When we talk about disruptive innovation, we look at the tsunamis of innovation, because they are like huge waves that can whirl up a market and destroy it, but at the same time build a new one. For example, the disruption waves of the 18th and 19th century include events such as the introduction of the steam engine, the railroad, the telephone, the automobile and electricity. The 20th century, in turn, was characterized by the introduction of computers and the internet. But how do such waves of disruption arise and can we protect ourselves against them? As Julia Kylliäinen of Viima rightly points out in her 2019 blog “Disruptive Innovation - What is it and How Does it Work?”, we live in a world of endless choice and opportunity, where new products and services are being brought to market at an ever-increasing pace. In the age of innovation, new solutions can be built on existing technologies faster than ever before. This means that a new, even bigger wave of innovation lies ahead and virtually every industry will be affected by this change. According to Innosight.com from 2018, around half of the S&P 500 companies will be replaced in the next decade due to disruptive changes. It is therefore important for companies to prepare and adapt. And if we look at the Arc Invest forecast chart, the next waves of innovation are already on the horizon with blockchain technology, genome sequencing, robotics and energy storage. As far as artificial intelligence (AI) is concerned, this wave is already in full swing and is destabilizing entire democracies and all their economic systems. This is happening with well-manipulated texts, images and films that are intended to influence the elections of democratic states (including the USA and EU). This behavior is not used to attack and overrun a specific market sector, but the entire economic system of a state or confederation of states.
Quelle: Arc Invest. Waves of disruption from the beginning of the 18th century to modern times and forecasts for the near future.
The next waves of disruption will hit some industries sooner, others later, which is why it is important for every organization to understand what constitutes a disruptive innovation and how it can be harnessed before being blindsided.
Disruptive innovation – a definition
The concept of disruptive innovation was first introduced in 1995 in a Harvard Business Report by Clayton Christensen, professor of business administration and management consultant. He later discussed the principle of disruptive innovation in detail in his book “Innovator's Dilemma”.
As already mentioned, disruptive innovations overrun an existing market with a product or service and turn this market upside down by creating a new value creation network. They are not particularly noticed at first because, measured by traditional standards, they achieve a rather low performance on the market. But from the perspective of a small specific market segment, they score points with various offers and advantages. These innovations are often able to arouse curiosity precisely because they do not necessarily appeal to the needs and preferences of mainstream customers, at least not yet. But they are able to convert the uninterested and hesitant into customers. Since established organizations operate completely rationally and are strictly focused on optimizing their existing offering or business model that has proven itself on the market, they are unwilling or unable to adapt to new competition. They would rather suppress a competing potential innovation than jeopardize their cash cow. As a result of this behavior, the market is generally more likely to be fundamentally changed by new rather than established companies, and it tends to be new small companies that knock big established players off their throne with their innovation.
© Laurence Soulez / iStock
But what characterizes disruptive innovations? What are the first signs of a coming tsunami?
Here are some characteristics of disruptive innovations:
According to Christensen, the dependence of companies on customer behaviour and their investments is one of the reasons why disruptive innovations are a challenge for large organizations. They value their tried and tested system and stick to it. Instead, they often have well-developed systems for suppressing new ideas and consider the chances of a quick profit to be too small. They prefer to maintain their share prices and concentrate on the most profitable market segments. Established companies find it very difficult to introduce and maintain major innovation plans, as failure to commercialize a disruptive technology is no longer seen as a learning opportunity.
© Deagreez / iStock
According to a survey conducted by Innosight in 2017, executives generally believe they can react quickly to upcoming changes and therefore show little willingness to strategically transform their company. New market players are often underestimated as a serious threat. The biggest competitive factor is still the existing competition in the market, which blinds management to new developments from small start-ups. Instead, changing needs, known competitors and government regulations are seen as the most threatening factors. Although none of these points are wrong and should not be overlooked as important indicators, the motto should be “do one thing and don't do another”, i.e. don't lose sight of existing competitors and keep a watchful eye on new emerging trends. As the results of the survey show, the “innovator's dilemma” is not just a theory, but an actual phenomenon that explains why most established organizations are surprised by disruptive innovations.
Examples of disruptive innovation
One of the best ways to understand a phenomenon that continues to surprise so many established and experienced organizations is to look at real-world examples of disruptive technologies and business models that have transformed industries in recent decades.
From analog photography to digital cameras
© Chamille White / iStock
Large companies such as Kodak, Fuji, Agfa and Ilford dominated the photography world in the last century by providing films for 35mm cameras and the necessary equipment to develop these films. They were the top dogs in a market in which there were no innovative leaps for a very long time. Camera manufacturers such as Nikon, Canon, Minolta and Olympus took care of the cameras and lenses for the masses, while Kodak & Co. provided the consumables. Kodak, of all companies, could have ushered in the 21st century for photography if they had consistently developed the new technology. Instead, they did so only half-heartedly and left it to the competition from Canon, Casio, Fuji, Minolta and others, even though they had already generated a patent for the first digital camera in 1975. Perhaps they were not so interested in developing it in order to protect their own cash cow. It took another 20 years of development, but the triumph of the digital camera was then unstoppable (www.digitalkameramuseum.de). While the market share at the beginning of the millennium was still a mere 12%, this changed abruptly ten years later, when analog cameras had already mutated into a shelf warmer and sales of digital cameras had already reached 99% (www.business-wissen.de). While the first digital cameras could neither reproduce the quality nor the resolution of analogue cameras, the almost annual optimization of image sensors and the computers in the cameras ensured that they caught up very quickly. Analog cameras quickly lost the race because the advantages of the new technology were unbeatable. On the one hand, the user could now see the result of his efforts on the screen even before the shutter was released, and on the other, the digital images no longer had to be developed but could be displayed directly on a computer. In the meantime, the modern digital representatives have far surpassed their analog predecessors in terms of speed, resolution and image quality. However, their dominance is likely to be short-lived, as they are now themselves under attack from smartphones, in which ever more, constantly improved and multifunctional lenses with ever better software are being integrated, so that they will soon no longer have to fear comparison with large photo cameras.
Enjoying music - from vinyl records to CDs and finally to streaming services
The music industry felt these attacks and upheavals in its market 20 years earlier than photography. And here, too, a digital medium revolutionized the industry. In the early 1980s, Phillips/PolyGram, together with Sony and Bayer, developed the compact disc, or CD for short, to declare war on the music cassette. With the introduction of the CD, not only the music cassette but also the vinyl record was almost completely ousted from the market, including many record pressing plants and some record labels. CDs had a number of advantages over vinyl records. They no longer had to be turned, were small and easy to handle and the “campfire” in the background, including various cleaning practices, was no longer necessary. And compared to the music cassette as a recording medium, the CD had the advantage that digital data could be burned onto blanks quickly, conveniently and without loss, and there was no longer any need to worry about “tape clutter” during frequent playback. However, the CD also faced strong competition in 1992 with the introduction of the MP3 format, as the format compressed the large amount of data in a song so much that music could now be listened to and distributed over the internet with only minimal loss of quality. This opened up completely new opportunities to bring listeners closer to their music groups, as mp3 files could be accessed and stored all over the world via the Internet. This posed a huge problem for the major music publishers such as Sony, Warner, EMI, Universal and BMG, as they suddenly lost their exclusive marketing rights. Instead, internet platforms such as Napster (Shawn Fanning), iTunes (Apple) and finally streaming services such as Spotify shook up the music market and captured large market shares in the music value chain. In the last 20 years, physical carriers have lost almost 80% of their sales, while streaming services have increased their sales thirty-fold in the last ten years and now account for 50% of sales in the music industry.
© Bru-no / Pixabay
The history of the CD for music can be recounted practically in parallel for the DVD and the Blu-ray Disc for films. The analog tape of the VHS cassette quickly became history after the image resolution of the DVD and the reliability of playback and the control of film sequences were so much better than with the VHS cassettes, especially as these suffered a severe loss of quality with age. However, even the even better quality of Blu-ray discs compared to DVDs has not helped to fend off the emerging streaming services such as Netflix. In the music and film business, physical media only occupy market niches and remain the preserve of collectors.
It should be noted in these examples, however, that the displacement of one physical carrier by another by the same established major industries represents a revolution on the music market, but not a disruptive innovation, as according to Clayton Christensen, disruptive innovations are usually found in market niches and new markets. The emergence of such markets is usually unexpected for established providers, as these “innovations” are uninteresting due to their initially small volume or customer segment. However, if the established major industries themselves initiate such market upheavals, there can no longer be any talk of disruptive innovation and those responsible are no longer surprised, but have corresponding expectations of profit optimization. With the emergence of streaming services, however, the cards were reshuffled and the classic course of a disruptive innovation occurred, which caused the established major industries to totter. This is because streaming services have grown enormously in popularity over the last decade. They have conquered households worldwide and are now indispensable, the Spotfies and Netflixes of this world. According to the authors Derr, Georg and Heiler (“The disruptive innovation of steaming services”), listening to music and watching films have long been among people's favorite leisure activities. And it has never been easier to use media than it is today.
These examples clearly show the impact that disruptive innovations can have on the market and the established industry. But how do you adapt to such innovations, how do you prepare for them? Or is this not even possible because disruptive innovations are, by definition, always underestimated and ignored?
Julia Kylliäinen from the Finnish innovation software company Viima provides some helpful tips in her 2019 blog:
How to prepare for disruption
As the examples show, developing a disruptive, billion-dollar business idea doesn't happen in the blink of an eye. It takes perseverance and the right skills to actually look beyond industry norms, and the right timing to get people to actually take an interest in the new idea. To disrupt a market, you have to be willing to cannibalize the existing business, be nimble and willing to take risks. Despite the fact that creating disruptive innovation can be challenging, that doesn't mean you can't do anything to be prepared.
1. listen to customers and observe industry trends
“Success breeds complacency. Complacency leads to failure. Only the paranoid survive.” Andrew Grove, co-founder of the company Intel
If you rely too much on your own ability to transform and overlook the potential for success of others, you can easily be caught off guard in the ongoing innovation process. It is therefore worth keeping an eye on new offerings on the market and understanding what is different compared to established market players. Even if that new offering may appeal to a different customer segment at the moment, you shouldn't miss out on potential growth opportunities by only focusing on what works for your current customer base at the moment. In order to keep up with ongoing changes, it's crucial to ask the right questions and keep the customer at the center of everything you do so that you always know what the real need is.
2. perseverance on the path to a breakthrough
Disruptive innovations should be approached iteratively and with patience. Market disruption does not happen overnight, and even the biggest growth opportunities are often discovered through smaller, incremental improvements. In the examples above, none of the companies were successful from the start, but the products had to go through several phases to finally reach the mainstream and maintain their position in the market. It is crucial to get ahead early and be enthusiastic about even small wins. There are likely to be a number of obstacles to overcome on the tough innovation road. If initial attempts fail, these efforts to develop a disruptive innovation should be viewed as learning opportunities. While patience is important, you still need a clear idea of what can and should be achieved. One way to make sure you are on the right track is to create a concrete roadmap that leads in the desired direction.
Conclusion
You shouldn't immediately try to become the next Netflix or Spotify in order to be successful, especially if you don't have the same resources to invest in global domination as these billion-dollar companies.
© gorodenkoff / iStock
It makes more sense to start by winning over smaller local markets. The key to disruptive innovation lies in the ability to break the existing business model and create the right conditions for a new one to emerge. Disruption is about doing things differently and making a conscious decision to change the general perceptions in the industry. This allows a new kind of value to be created, even if it is not the most profitable solution in the short term. And this is where perseverance is needed until the mainstream follows.