Disruptive Innovation

Sustain vs Disrupt

Sustaining technology – also called ‘sustaining innovation’ - sees gradual improvements being made to existing products or services. Its aim is to enhance a current product's functionality and meet the demands of existing customers.

Disruptive technology, on the other hand, targets new technologies at small, niche markets. It provides new value to new customers, but with lower specifications compared to existing products. This is why, initially, it may only be embraced by a limited number of consumers.

Christensen also extends the definition of technology. For him it involves not just physical products, but the processes organizations use to turn labor, capital, raw materials and information into valuable products and services. Innovation, as he sees it, refers to any changes in these technologies, whether they’re related to engineering, manufacturing, marketing, investments, or management.

Reasons for failure

What interests Christensen is why well-established companies often fail to invest in, and anticipate, disruptive innovation. Such companies, he writes, face several challenges but then make strategic mistakes that prevent them from embracing disruptive technologies and business models. Here are some key points from the book.

·      Ignoring new markets

Established companies tend to focus on nurturing innovations that meet the needs of their current customers. They overlook disruptive innovations that would target new, underserved markets.

·      Misdirecting resources

Large organizations allocate resources based on profit margins and immediate returns. This can hinder investment in disruptive innovations that may start with smaller markets and lower profit margins.

·      Avoiding risk 

Established companies are generally risk-averse and prefer proven technologies and business models. This makes them hesitant to pursue unproven (and possibly risky) disruptive ideas.

·      Encouraging inertia

The structures, processes, and cultures in established companies are designed to support current business models and operations. This makes the adoption of new, disruptive technologies a challenge.

·      Failing to recognize threats

Disruptive innovations are often introduced by new, agile competitors. Established companies may not recognize them as threats until it's too late.

·      Overlooking emerging markets

Established companies tend to overlook emerging or underserved markets, the very places where disruptive innovations often start before expanding into mainstream markets.

In brief, The Innovator's Dilemma argues that established companies can find themselves struggling to embrace disruptive innovation because of: their focus on existing customers; the way they allocate resources; their aversion to risk; organizational inertia; and a tendency to overlook smaller or emerging markets. By failing to adapt to disruptive technologies and business models, they open themselves up to decline or displacement by more innovative competitors.

Three horizons

So how can companies embrace the future? In 1999, Chicago’s McKinsey consulting firm produced a three-stage 'Horizon model' to help companies open up new areas, while at the same time improving and extending their existing business. Let's break it down.

Horizon One
This is all about coming up with new ideas and strategies to enhance what you're already doing. The goal here is to make your existing business better by using your current resources and assets more efficiently. It's mainly focused on short-term profits and cash flow.

Horizon Two

This is about looking for new opportunities that still connect to your current business and strengths. You're trying to expand into new customer segments, markets, or areas that could bring in big profits in the future.

Horizon Three

Here, things get more radical. Horizon Three is about creating entirely new businesses or capabilities. It's about being ready to jump on disruptive opportunities, or dealing with big changes in the business world. It’s about innovation that can completely transform your business to adapt to what's happening around you.

Now, over the years, people have come to think of Horizon One as covering the next 3 to 12 months, Horizon Two the following 24 to 36, and Horizon Three as anything 36 to 72 months away. But that isn’t quite accurate.

Mixing technologies

In today’s world, Horizon Three changes don’t always need disruption; they can also come about by using existing technologies in new ways. Or, to put it in other words, a new mix of existing technologies can create a disruptive technology.

Think of Uber and Airbnb. They're both considered disruptive innovations, but what they really did was take existing ideas and technologies and use them in new ways to create something disruptive. And it didn’t take 36 to 72 months. It happened much more quickly.

Open to adapting

In today's business world, waiting up to 72 months for a disruptive innovation to emerge is not a practical approach. Big changes can occur unexpectedly and rapidly, sometimes even overnight. If you want to stay competitive, you have to be ready to adapt, and ready to pick up on quick, disruptive innovations. Because the technology you need may already be out there – just waiting for you to do something unexpected with it.