Digital Prisoner’s Dilemma II: Sustaining and Disruptive Innovations

I got a couple of good questions on Twitter about my last post, so I thought I’d take the opportunity to clarify some of the key language and concepts around innovation.

People often use the word “disruption” to talk about any new approach to a business, especially one involving technology. However, in the original usage, disruption had a very specific meaning, and it’s one that’s important to call out here. A disruptive innovation is one that allows a company to introduce an entirely new business model into an existing market. The disruptive model doesn’t target, or attract, existing customers for the most part, and it doesn’t compete directly with existing incumbents.

Instead, a disruptive innovation eliminates many of the features associated with existing offerings, and along with it removes cost. That makes the disruptor appealing to that subset of existing customers who only need some of the features in existing offerings, plus people who weren’t customers at all for the original market offer (because they couldn’t afford it). Because the innovation doesn’t appeal to high-value customers, the incumbents typically ignore the innovator…not because they’re blind or foolish, but because the customers who are using the innovator’s products are ones that weren’t valuable to them anyway.

Over time, the disruptive entrant improves their offering until it becomes competitive in terms of features with incumbent offerings, at a lower price. This is where disruption occurs. It’s no longer rational for incumbents to ignore the disruptor, but it’s too late–their business models can no longer compete even for the valuable customers, and so they get pushed out of the market. The point of disruption theory is that the incumbents behave rationally at every step of the way, but the incentives of their business make it almost impossible for them to respond.

However, most innovations are not disruptive, they are sustaining–meaning that they can be copied by incumbents without breaking their business models. The kind of “race to the bottom” results from digital transformation that I highlighted in the Digital Prisoner’s Dilemma are only possible when it’s easy for innovations to be adopted by competitive firms. As technology eliminates cost, there is pressure due to competition to take that out of prices and so reduce profits. The only way to win is to find differentiating changes–ones that allow your company to build a moat and to maintain a unique value proposition for some group of customers.

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