Disruptive Innovation

One of the most controversial words used in business today is “disruption”. Without fail, this is a word so charged with alternate interpretations that its use clouds any discussion almost immediately.

The most common misuse of the term is when it's applied to any product new enough that it's not yet been replicated by competitors.

The thinking most have is that if you're doing something competitors aren't, it must be disadvantaging them.

In other words, they're being “disrupted” by your activity. Now, as you'd expect, since it is easy for competitors to replicate most things easily, such “disruption” is short lived.

The reality is new things are only disruptive when they are not easily replicable by competitors. Academics usually use the term “disruption” in a few, very specific, contexts.

They consider a product or service to be disruptive in two cases:1.

The offer is disruptive if it serves a customer segment that the incumbent doesn't want. Generally, incumbents don't want customers who are unprofitable, or who can't afford all the features offered.

In this scenario, a disruptor with a small cost base is able to create a business around these low value customers and then use this as a beach head for expansion upwards.

The incumbent, on the other hand, is unable to compete because their cost bases are highly optimised for serving their best, demanding, and high value customers.
2.

It provides customers an alternative to a product or service they are presently using, but which does much more than they need.

In this case, the customer will be paying a premium for capabilities they don't use, so the entrant is able to undercut the incumbent supplier by providing fewer features at a better price. Here, too, the incumbent is unable to respond because it has optimised its cost base to provide for its best customers, and cannot easily remove them without jeopardising its most valuable segment. This is what has occurred with Microsoft Office, whose features are used by, at most, 20% of its customers. Now, in both these scenarios, the incumbent supplier is under threat in the long term, because the new player is able to serve customer in a way they can't. Disruption, in this case, means that big companies with strong positions can be overturned by smaller ones.
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