Disruptive innovation shakes up industries by creating new markets and value networks. It starts with products that seem inferior but offer unique benefits, eventually improving to meet mainstream needs while retaining advantages. This process can topple market leaders and transform entire sectors.

For established companies, disruptive innovation poses a major challenge. They must decide whether to create separate units, partner with disruptors, adapt their business model, or stick to their guns. The best approach depends on the specific situation and requires careful analysis.

Disruptive Innovation and Impact

Definition and Characteristics

• Disruptive innovation is a term coined by Clayton Christensen describing innovations that create new markets and value networks, eventually disrupting established market-leading firms and products
• Often initially considered inferior by most of an incumbent's customers, but offer other valuable features to a few fringe customers (less expensive, more convenient, simpler)
• Performance improves over time to a level acceptable to mainstream customers, while maintaining advantageous attributes, leading to disruption of the established market

Impact on Industries

• Displaces market leaders, transforms value propositions, and reshapes industry boundaries
• Examples:
  • Personal computers disrupted mainframes
  • Smartphones disrupted traditional cell phones
  • Streaming services disrupted the video rental industry (Netflix vs Blockbuster)
  • Digital photography disrupted film photography (digital cameras vs Kodak)

Characteristics of Disruptive Technologies

Attributes of Disruptive Technologies

• Often simpler, cheaper, and more convenient than existing technologies
• Attractive to a new set of customers or enables new applications
• Start as inferior to existing technologies in performance, but improve rapidly and eventually surpass incumbent technology performance

Disruptive Business Models

• Target overlooked or underserved customer segments with a different value proposition than incumbents
• Involve a new way of creating, delivering, or capturing value (different cost structure, distribution channel, revenue model)
• Often developed by new entrants rather than incumbent firms constrained by existing business models, organizational structures, and customer base

Business Model Innovation for Advantage

Definition and Benefits

• Involves fundamentally rethinking how a company creates, delivers, and captures value by reconfiguring activities, resources, and partnerships
• Powerful source of competitive advantage enabling differentiation from competitors, tapping into new markets, and creating new value propositions

Process Stages

1. Ideation: Generating and exploring new business model ideas (brainstorming, scenario planning, customer insights)
2. Concept Development: Refining and testing promising business model concepts (prototyping, market research, financial modeling)
3. Detailed Design: Specifying key elements of the new business model (value proposition, target customers, key activities, resources, partnerships)
4. Implementation: Executing the new business model, requiring changes to organizational structure, processes, culture, and engagement with external partners and stakeholders

Strategies for Incumbent Firms vs Disruption

Challenges Faced by Incumbents

• Struggle to respond effectively to disruptive innovation due to constraints from existing business models, organizational structures, and customer base

Strategic Response Options

1. Create a separate business unit or spin-off company to independently develop and commercialize the disruptive innovation
2. Acquire or partner with the disruptive innovator for access to their technology, business model, and customer base while maintaining control
3. Adapt existing business model to incorporate elements of the disruptive innovation (offer lower-cost or more convenient version of product/service)
4. Ignore or downplay the threat of disruptive innovation and focus on defending existing market position and serving current customers

Considerations for Choosing a Strategy

• Most effective response depends on specific characteristics of the industry, incumbent firm, and disruptive innovation itself
• Requires careful analysis of strategic options and their potential risks and rewards
• Examples:
  • Netflix began as a DVD-by-mail service, then pivoted to streaming to disrupt video rental incumbents like Blockbuster
  • Apple's iPhone disrupted incumbent mobile phone makers like Nokia and Motorola who were slow to adapt to the smartphone revolution