Disruptive Innovation

By Maurie Cashman

A disruptive innovation is an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leaders and alliances.

Disruptive innovations are:

1. Less expensive (from a customer perspective)
2. More accessible (from a usability or distribution perspective)
3. Use a business model with structural cost advantages (relative to existing solutions)

The reason these characteristics of disruption are important are that when all three are present, it’s difficult for an existing business to respond to competition.

Less Expensive

When I look at disruptive innovations that are less expensive I think a good example is the increasing penetration of cloud computing. This innovation did not start off as being less expensive as the fixed cost of entering these systems overwhelmed their value and one was required to have an internet connection at all times to access one’s data.

However, now that smartphones have become ubiquitous, it is increasingly easy to have not only an internet connection but a secure one. There is rarely a time or place that I cannot connect securely. With increasing encryption of data, this innovation is likely to become more disruptive.

What is it disrupting? The personal computer industry for one. If you can connect to a system that houses your software as well as your data files, you no longer need a $2,000 laptop. A $500 laptop with lots of RAM and a good internet connection is all you need.

It is also disrupting the workplace in a positive way. You have no need to back up your data as these companies will do that for you. You have no need to attempt to communicate with software providers about why their products don’t work (that is if you can find someone to talk to). That can drive a tremendous increase in productivity.

More Accessible

Disruptive innovations provide accessibility to information, customers, suppliers and employees that were unheard of only a few years ago. Companies are now integrating their systems so that suppliers know what parts are going to be needed by the manufacturer and when. The OEM can provide data on its needs so that the supplier can maintain minimum inventory and still provide supplies and parts needed. Small to mid-size are now very actively sourcing from foreign suppliers in container loads that can take weeks to manufacture, load, ship, unload and deliver. They are able to track those orders and know precisely where they are and when they will arrive.

Innovation has made it possible to dramatically increase agricultural production to feed an increasing global population. It has rendered horrendous diseases extinct and I believe a disruptive innovation will eventually not only cure, but prevent cancer. Just think what impact that could have on health-care costs and quality of life – not to mention life expectancies.

Structural Cost Advantages

This may be the mother lode of disruptive innovations, and usually the most overlooked because it is not sexy. There are no IPO’s based on structural cost advantages. They are usually small changes that differentiate in niche markets. On their face they save pennies. But when you add up all of the pennies they save across supply chains they can be the difference in whether a company or a group of companies can survive.

Often these types of disruptive innovations come from small companies that are operating in niches. They come from cooperating companies and teams that look at their industries differently than they have been looked at before. Think about this: what are organizations designed to do? They are designed to perpetuate themselves. That is why we have, in my opinion, such a woeful group of candidates from which we must choose at the Iowa Caucuses this week. They are all, in one form or another, attempting to preserve the status quo. They have no new ideas for how to change things. They may have ideas but it is impossible to implement them given dysfunctional legislatures and the inability to pay for their grandiose “ideas”.

Big companies don’t want things to change. They like making money the way they always have. They will adopt new innovations, but only after they have been proven and are cutting into their market shares. It is usually the small firm or group of cooperating firms that will find ways to quickly innovate.

Questions

When looking at disruptive innovations, ask yourself these questions:

• “How can you adapt in the face of this new type of competition?”
• “How do you evaluate new threats and opportunities?”
• “What capabilities do you need and where do you get them?”

In conclusion, remember the old axiom: What got you here won’t keep you here.