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Disruptive Innovation- So Far, So Bad For Business?

 

 

Adding the word disruptive to the word innovation does more than just create a phrase: Disruptive Innovation. It also defines what may ultimately be for many organizations, an almost impossible objective or goal.

 

The kind of Innovation we're talking about here doesn't occur everyday, in fact it is exceedingly rare. Yet What is Disruptive Innovation exactly and what kind of threat does it represent to a business, or businesses?

 

What is Disruptive Innovation?

 

Disruptive Innovation occurs when a revolutionary new product or service enters an existing market and then disrupts that market; by virtue of its enhanced appeal over the current products or services being offered to consumers. It is, in the main, liable to come from new entrants - rather than existing companies. This is true for a number of different reasons; some of which we covered in more in an earlier post about where disruptive ideas are most likely to come from.

 

That in itself is useful knowledge to companies incumbent in a particular market; for at least they know where the killer ideas are most likely not to come from, i.e the existing competition.  Yet irrespective of the actual source of the disruptive innovation,  it will generate disruption..and over time displace market volume, i.e consumers. The market will then to a degree, become steadily smaller; as a proportion of the consumers move to the new market created by the disruptor's product or service. It should be mentioned of course, that this process occurs over a considerable time frame. (See Fig 1.0)

 

 

 

 

 

The rarity of this type of groundbreaking innovation.. may suggest that is not actually as critical a consideration as perhaps the hype out there would have us believe. This may be true to a degree,  at least that is for the larger players in the market. Yet Disruptive Innovation is a force that does need to be reckoned with; the very laws of the Universe make it so. The greatest impact of the disruption is likely to be experienced by the smaller (or less well resourced) businesses in the sector concerned. That is not to say however that the larger organizations will not also be impacted, as the disruption caused by disruptive innovation affects the whole market. Here is a stab at why we hold this to be self-evident:

 

 

Example:

If X is the market and disruptor A enters the market with a revolutionary new product or service PS.  

Then overtime X= X-PSe (e being the effect of the new product/service on X. 

This leads to the displacement of some consumers from X into Ax (Ax being the new market A created). 

 

It then follows that as X shrinks in size, all companies stand to make less than before, as the 'pie' to be shared is obviously smaller. However, business realignment is also likely to be important and whilst difficult to quantify- cannot be ignored. 

 

Whether what we are discussing here, is more of a problem for the bigger players than it is for the smaller organisations, is questionable. Yes larger companies are better resourced, but they are less adaptable. The smaller companies are likely to have less resources, yet are more agile.

 

 

 

Diagram showing how companies realign,downsize or can get forced from the market following displacement, caused by Disruptive Innovation.  

 

 

Disruptive Innovation Shrinks The Existing Market

 

It is of course true, and as the market shrinks, it creates various issues for the smaller, less well resourced firms and the larger companies. I.e perhaps eventually there will be questions over staffing levels, potential consolidation and downsizing, or diversification and refocus on new market opportunities for instance. Remember again, this is not happening overnight.. but it is happening.

 

However,  as mentioned it is not just the smaller companies that are going to suffer. Yes it may take more time for the ripples of disruption to reach the shores of the bigger organizations; especially since these larger companies will be better able to absorb the effects of market turbulence. They are likely to be more able to respond to the disruption caused, if necessary by realigning areas of the business a degree or two- or taking other countermeasures. Yet, what can't be ignored is that both initiating and maintaining any such efforts come at a price; this affects the bottom line and profitability of the business.

 

So- based on our logic at least, as the title of this post suggests: So far, so bad?  it certainly feels that way.  

 

 

Disruptive Innovation And Its Far Reaching Impact

 

Perhaps then it's time for a game of 'Spot The Winner'?  Let's  start with, the company actually responsible for bringing the new disruptive Idea into the market.. it surely has to be good for these guys right? 

 

One would think or hope so for sure, yes of course initially it's all good. Yet over time, albeit a fair chunk of it, the disruptor will also be disrupted. At this point the disruption caused by further external disruptive innovation begins to chip away at their profitability too. 

 

However, the effect of this in our opinion, would be greatly reduced when compared to the more established organizations; for a variety of reasons. For instance, the newly disrupted disruptors would  be less top heavy and potentially quicker to respond to changes in the  market; they may also have had a road map for new iterations of their initial offerings.  In any case, whilst they may enjoy great success initially they too are not fully insulated against the threat of disruption over the longer term. (See Fig 2.0)

 

 

 

 

So in conclusion, Disruptive Innovation offers great promise to those able to successfully make it happen, with limited risk of disruption in the longer term. It is however, likely to pose a real concern for some of the more established players in the Market- for the reasons laid out in our post. 

 

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