Disruptive Innovation

1. Disruptive innovation targets overlooked markets, not mainstream customers

Disruptive technologies, in contrast, don't attempt to bring better products to established customers in existing markets. Rather, they disrupt and redefine that trajectory by introducing products and services that are not as good as currently available products.

Disruptive innovations start by serving niche markets overlooked by established companies. These products are often simpler, more convenient, and less expensive than existing solutions. Initially, they may underperform in traditional metrics but excel in new attributes valued by emerging customer segments.

Examples:

• Personal computers disrupting mainframes
• Minimills disrupting integrated steel mills
• Discount retailers disrupting department stores

Over time, disruptive innovations improve and move upmarket, eventually challenging established products and companies. This pattern has repeated across various industries, from disk drives to automobiles to education.

2. Established companies excel at sustaining innovations, struggle with disruption

The established competitors almost always win the battles of sustaining technology. Because this strategy entails making a better product that they can sell for higher profit margins to their best customers, the established competitors have powerful motivations to fight sustaining battles. And they have the resources to win.

Established companies are well-equipped to handle sustaining innovations - improvements to existing products that serve current customers better. They have the resources, processes, and values aligned to excel at these types of innovations.

However, these same strengths become weaknesses when facing disruptive innovations:

• Focus on high-end customers
• Emphasis on improving profit margins
• Existing processes optimized for current business model

This explains why industry leaders often fail to adapt to disruptive changes, despite their apparent advantages in resources and capabilities.

3. Resource allocation processes favor sustaining over disruptive innovations

Disruptive projects stalled when it came to allocating scarce resources among competing product and technology development proposals.

Resource allocation in established companies is designed to support sustaining innovations that serve existing customers and improve profit margins. This process systematically disadvantages disruptive innovations:

• Middle managers hesitate to back risky, uncertain projects
• Financial projections favor known markets over emerging ones
• Existing customers' needs take priority over potential new markets

The result is that even when companies are aware of disruptive threats, they struggle to dedicate sufficient resources to address them effectively.

4. Small markets don't solve big companies' growth needs

To maintain their share prices and create internal opportunities for their employees, successful companies need to grow. It isn't necessary that they increase their growth rates, but they must maintain them. And as they get larger, they need increasing amounts of new revenue just to maintain the same growth rate.

Large companies face a growth imperative that makes it difficult for them to pursue small, emerging markets:

• Need for significant revenue to maintain growth rates
• Pressure to improve profit margins
• Focus on large, established markets

This creates a dilemma:

• Small, disruptive opportunities are unattractive initially
• By the time markets become large enough, it's often too late to enter

Ironically, the pursuit of growth in established markets often leads to stagnation and vulnerability to disruption.

5. Markets that don't exist can't be analyzed using traditional methods

Sound market research and good planning followed by execution according to plan are hallmarks of good management. But companies whose investment processes demand quantification of market size and financial returns before they can enter a market get paralyzed when faced with disruptive technologies because they demand data on markets that don't yet exist.

Traditional market analysis fails when dealing with disruptive innovations because:

• No data exists for non-existent markets
• Customer needs are unclear or evolving
• Financial projections are highly uncertain

Instead, companies need to adopt new approaches:

• Rapid prototyping and experimentation
• Learning from small-scale market tests
• Flexibility to pivot as new information emerges

This requires a shift from planning-driven to discovery-driven approaches when pursuing disruptive opportunities.

6. Organizational capabilities can become disabilities when facing disruption

Organizations have capabilities that exist independently of the capabilities of the people who work within them. Organizations' capabilities reside in their processes and their values—and the very processes and values that constitute their core capabilities within the current business model also define their disabilities when confronted with disruption.

Organizational capabilities are embedded in processes and values that have been optimized for the current business model. These same capabilities can become obstacles when facing disruptive change:

• Processes designed for efficiency in current markets
• Values that prioritize existing customers and profit margins
• Decision-making structures that favor incremental improvements

To overcome these disabilities, companies often need to create separate organizations with different processes and values aligned with the disruptive opportunity.

7. The innovator's dilemma: doing the right thing can lead to failure

Successful companies want their resources to be focused on activities that address customers' needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish these things also to do something like nurturing disruptive technologies—to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets—is akin to flapping one's arms with wings strapped to them in an attempt to fly.

The innovator's dilemma arises because the very management practices that lead to success in established markets can cause failure when facing disruptive innovations:

• Listening to current customers
• Focusing on higher-profit products
• Pursuing larger markets
• Demanding certainty in financial projections

These practices, while rational in the short term, can blind companies to disruptive threats and opportunities. Overcoming this dilemma requires a fundamentally different approach to innovation management.

8. Creating separate organizations for disruptive innovations

When managers tackle an innovation problem, they instinctively work to assign capable people to the job. But once they've found the right people, too many managers then assume that the organization in which they'll work will also be capable of succeeding at the task.

Separate organizations are often necessary to successfully pursue disruptive innovations:

• Independence from mainstream business pressures
• Freedom to develop new processes and values
• Ability to focus on small, emerging markets

Examples of successful spin-offs:

• IBM's PC division
• HP's ink-jet printer business
• Johnson & Johnson's disruptive medical device units

These separate units allow companies to simultaneously exploit existing markets while exploring disruptive opportunities.

9. Discovery-driven planning for disruptive innovations

Because much less can be known about what markets need or how large they can become, plans must serve a very different purpose: They must be plans for learning rather than plans for implementation.

Discovery-driven planning is essential for disruptive innovations:

• Emphasis on learning and flexibility
• Rapid prototyping and market testing
• Continual reassessment of assumptions

Key elements:

1. Identify key assumptions
2. Test assumptions quickly and cheaply
3. Adjust strategy based on new information
4. Iterate and scale as uncertainties are resolved

This approach allows companies to navigate the uncertainty inherent in disruptive innovation while minimizing risk and maximizing learning.

10. Jobs-to-be-done as a framework for understanding customer needs

Customers—people and companies—have "jobs" that arise regularly and need to get done. When customers become aware of a job that they need to get done in their lives, they look around for a product or service that they can "hire" to get the job done.

The jobs-to-be-done framework provides a powerful lens for understanding customer needs:

• Focus on the problem customers are trying to solve
• Identify the circumstances in which needs arise
• Understand the full set of competing solutions

Benefits:

• Reveals non-obvious competition
• Identifies opportunities for disruptive innovation
• Guides product development and marketing efforts

By understanding the jobs customers need to get done, companies can create products that more effectively meet those needs and identify new market opportunities.

11. Matching the business model to the disruptive opportunity

A disruptive business model that can generate attractive profits at the discount prices required to win business at the low end is an extraordinarily valuable growth asset.

Successful disruptive innovation requires aligning the entire business model with the opportunity:

• Cost structure that enables profitability at lower price points
• Processes optimized for the new market requirements
• Values that prioritize the disruptive opportunity

Key elements to consider:

• Revenue model
• Cost structure
• Target market segment
• Value proposition
• Key resources and processes

By developing a business model tailored to the disruptive opportunity, companies can create sustainable competitive advantages and drive growth in new markets.

Last updated: July 21, 2024