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“Disruptive innovation” is the holy grail of the modern business world. It’s a term that has been full-heartedly embraced by tech media. And, naturally, it is a concept of great interest to executives in business administration and enterprise. It has been for a while, in fact, the term was coined by researcher Clayton M. Christensen in 1995.

Indeed, over the past two decades, disruption has become a major business focus for multinationals and start-ups, alike, and it is often referred to as the most influential business idea of the early 21st century. Nonetheless, the theory’s core concepts are often misunderstood and the term is used far too liberally.

 

Types of Innovation

Sustaining innovation is the most common type of technological innovation. It refers to the practice of improving products and services, either through incremental advances or major breakthroughs. This is the typical process through which companies improve products and services, year after year, to drive brand loyalty and retain customers in the most profitable market segments.

Disruptive innovation, on the other hand, is not about the improvement of individual products or services, but about processes, business strategies and the identification of new consumers. The products of disruptive innovation are often considered inferior when they first appear on the market. They appeal to shrewd and inquisitive early adopters, but the “cash cow” segment – the true focus of any major business venture – often opts to overlook lower prices and prefers to wait for better quality.

 

Theory of Disruptive Innovation

The Theory of Disruptive Innovation, which has introduced a novel approach to tackling innovation-driven growth, addresses the creation of a new market or value network. This type of growth is capable of shaking up and reorganising existing markets and value networks, often displacing historically consolidated market leaders.  It refers to the process through which a small start-up with scant resources may achieve market leadership. However, disruption cannot be used to describe any breakthrough situation in which an industry is turned upside down and consolidated companies begin to falter.

Disruption addresses the evolution of product and service lines. It is about conceiving a business model – often a radically new business model - rather than any specific product or service. Indeed, a successful business model is what will propel start-ups from fringe environments, directly into the mainstream market.

 

Why Enterprises Overlook Disruption

As market leaders focus on improving their products and services, pursuing sustaining innovation for their most profitable customers, they tend to overlook the less profitable market segments.

Start-ups, spin-offs and micro-enterprises, on the other hand, tend to focus precisely on these ignored market segments. They provide new products or services, often at a better price, to a niche market. Strategically, therefore, this allows them to gain a foothold in the industry. This is what happened when Octo Telematics introduced usage-based insurance.

Moreover, disruption is often a slow process. As market leaders continue to pursue profitability in the top-most segments of a given market, start-ups gain precious time to capitalise on their business advantage. Disruption is said to occur when these new business strategies, products or services are suddenly adopted en masse by mainstream consumer and business segments.

An even rarer (and far more profitable) type of disruption is represented by the creation of an entirely new market and class of consumers. This, for example, is what happened with the introduction of the personal computer in the early 1980s.

 

An Evolving Concept

Initially, the Theory of Disruptive Innovation was based on a simple correlation: consolidated companies do better than start-ups in sustaining innovation, but start-ups outperform large companies in producing disruptive innovation. Nonetheless, successful disrupters eventually aim to expand their business strategy and head upmarket.

Indeed, the difference between sustaining and disruptive innovation is embedded in the very interests and resources that consolidated companies strive to protect. This business focus is reflected in the company’s internal processes, which, in turn, makes it very complicated for senior management to shift investments towards disruptive innovation. Thus, the very same forces that drive consolidated companies to overlook early-stage disruption, also compel disrupters to enter niche markets.

Furthermore, not all disruptive processes lead to business success, just as not all market newcomers always follow a disruptive path. Indeed, the often-heard “disrupt or be disrupted” mantra can be misleading.

While the Theory of Disruptive Innovation will certainly never fully explain innovation, let alone business success, it remains a powerful concept for modern enterprise. There are so many knowns and unknowns involved in enterprise success that a comprehensive theory of business success has never been tackled. Nonetheless, the Theory of Disruptive Innovation does make business predictions far more accurate. It earned its niche  market in the world of enterprise and has been encoded as a consolidated business strategy.