7.2 Disruptive technologies and business models

Disruptive technologies shake up industries by offering simpler, cheaper alternatives that appeal to overlooked markets. They start small but grow to challenge established players, forcing them to adapt or risk becoming obsolete.

Companies can respond to disruption by setting up separate units to explore new ideas, partnering with startups, or even disrupting themselves. Fostering a culture of innovation and agility is key to staying ahead in rapidly changing markets.

Disruptive Innovation and its Characteristics

Defining Disruptive Innovation

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• Disruptive innovation is a term coined by Clayton Christensen to describe a new technology or business model that unexpectedly displaces an established one by addressing a market that incumbents overlooked
• Disruptive innovations often start by targeting low-end or new market segments that are underserved by existing solutions
• Over time, disruptive innovations improve in performance and move upmarket, eventually displacing incumbent solutions in mainstream markets

Key Characteristics of Disruptive Innovations

• Initially underperform compared to existing solutions in mainstream markets
• Appeal to overlooked or new market segments with different needs and preferences
• Often simpler, more convenient, and less expensive than incumbent offerings
• Make the product or service accessible to a wider customer base
• Incumbents struggle to respond due to the innovator's dilemma, where their focus on serving high-end customers and maximizing short-term profits hinders their ability to invest in and adapt to new technologies

Disruptive Technologies and their Impact

Digital Disruption

• Digital photography disrupted the film industry by offering a more convenient and cost-effective way to capture and share images (digital cameras, smartphones)
• Led to the decline of traditional camera and film companies (Kodak, Fujifilm)
• Streaming services (Netflix, Spotify) disrupted the entertainment industry by providing on-demand access to vast libraries of content
• Challenged traditional cable TV and music distribution models (Blockbuster, CD sales)

Transportation and E-commerce Disruption

• Ride-sharing platforms (Uber, Lyft) disrupted the transportation industry by leveraging mobile technology and a gig economy model
• Offered more convenient and affordable alternatives to traditional taxis and car ownership
• E-commerce giants (Amazon, Alibaba) disrupted the retail industry by offering a wide selection of products, competitive prices, and fast delivery
• Forced brick-and-mortar stores to adapt or face declining sales (Sears, Toys "R" Us)

Convergence and Mobile Disruption

• Smartphones disrupted multiple industries by converging multiple functions into a single, portable device
• Impacted mobile phones, cameras, personal computing, and navigation systems
• Mobile apps and platforms (Instagram, Uber) leveraged smartphone capabilities to create new disruptive business models
• Challenged established players in various industries (Garmin, Flip Video cameras)

Challenges and Opportunities of Disruptive Models

Regulatory and Competitive Challenges

• Disruptive business models often challenge established industry norms and regulations
• Can lead to legal and political battles as incumbents seek to protect their interests (Uber vs. taxi unions)
• Successful disruptive business models can create powerful network effects and economies of scale
• Makes it difficult for new entrants to compete once the disruptor has established a dominant position (Amazon, Facebook)

Market Expansion and Growth Opportunities

• Disruptive innovations can create new markets and expand the overall size of an industry
• Provides growth opportunities for both new entrants and adaptable incumbents
• Disruptive business models often prioritize growth and market share over short-term financial returns
• Can face challenges in achieving profitability in the early stages of development

Balancing Innovation and Existing Business

• Incumbent firms face the challenge of balancing investments in their existing business while also allocating resources to explore and develop disruptive technologies and business models
• Requires a delicate balance between maintaining cash flows from core offerings and investing in potentially cannibalizing innovations
• Organizational culture and structure can hinder incumbent's ability to respond to disruptive threats (Kodak, Blockbuster)

Responding to and Leveraging Disruptive Innovations

Organizational Strategies

• Incumbent firms can respond by setting up separate business units or subsidiaries to explore and develop new technologies and business models (Google X, Amazon Web Services)
• Insulates disruptive efforts from the constraints and priorities of the core business
• Companies can engage in strategic partnerships or acquisitions with disruptive startups to gain access to new technologies, talent, and market insights (GM and Cruise Automation, Facebook and Instagram)

Adaptive Approaches

• Firms can adopt a "fast follower" strategy, closely monitoring the development of disruptive innovations and quickly adapting their own offerings once the market potential becomes clear (Microsoft and cloud computing)
• Companies can proactively disrupt their own business models by cannibalizing existing products and services in favor of new, potentially disruptive offerings (Adobe shifting from perpetual licenses to subscription-based Creative Cloud)
• Focus on building strong customer relationships, brand loyalty, and unique value propositions that can help retain customers even in the face of disruptive competition (Apple's ecosystem, Starbucks' customer experience)

Fostering a Culture of Innovation

• Organizations can foster a culture of innovation and agility to better respond to disruptive threats and opportunities
• Encourage experimentation, risk-taking, and continuous learning across the organization
• Embrace failure as a necessary part of the innovation process and learn from it
• Empower employees to challenge the status quo and propose new ideas (Google's 20% time, 3M's 15% rule)
• Cultivate a diverse and inclusive workforce to bring different perspectives and ideas to the table