Explained: Disruptive innovations and why they are important!
The dawn of 21st century has brought in a plethora of disruptive innovations that have re-written the course of human lives and financial structures alike. However, before we can discuss these innovations and the changes that they cause down the line; let us first understand the exact definition of “disruptive innovation”.
According to Clayton Christensen, the person who coined the term in 1995,“disruptive innovations” are defined as “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors”. Although, the core aesthetics of the term are still applicable and somewhat the same in the modern times; however, the overall meaning has gone through quite some significant variations. Thus, at times, even a scholar could easily coin something as a “disruptive innovation”, and later regret about it for being wrong.
Now to understand the true essence of the term “disruptive innovation”, ensure that you remember these 3 points that define them:-
- A new innovation can only be termed disruptive when it starts from the bottom of the cradle and later on, sways the mainstream audience.
- The core feature of a disruptive innovation will always be the fact that it’s a lower-cost alternative to an established customer segment, which may or may not be served by an existing provider.
- The innovation offered by the new provider continuous to improve, forcing the existing dominant player to retreat and others copy its business model.
So, now that we have discussed the nature and the true essence of a disruptive innovation. Let us further broaden our horizon on this subject with the help of this example:
Uber v/s Netflix
In here, we have taken the example of Uber and Netflix in order to understand the various reasons as to why the latter is considered as a disruptive innovation, but the former one is isn’t.
Uber is a popular cab-hailing service which began functioning in the US and soon took over the world with its popularity. After all, you can not only book a cab within a few clicks but also look at the prices to compare and find the best ride! However, at the same time, Uber didn’t do anything new or fulfill any of the pointers that we have discussed earlier to be deemed as a disruptive innovation. To be honest, Uber neither created a new market for customers nor did it start with a product or a service that was of lower-cost. The only thing that Uber did right was to successfully target and convert the existing audience into its own customers. Therefore, as the innovation did not turn any non-customers into customers or create a new market, we can be sure of it not being disruptive enough.
However, on the other hand, we have the popular example of Netflix; which is considered as one of the most classical examples of disruptive innovations in modern business practices. In the earlier days, when Netflix was still in its nascent stages, it used to offer mail-in subscription service of DVDs to its customers. However, during that time, there was already a dominant player in the form of blockbuster, which firmly held the rental DVD market by its neck. Thus, maybe out of sheer necessity to survive or perhaps with a mind-set to try something new, Netflix did something which made it stand out from everyone else- “it innovated.” Netflix started offering streaming services at a lower price to the section of audience, which was earlier ignored by the dominant player i.e. the blockbuster.Initially, Netflix only catered to those people who were looking for an entertainment source at an affordable price; however, it soon moved up the ladder and started offering services that the mainstream audience were looking for. Thus, capturing its competitor’s audience along with creating a new market altogether.
The various reasons why disruptive innovations are important:
They create a new market
The best thing about a disruptive innovation is its innate ability to create a new marketplace by turning non-customers into customers. This not only helps the economy to improve but also boosts flow of capital by increasing employment opportunities for people.
They are low-cost in nature
The sole essence of the first product or service offered by a disruptive innovation is that it is low-cost in nature. This provides even the lower income groups with purchasing power, which they didn’t have earlier; thus, boosting the growth of economy at a quicker pace.
They make life easier and better
The core functionality of a disruptive innovation is its usefulness in the market. The innovation is more than often created out of necessity to make life simpler or better. A few examples of such innovations are: Radios, smartphones, Photography, Xerox, etc.