What Exactly Is Disruptive Innovation?
Now when it comes to taking over a market leader in an established market, it is generally accepted that there are only two ways to accomplish this goal:
- Buy the current market leader
- or Disrupt the market with a radically alternative offer.
That’s it, you’ll never get there by incrementally improving your product along the same lines as the market leader. Because how ever fast you improve, the market leader is doing the same with more resources due to the the greater profits that the leader enjoys from their leadership position. Everything is in their favour, they’ve got the brand, the market loyalty, greater volumes and supply chain clout to get the best deals.
The term was coined by Harvard Professor, Clayton Christensen in his book The Innovator’s Dilemma (Management of Innovation and Change) and described in the explainer video below:
The chink in the market leader’s armour, is the fact that they have been listening to the customer too much. Generally, what happens as a market matures, the leader gets very good at listening to the customer and incorporating improvements in the product or service accordingly.
However with time, the cost just keeps going up with the improvements, leading to the opportunity for an innovator to come in and win in particular niches in the market where cost has become a problem. With time, the lower cost attracts lots of new niches because the costs are now much more viable and they were never that impressed by the previous improvements. Clayton calls these over-served improvements. Furthermore, customers are very bad at asking for things that they don’t understand where the product is under-served. Henry Ford once said:
“If I had asked people what they wanted, they would have said faster horses.”
So there is the opportunity for a smaller company or even a startup with much fewer resources to unseat the leader by thinking about the market differently.
Richard Koch in his book The Star Principle: How it can make you rich provides a formula for finding these chinks and addressing the market with a new innovation that:
- Addresses an under-served outcome that re-categorises the market
- That takes something away and simplifies the product
Eventually, the new product category niche substitutes out the main market and now becomes the norm.
He gives the example of Betfair, which was a great investment for him. With Betfair, they allowed punters to bet against other punters rather than well informed professional bookmakers who would take a much bigger margin. Betfair gets a fixed transaction fee and no more. This new model addressed an underserved-need, but better still it simplified the market by using the internet to match gamblers together and hence remove the costs of high-street betting shops. “Win/Win”
The rest is history.
Do you have an idea for a disruptive innovation?