al (2015), What is disruptive innovation?, accessed on 23 April 2021, https://hbr.org/2015/12/what-is-disruptive-innovation. Diehl, D. (2019), Was on-demand music streaming a disruptive innovation?, ProQuest LLC, Ann Arbor, MI. Dunn, Brian K. and Kemerer, Chris F. (2017), Netflix Inc.: The Disruptor Faces Disruption, no place. Netflix (2020), The Story of Netflix, accessed on 23 April 2021, https://about.netflix.com/en.