Disruptive Innovation may be Dangerous

Disruptive innovation is about changing the goal posts for an existing market in some way. Disruption has the ability to make even a small organisation successful in the face of a much larger competitor. The way this happens is twofold:

Firstly, the innovation serves a customer segment that is unattractive to an incumbent. Normally, this will be either because margins are too thin to make it a decent proposition to go after the customer, or else the functionality provided by the supplier is much greater than the customer can afford. In this case, a disruptor with a small cost base can enter the market with something that is perfectly adequate the low-end customer and use this as a beach-head for expansion upward. Incumbents are generally unable to respond because their cost bases (and operational structures) are optimised to serve their customers at the high end of the markets. This is the model that was pioneered by South West Airlines and Ryan Air.

Secondly, disruptive innovation occurs if an incumbent supplier provides has an offer which is much more powerful and expensive than the customer actually needs. Here, the customer is forced to pay a premium for features they don’t need, so an entrant is able to get a foot hold by offering something that does way less for a much better price. The incumbent, meanwhile, isn’t able to respond, because they are forced to offer all the capabilities they have to satisfy their high end, most valuable customers. This, in fact, is the scenario Microsoft finds itself in with its Office product… most users only use 20% of the features available, but are forced to pay for them all.

Of course, it is sensible for innovators to start some disruptive projects. However, there are a few things it is critical to make clear before the team does so. The first is that disruptions do not generate decent returns overnight. It can sometimes take years for market level changes to affect established organisations. Therefore an innovation team that wants to be disruptive must ensure it has enough successes under its belt to keep alive until its projects start to show decent returns. Frankly, most innovation programmes are cancelled after 18 months because they haven’t shown decent returns in time, and most disruptions take much longer than that to occur.

The second reason care must be exercised is the temptation of disrupt an internal business operation. Inevitably, innovators will spot such internal opportunities they know will have positive benefits for their organisations. The problem, though, is that those who are accountable for those business operations today will be forced to fight the innovators to keep them off their turf. Doing anything else is accepting that they will be out of business themselves.

This behaviour seems completely rational from the point of view of an existing line of business manager, who spends most of their time working out how to prevent threats to their operations. It is eminently sensible for them to make that what worked in the past continues to do so. This approach, after all, reduces their risk.

Innovators, on the other hand, are interested in designing the future. Inevitably, that will involve disruption at some point.

The key is the innovation team is mature with a long history of successes behind it attempts disruptive activities. It needs these successes in place to ensure it has proof that what it’s doing is actually good for the organisation. Otherwise, powerful stakeholders will feel they have little choice but to shut down the “cowboys”.