Disruptive innovation, although it sounds like a trending phenomenon, has been a term coined over two decades ago to describe a process in which a small company with a lesser degree of resources at their disposal, ie. capital, seeks an opportunity to successfully challenge already founded businesses. While established businesses direct their focus on bettering their products and services to meet demand, they often overlook certain segments in this pursuit. Newcomers to the market act disruptive when they successfully engage those customers that were ignored by offering better conditions, which often equate to lower prices and better service. These new businesses gain a foothold and scale by acquiring the incumbents mainstream clientele by outperforming the establishment and sustaining the advantages that first spurred their success. Disruption takes place when these mainstream customers increase in mass.
In recent times disruptive innovation has been given a bad rapport, confusing it with breakthrough inventions or providing entirely different services. To put it blatantly, companies that are disruptive innovators take a strategic approach to adapting previously proven products or services in a more enticing manner. This will not look the same in reality for every company as markets shift and different tools are required to succeed.
An example of disruptive innovation
Let’s take a look at AirBnB, a company that prides itself in its brand philosophy more than turning a profit, which it does very well at in addition to making guests feel like they belong to a community of like-minded travelers. What plays in AirBnB’s favor is that when potential customers look at travel as a whole, a huge lump sum of the budget is spent on accommodation. While staying in a five-star hotel is grand, it is often out-of-reach for the mainstream traveller that is cost conscious. While you need a place to lay your head at night, it is not often the place you spend most of your time during the day because you are more interested in the sights and local culture in the city or region you are visiting. AirBnB is not a hotel, and it is not trying to be. Is it a competitor, yes, but it did not innovate within the parameters of the establishment. It instead created a whole new market that managed to turn finding the right accomodation into a major part of the whole experience, a determining factor for even going in the first place. Booking a room, entire home or apartment allows the customer to transform themselves. It creates a sense of belonging, that you too are a local with an entirely new life to live in a fantastically different destination from which you came. This selling feature is far more enticing than what any hotelier can offer.
Is AirBnB a disruptive innovation? Yes. To be a disruptive innovator, one of two criteria must be met.
Disruptive innovations are founded in low-end or new-markets.
- Low-end footholds prosper because entrepreneurs and small businesses typically try to provide their most lucrative and taxing consumers with products and services that are constantly being improved, and they invest little energy on less needy customers.
- Institutions that create a new-market disrupt the current establishment by bringing to fruition an idea that did not exist before. Frankly put, newcomers transform once nonexistent consumers into consumers.
In the case of AirBnB, it is easy to forget that disruptive innovations are initially considered inferior by most of an incumbent’s buyers. Normally, it is not so easy to turn consumers onto a newfangled idea that is less expensive and seemingly menial in quality. It takes time. The mainstream consumer will wait until the newcomer proves its quality is high enough to satisfy their demand. Once that corner has been turned and they adopt the new product, consumers happily agree to its lesser price. Note, this is why we see a price shift in the market that drives cost down.
Why is disruptive innovation important?
The disruptive innovation theory is essential to realizing its benefits to businesses and society as a whole as we consider new trends that hit the market. For example, as a business operator, identifying small competitors that peck away at the periphery of your business like a bird are unlikely to shift your profits—unless you can see they are on a disruptive course, in which case they are a potential threat to the growth and success of your business.
Important points to remember:
1. Disruption is a process.
Consider the words “disruptive innovation.” It may sound like the overhaul of an industry occurs in a blink of an eye and everything is flipped on its head, but that is not the case. Innovations that cause a major change in buying behaviors happen over time and evolve to satisfy and attract an already established market or one that is untapped.
2. Business models vary significantly.
There is no one-size-fits-all disruption model.
3. Some disruptive innovations are successful; some are not.
“Not every disruptive path leads to a triumph, and not every triumphant new business on the block follows a disruptive path.” It is not accurate to calculate a disruptive company by the achieved results alone.
4. The mantra “Disrupt or be disrupted” can be misleading.
In a generation of disruptors, we often feel it is all or nothing. It is important for already well-founded companies to respond to disruption if it’s occurring, but it’s equally imperative not to overreact by deconstructing what has already been built, a still-profitable business. Work towards strengthening and transforming what already works into a greater success. Let disruption serve as motivation.
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