Disruptive Innovation - Making it happen in Organizations
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Authors
Authors: Sanjib Dutta, Anil Kumar Kartham
Senior Faculty Member, Faculty Associate
ICMR (IBS Center for Management Research).
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Disruptive Innovation
When the best products in the market are offering technology that is far beyond what the customer needs disruptive innovation involves introducing products that are not as good as those in use in established markets. The performance of these innovative products is not good enough to be in mainstream markets. However, these products are simple and convenient to use, and are less expensive. They are meant for customers from new, small, and initially unattractive segments (refer to Exhibit 1.1). Disruptive innovation helps the customer meet his needs, but at a far lower price and more conveniently.
Exhibit: 1.1
Model T: A disruptive innovation
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Model T was a disruptive innovation because it was simple, light, flexible, powerful, and easy to use. The success of the model owes more to the convenience it offered than its features. The first Model T rolled out in October 1908. It was affectionately called 'Tin Lizzie,' slang for an obedient and reliable servant. The Model T was priced at $850. The car was targeted primarily at farmers and had higher than normal ground clearance. (In the very first year, Ford set new industry records by manufacturing nearly 10,660 Model Ts. In the second year, 18,257 more Model Ts were produced. On account of the significant increase in demand for Model Ts, Ford decided to set up a new factory. The facility at Highland Park was inaugurated in 1910. It had four-storeys, encompassing a radius of 62 acres. Production in the factory was structured to move from top to bottom. Body panels were rolled out on the fourth floor and sent to the third floor, where tires were fitted on to the wheels and the bodies of cars were painted. Assembling took place on the second floor and the vehicle was then lowered on to the ground floor, where the car was finally made ready for use. In the first three years, production of cars went up from 19,000 in 1910 to 34,500 in 1911 and to 78,440 in 1912. From a market share of just 9.4% in 1908, Model T grabbed a market share of 48% in the US by 1914. By 1921, Model T had a global market share of 56.6%. |
Source: ICMR (IBS Center for Management Research)
When two products offer the same technology and match the customers' requirements, higher performance ceases to be the criterion on which the customer bases his decision to buy. The prime criterion then becomes reliability. When both the products are reliable, then the basis of product choice is convenience (here disruptive innovation starts gaining ground). When convenience is no longer a differentiating factor, price becomes the most important criterion. Here the product with high technology is almost edged out of the competition since the combination of high technology and a lower price is not sustainable in the long run (because competitors will benchmark the market leader's processes, practices and nullify the advantages they enjoy.) When the larger company can no longer offer a technologically superior product at a cheap price, through the economies of scale it derives, disruptive innovation is likely to replace the product. This is how disruptive innovations enter an established market.
Disruptive innovations occur in small, new markets in which large companies are not interested. Large companies prefer to take a wait-and-see approach when a new market is evolving, but this could be a mistake. A new market is often the ideal ground for disruptive innovators. And a disruptive innovator gains significant first mover advantages once it enters and establishes itself in the new market.
Even seasoned market researchers and business planners find it difficult to measure new markets created by disruptive innovations. Evidence from industries such as the diskdrive, motorcycle, and microprocessor markets shows that forecasts made about the evolution of new markets is unreliable. Hence, companies that rely on the analysis of market sizes and financial returns before entering new markets are often wrong-footed when faced with disruptive innovations. In new markets there is hardly any market data, and the revenues and costs cannot be reliably estimated.