Mostly every innovation — disruptive or not — begins life as a small-scale experiment. Disruptors tend to focus on getting the business model, rather than merely the product, just right. When they succeed, their movement from the fringe (mostly, the low end of the market or a new market) to the mainstream erodes first the incumbents’ market share and then their profitability. Essentially, this is known as “Disruptive innovation” (Christensen et al., 2015).
Many researchers, writers, and consultants use disruptive innovation incorrectly to describe any situation in which an industry is shaken up and previously successful incumbents stumble, for e.g. Uber disrupting the taxi space.
Disruptive innovation doesn’t apply to every industry breakthrough as different types of innovation require different strategic approaches. Christensen specifically emphasizes new products, from new entrants, that begins in the “low end” of a market, with inferior quality, and gradually improve until they win over the high-end customer of an incumbent. Hence, according to his definition of disruptive innovation, “Uber” is not disruptive. Uber didn’t enter the market with a low-end offering but with an innovative business model built upon a two-sided market platform and scalable technology with network effects.
Christensen and his colleagues have been focusing on how to maintain corporate longevity and address key customer needs long before the 1997 book “The Innovator’s Dilemma”. Their work has never been more relevant than in the current disruptive economy, when the topple rate, i.e. the rate at which companies are exiting the S&P 500, is accelerating like never before. More formally, according to Patrick Viguerie (McKinsey consultant), who invented the term — “Topple rate is the rate at which firms lose their leadership positions”(read more).
“Most managers think the key to growth is developing new technologies and products. But often this is not so. To unlock the next wave of growth, companies must embed these innovations in disruptive new business models.” By Clayton M. Christensen, Professor of Business Administration, Harvard Business School.
According to a 2018 report by management consulting firm, Innosight, the 33-year average tenure of companies on the S&P 500 in 1964 narrowed to 24 years by 2016 and is forecast to shrink to just 12 years by 2027 (Full report — 2018 Corporate Longevity Forecast). The increase in topple rate reflects that companies are changing more rapidly and gaining or losing market share and industry relevance more quickly than they used to. At the current churn rate, about half of the S&P 500 companies will be replaced over the next ten years.
Despite an enormous amount of information on business model frameworks and education on corporate strategies from experts like Clayton Christensen, Michael Porter and well-known CEOs like Jack Welch, Charles Koch, etc., companies continue to miss opportunities to adapt or take advantage of the growing consumer needs. To harness disruptive innovation, incumbent companies can do the following:
- They must not always apply existing business models to new markets;
- They must respond to disruptive competitors in low-profit segments by investing in nimble startups or by launching their own ventures outside of the core operations;
- They must formally build capacity and environment to incubate new product ideas and experiment different offerings for new or existing customer segments;
- They must continuously monitor customer behaviour in adjacent as well as white space markets and acquire or invest in disruptive startups during early rounds, avoiding huge valuations at later stages. Then seamlessly integrate their disruptive business models and technology into existing operations. To successfully capitalize on these investments, incumbents must also evolve their existing culture and business models; and,
- They must formally setup technology intelligence and roadmapping practice to adequately envision and invest in new growth areas which often takes a decade or longer to pay off. More on this in future articles.
Incumbents in any vertical (technical or non-technical) can track opportunity cost for not acting on areas disrupted by startups and competition. Establish practices and mindset for key departments/managers/business units to think of themselves as revenue generation centre instead of cost centres — like IT, Marketing, Branding, Design, Manufacturing etc.
Finally, to better manage disruptive innovation like Waymo, Tesla and Amazon, incumbent companies can also establish that — it is not just the job of the sales department to generate revenue but also all other departments that are servicing the overall corporate engine. If there are internal services that are being offered as standalone products in the outside world by heavily invested startups, then think about providing those services to existing or new customer segment to stave off disruptive innovation and to maintain corporate longevity.