Dealing with disruptive innovation

Disruptive innovation is a term used in business and technology to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in a new market and later by lowering prices in the existing market.

In order to gain a competitive edge, you need to raise your head above day-to-day operations and start expanding your vision. You need to ask yourself which disruptive changes in your industry might serve as the source of innovation for you and your company?

The term disruptive technologies was coined by Clayton M. Christensen and introduced in his 1995 article Disruptive Technologies: Catching the Wave, which he co-wrote with Joseph Bower. The article is aimed at managing executives who make the funding/purchasing decisions in companies rather than the research community. He describes the term further in his book The Innovator’s Dilemma, which explored the cases of the disk drive industry and the excavating equipment industry (and other hand-picked case studies).

According to Christensen’s theory, the types of innovation can be grouped in:

a)Sustaining – An innovation that does not affect existing markets.
b)Evolutionary – An innovation that improves a product in an existing market in ways that customers are expecting. (e.g., fuel injection)
c)Revolutionary (discontinuous, radical) – An innovation that is unexpected, but nevertheless does not affect existing markets. (e.g., the automobile)
d)Disruptive – An innovation that creates a new market by applying a different set of values, which ultimately (and unexpectedly) overtakes an existing market. (e.g., the lower priced Ford Model T)

Christensen thinks that R. & D. departments housed within a business and accountable to its executives are structurally unable to innovate disruptively; they are preoccupied with pleasing existing customers through incremental improvement. He was the first to state that ‘good firms are usually aware of the innovations, but their business environment does not allow them to pursue them when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from that of sustaining innovations (which are needed to compete against current competition)’.

Milan Zeleny based some of his writing about the knowledge – information cycle on the disruptive technology fundamentals. He described high technology as a technology core that changes the very architecture (structure and organization) of the components of the technology support net. High technology therefore transforms the qualitative nature of tasks of TSN and their relations, as well as their requisite physical, energy and information flows. It also affects the skills required, the roles played, the styles of management and coordination – the organizational culture itself.

The same concept was behind McKinsey Global Institute’s study on disruptive technologies, in 2013. Their analysis concluded that, as knowledge surpasses capital, labor and raw materials as the dominant economic resource, technologies are also starting to reflect this shift. Technologies are rapidly shifting from centralized hierarchies to distributed networks. Nowadays knowledge is not residing in a super-mind, super-book or super-database, but a complex relational pattern of networks brought forth to coordinate human action.

How do the disruptive waves affect established businesses?

Christensen’s critics argue that disruptive innovation is a theory about why businesses fail, not one that explains the business dynamics that follow technological advancements. Yet, surveys show that disruptive technologies, business models, regulatory environments, and societal norms destabilize markets, industries, and organizations, executives are finding that incremental innovation is not enough. Executives around the world have spent the past decades redesigning processes and restructuring their firms to meet the challenges of operating in a more dynamic, hypercompetitive world, but they rarely feel equipped to make those changes.

An IBM study in 2006 asked over 750 CEOs of the world’s largest and most respected firms about their views on innovation. They knew that innovation was important, but 65 percent of the CEOs said they were planning significant change over the next 2 years, and another 22 percent said they planned to implement moderate change. More importantly, when the CEOs were asked “What’s your past level of success in managing significant change?” only 15 percent said they had been “very successful.” Another 15 percent said they had had “little or no success”. Almost half of them said the source of innovation was from changes in the business environment, while less than 20 percent reported that innovation came from internal R&D.

Mature companies understand that to compete today they need to innovate. But finding sources of innovation while still paying attention to the current business can be a struggle.

What is the typical profile of a successful disruptive business?

Successful innovators take ideas and turn them into opportunities by adding a business model that creates sustainable economic value for all stakeholders. They then go one step further and exploit the opportunity by creating a sustainable business, one that will not flare out as the market stabilizes.

Successful entrepreneurs search for ideas at the intersection of markets, industries, and emerging technologies. They look for disruptors that will “unfreeze” a stable industry and the companies that compete within them. They recognize that they must listen to customers but must sometimes educate the marketplace to new approaches.

What are some of the changes that innovators are exploiting to create value? Technology, business models, industry dynamics, globalization, changes in regulation, offshoring and outsourcing.

How can you compete with innovators?

In order to gain a competitive edge, you need to raise your head above day-to-day operations and start expanding your vision. You need to ask yourself which disruptive changes in your industry might serve as the source of innovation for you and your company?

• Technology: How can you stay up to date on the key emerging technologies in your industry?
• Offshoring and Outsourcing: Are there opportunities to create value by outsourcing or offshoring activities that you currently perform inside your organization? How can you leverage multishoring solutions to handle shorter, accelerated product cycles?
• Business Models: Can you add new business models—for example, if you currently have a product business, can you add information, services, or solutions? Can you expand into adjacent businesses by either taking over activities that used to be done by someone else in your industry, expanding into new markets, or adding new products?
• Industry Dynamics: Are there fragmented industries where significant value can be delivered through consolidation? Are there shifts in power that threaten your existing position or create opportunities to partner in your existing business or enter a new one?
• Globalization: What’s happening in another part of the world that you could adopt or adapt in your environment? What are the proprietary advantages that you have based on your access to people, information, materials, or capital? Are new markets or businesses emerging in other parts of the world that create opportunities or threats?
• Regulatory, Macroeconomic, Political, Societal: Are there impending (or early) shifts in regulation, political power, or society that threaten to disrupt entrenched power bases and provide opportunities for new entrants?

How can you leverage these changes to create value?

Turn disruptive change into a source of ideas. Jeff Timmons, whose book New Venture Creation has been a bestseller for over a decade, identified the following guidelines:
• Listen to—and learn from—the market: Identify sources of significant problems that cannot be solved using today’s product and service offerings. Focus first on the problem—not the solution. Keep in mind Henry Ford’s classic comment as he struggled to take advantage of new technologies in the early 1900s: “If I asked people what they wanted,” he said, “they would have said, ‘Faster horses.’
• Expand your horizons: Identify important global and local trends that signal potential revolutionary shifts in customer behavior. Look for new business models and technologies that can radically transform product, market, and industry economics and power.
• Identify potential disruptors that could be a source of opportunity: Identify people with a broad range of perspectives on potential disruptive opportunities. Working individually, analyze disruptive trends.
• Select ideas for further evaluation: Now bring the individuals together. Working as a team, have each person share his or her analysis of disruptors. Discuss what you have learned from the analysis and brainstorm business ideas that leverage disruptors to create value for you and for your customers, partners, and other stakeholders. Identify the potential value of promising ideas and a process for prioritizing and choosing among them.
• Turn promising ideas into opportunities: Identify a promising opportunity and develop a business plan that highlights both long-term and short-term (“go-to-market”) opportunity. Define product-market positioning at entry and the capabilities and resources required. Define a plan for evolving strategy and capabilities to exploit long-term value potential.
• Implement to reduce risk and manage uncertainty: Some firms create separate new venture groups responsible for leading radical business innovation and disruptive change. Others maintain a closer connection to established business groups to facilitate future integration of new businesses into the established business. We’ve seen examples of success using both approaches
• Collaborate! Innovations that matter arise from perspectives that cross boundaries.

References:

• Christensen, Clayton M. (1997), The innovator’s dilemma: when new technologies cause great firms to fail, Boston, Massachusetts, USA: Harvard Business School Press, ISBN 978-0-87584-585-2.
• Zeleny, Milan (2006). “Knowledge-information autopoietic cycle: towards the wisdom systems”. International Journal of Management and Decision Making 7 (1): P 3–18. doi:10.1504/IJMDM.2006.008168 http://www.inderscience.com/offer.php?id=8168
• Manyika, James (May 2013). “Disruptive technologies: Advances that will transform life, business, and the global economy”. McKinsey Global Institute. http://www.mckinsey.com/insights/business_technology/disruptive_technologies
• Lepore, Jill (June 2014)The Disruption Machine – What the gospel of innovation gets wrong, The New Yorker, http://www.newyorker.com/magazine/2014/06/23/the-disruption-machine
• Applegate, Lynda M. (September 2007) Jumpstarting Innovation: Using Disruption to Your Advantage, Harvard Business School http://hbswk.hbs.edu/item/5636.html
• Forrester Research, Digital Disruption: Unleashing the Next Wave of Innovation [Video] (October 2013) https://www.youtube.com/watch?v=neShgTczCM0
• Timmons, Jeffrey A., Spinelli, Stephen (May 2003) New Venture Creation, McGraw-Hill/Irwin http://catalogs.mhhe.com/mhhe/viewProductDetails.do?isbn=007287570