Anyone in the tech circles would have heard (and used) the term ‘disruptive innovation’ more times than they can remember. The tech world is fascinated with overnight success - moral stories and lore abound on how leading companies, at the peak of their powers, missed the ominous signals of disruption that finally delivered the killer blow. Blockbuster’s demise and Netflix’s meteoric rise is stuff that digital history is proud of.i However, as is the case with most other popular concepts, the disruption theory is unfortunately becoming a victim of its own popular success. Politicians to boardroom CXOs, shop-floor managers to consultants, and pretty much everyone else in between in piggybacking on the term ‘disruptive innovation’ without realizing what it actually is. Innovation and the consequent disruption are part of a process, not a product.
This paper discusses what disruptive innovation really is, how it differs from incremental innovation, and what it takes to get innovation right.
Decoding Disruptive Innovation
“Disruptive Innovation” refers to the evolution of a product or service over time, which means that almost every innovation — disruptive or not - starts as a small-scale experiment. What differentiates successful disrupters from the not-so-successful ones is that the former primarily focus on getting the business model right, more than the product. For instance, take the iPhone – its success is not just due to awesome product quality, but due to the fact that it gave users a convenient way of using internet-centric applications and created an ecosystem of application developers. When such small innovations are applied at scale, they start eroding the incumbents’ market share and their profitability. Because disruptive innovations typically take hold at the bottom of the market, addressing the same needs as high-market solutions in a simple and relatively cheap way. Often in all small-scale experiments that go on to become big disruptions, financial rewards are not the driving force for the innovation - they are the outcome.
Let’s take the example of Google that began as an academic experiment by two PhD students to understand how web pages link to each other.ii The search results in their experiment were simply a by-product of the index they created. Their goal was small and simple - providing a big positive change to the experience of users. Similarly, Uber started with the goal of providing a better service than taxis and had just three cars registered on its app back then. Airbnb, the world’s most revered vacation rental company, began when its founders rented out their own loft with an air mattress and free breakfast to make extra money. All of these examples reiterate a simple fact – disruptive innovation in most cases may not be the product or service itself but the process and business model behind it.
Most companies make the mistake of thinking of innovation only in terms of new features and products, while real success hinges on two other key factors: a) Business model innovation, and b) User adoption and retention. Let us illustrate this with an example. In 1886, Carl Benz applied for a patent for his “vehicle powered by a gas engine.” This was a big invention, but did not qualify as a disruptive innovation. Because the early automobiles were expensive luxury items that could not disrupt the transportation market for horse-drawn vehicles that were used by the larger population.
Disruptive innovation in the automotive industry happened only when the lower-priced and mass-produced Ford Model T debuted. In 1913, the Ford Model T became the first automobile to be mass-produced on a moving assembly line. By 1927, Ford had produced over 15,000,000 Model T automobiles. The lesson: the disruption was not the automobile itself but the assembly line approach (business model innovation) that built the automobiles at affordable rates, enabling greater uptake (user adoption innovation).
At this point, let’s take a step back and come to the story of Uber again. Would it qualify as an example of disruptive innovation or a service improvement? Industry pundits often exclude Uber from the list of true disruptive innovations because of three important factors:
- It didn’t start from a new-market foothold. Uber’s customers were already using taxis, so no product switch was required.
- It didn’t start as a significantly lower-priced version of taxis. The company did introduce variable pricing, which again was already being followed by the aviation and hospitality industries.
- Uber improved on the existing taxi experience and its USP came to be a highly convenient, reliable, and self-serving cab-booking experience that empowered customers without having to dial a contact center.
The Disruptor or the Disrupted: What Separates Incumbents From Start-ups
While the definition of disruptive innovation is clear, the bankruptcy of Kodak in 2012 shook incumbents across industries. The term “disruptive innovation” became a buzzword and began to be linked to the ability to use new digital technologies and business models to disrupt entire industries. The start-ups came to be symbolized with this kind of innovation due to their agility and nimble ways of working that give them the ability to challenge long-held business models.
Why do leading incumbents of industries fail to be the innovative disrupter themselves, despite the fact that they have the customer and financial base to maneuver? The answer lies in how most big companies think about innovation. Many large organizations are good at “incremental” innovation given their existing customer base, and easy access to market research and innovation trend consultants who support these initiatives. More importantly, there is a significant difference between disruptive and incremental innovation. The goal of incremental innovation is primarily to signal that the company is keeping up with trends—it is retaining relevance, and driving continual service improvements to stay competitive. Incremental innovation is also relatively easy to plan, resource, and measure – mostly because it doesn’t disrupt anything. In fact it’s fun and exciting, like a new feature or a new flavor. Incremental innovation has a feel-good factor attached to it that makes it easier to implement as the typical change management hurdles on the employee side don’t stand in the way. Securing management buy-in is easier too in the case of incremental innovation as it doesn’t require reinventing the wheel - rather it enables companies to sail better, cheaper, and faster. Fortunately, most big, established companies are good at this kind of innovation. However, when it comes to disruptive innovation, incumbents’ main challenges stem from an excess of institutional control and an inability to scale up innovations. In a recent McKinsey survey, many respondents from established companies said that parent companies had hindered the development of their start-ups and limited entrepreneurs’ freedom to make independent decisions.iii
Viewing Innovation From the ‘Experience’ Lens
Regardless of start-ups or incumbents, a winning formula for innovation in any company should focus on how it will impact user experience – whether they are internal employees or external customers. Identify the opportunities that can improve the experience – even in a small way – and then tie that thought back to product features and/or services to see where disruptive or incremental innovation fits best. Taking an experience-focused approach can help companies marry the methods and pace of start-ups, with the scale of large enterprises – making for a win-win. As businesses navigate turbulent times amid global market uncertainties, innovation will be a key source of current and long-term competitive advantage and getting it right will be a critical differentiating factor for success.