What is Disruption in Innovation? How do Businesses achieve Success Through This?

As entrepreneurs and business owners, we generate ideas to find solutions to real-life, practical problems that will ultimately fulfill a gap in the market. In order to lead these ideas forward and disrupt the common grounds of business, innovation is key!

Innovation is a complex subject but can be divided into four areas, including, product, service, process and technological innovation. In turn, innovation can be compartmentalised into three types, namely, sustaining, radical and disruptive innovation. While all types involve varying levels of innovation, it is disruptive innovation that shakes up existing markets.

In this article, we delve into disruptive innovation and the characteristics thereof, plus we examine two businesses that have disrupted common grounds in order to forge a new direction in practices.

Areas of Innovation

Innovation is defined as the implementation and action of ideas that lead to outcomes such as the introduction or improvement of new products or services. While there are several areas of innovation, let’s look at product, service, process and technological innovation.

• Product Innovation: Product innovation includes the development of brand-new products, changes in the design of existing products and the introduction of new materials or other components in the manufacturing process. Example: Wireless headphones

• Service Innovation: Service innovation refers to the innovation in services, the innovation in services processes and the innovation in service firms and industries. Often, the innovation is focused on the non-technological aspects opposed to the technological aspects. Example: Uber taxi service

• Process Innovation: Process innovation combines the skills, technologies and structures that are used to produce products or services. This occurs when the process innovation performs an existing process in a new way that is highly beneficial to those who perform the process. Example: The car moving assembly line

• Technological Innovation: A technological innovation involves a new or improved product (product innovation) or process (process innovation) in which the technological aspects are unlike that of previous technologies. Example: Virtual reality

The Innovation Matrix

To understand whether your innovation will disrupt common grounds and forge a new direction in business, it is essential to look at the various types of innovation. While most innovations take smaller leaps by improving existing products, services and processes, some innovations can significantly transform industries.

Sustaining Innovation

Sustaining innovation focuses on small leaps of improvements to an existing product, service or process, often in response to customer and market demands or improvements in technology. Most companies engage in this type of innovation in which slight variations of a product, service or process may be released. Although sustaining innovation does not create new markets and often does not leverage radically new technology, it can attract higher paying customers or appeal to a larger, more mainstream market.

Radical Innovation

Radical innovation is extremely rare as it involves revolutionary, breakthrough technology. This type of innovation solves global problems and addresses needs in a radically new way or addresses needs that we weren’t aware of – and even prompt society to leap forward. In doing so, radical innovation has the ability to create new markets and alter industries, potentially causing an older, existing technology to become obsolete. An example of this is when digital cameras overtook film cameras, eventually becoming mainstream – causing film cameras to become obsolete.

Image source: Venngage – how to create a business plan

Disruptive Innovation

Unlike sustaining innovation which is gradual and radical innovation that involves technological breakthroughs, disruptive innovation creates a new value network, disrupting an existing market and ultimately displacing established market-leading firms. Disruption occurs when traditional value drivers are altered within an existing market, propelling change. This is generally prompted by a newcomer, such as a start-up, which enters the already saturated market with a new value offering by way of leveraging technology and/or a unique business model.

The characteristics of disruptive innovation, include:

• Usually a smaller, young company
• Involves new technology or business model
• Grows gradually until its value offering is absorbed by the marketplace
• Higher risks and lower margins (in the beginning)
• Disrupts existing market and forges a new direction in practices

What Businesses Are Likely to Cause Disruptive Innovation

As mentioned, disruptive innovation is generally caused by young companies that have no means to compete with larger companies that already occupy the majority of the marketplace. Therefore, young companies such as start-ups, are forced to develop an innovation that will offer a new value network within an existing market.

Opposed to larger companies, start-ups have extensively lower capital to develop offerings and bring these offerings to the market. Thus, a large part of a start-up’s strategy involves raising substantial capital to grow the business and absorb the market share. This entails a strong value argument in which the value of the offering needs to convince and propel customers to use it.

While countless start-ups fail and are unable to absorb the market share from larger giants, there are many success stories. Start-ups such as Netflix and Amazon are examples of disruptive innovations which have shaken up industries.

Case Study: Netflix

Netflix was founded in 1997 by software engineers Reed Hastings and Marc Rudolph in response to the growing demand for DVD rentals and sales. However, the young start-up was competing against large giants such as Blockbuster which dominated the market. (In 1994, Blockbuster was the industry leader, valued at $8.4 million).

At its inception, Netflix was an online DVD rental and sales website that provided DVDs via mail. As a start-up, Netflix required substantial capital to develop its product and by 1999, it managed to raise approximately $30 million in venture capital. By 2006, Netflix had experienced steady growth – with more than 6.3 million subscribers, the company had finally become profitable. While the company undertook various sustaining innovations such as a subscription service, no late penalties for DVD rentals and personalised movie recommendations, it had not yet disrupted the market.

Image source: Drift – Netflix vs Blockbuster

However, in 2007 Netflix unveiled a new concept which leveraged existing broadband technology – an online video streaming service. Its unique business model allowed members to instantly watch movies and TV series on their personal computers at a low subscription cost. By providing customers with a value network, Netflix has since dramatically grown in popularity. In 2016, Netflix became available worldwide with its global entertainment service provided in 190 countries around the world.

Due to the decrease in the use of DVDs and unable keep up with the disruptive innovators within the industry, Blockbuster was de-listed from the New York Stock Exchange and filed for bankruptcy in 2010. For comparison, today, Netflix is valued at around $203 billion.

Case Study: Amazon

Jeff Bezos and his wife MacKenzie opened online bookstore, Amazon, in 1994. During this time, Amazon rivalled traditional brick-and-mortar bookstores – however, it offered the convenience of ordering books online. While Amazon was not the first online bookstore, it would ultimately be instrumental in the prevalence of e-commerce.

In addition to utilising technological innovations, Amazon’s user-centric business model was unlike any other within the market. It sought not only to create a profitable e-commerce business but to appeal to the needs of its customers, prioritising a simplified e-commerce process (the Internet being a fairly new radical innovation at the time) and simultaneously offering its customers low prices.

In 1998, Amazon grew its portfolio of products and expanded into CDs and DVDs. Later, its portfolio would expand to include countless other products such as clothing, sports gear, electronic items, household appliances, beauty and personal care, and more. Today, Amazon a multinational technology company that focuses on e-commerce, cloud computing, digital streaming, and artificial intelligence. It offers its customers simplified and convenient shopping, as well as a variety of additional features such as Amazon Prime at a low cost.

This unique user-centric business model with continuous dedication to appeal to its customers has disrupted the retail industry – making Amazon one of the most successful retailers in the world. In 2018, Amazon’s stock price rose to make the company worth $1 trillion – the second company to pass that threshold, after Apple.

Conclusion

Both Netflix and Amazon, young start-ups at the time of inception, were able to utilise advancements in technology and unique business models to rival existing dominating competitors within the market. While there were no obvious problems with how their competitors were operating, Netflix and Amazon innovated to create offerings that were dramatic and game-changing – causing disruption within the market. Ultimately, both firms were able to create value networks for their customers that displaced established market-leading firms. Not only did these businesses lead their ideas forward and disrupt common grounds but they were instrumental in forging new directions within their respective markets.