It seems that these days, almost every entrepreneurial seminar, event, accelerator or conference uses a pun on the words innovation or disruption. They have become a part of the business lexicon and have become buzzwords for would-be techstars to throw around when describing their business. There seems to be a lot of confusion when it comes to their exact definitions and many startups claim to have disruptive innovations that will change an entire industry if only they had some seed capital.

The seminal book in business innovation is undoubtedly Clayton Christensen’s The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. If your company has an innovation department it is likely that someone in upper management has read this book! In a nutshell, when a disruptive innovation is proposed in an organisation, business best practice would be to ignore the disruptive innovation because by definition, the disruptive innovation currently has no market and cannot be sold to existing customers. Incumbents focus on improving their existing products (incremental innovation) instead of focusing some resources on an innovation that will serve a market that either currently does not exist or will only service the least profitable cohort of their customers. This leaves room for new entrants either in a new market or operating downmarket to establish a foothold and grow from there.

What is Innovation?

Interest in innovation has seen a steady increase in the post-war era as can be seen in the following graph that plots the number of occurrences of the word ‘innovation’ in all the books Google have catalogued since 1900 (which is a lot!) Innovation is well-defined in academia but colloquially the word is being misused as it’s popularity increases.

Number of occurences of the word ‘innovation’ in all the books Google have catalogued since 1900.

Broadly speaking, innovation is the process of making changes in something established, especially by introducing new methods, ideas, or products. Well, that’s what the dictionaries say. Innovation has been defined many times but my favourite definition comes from business management guru, Peter Drucker:

Innovation is the specific function of entrepreneurship, whether in an existing business, a public service institution, or a new venture started by a lone individual in the family kitchen. It is the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth.

Put simply, innovation is the act of making a product, service, process, technology or business model faster, cheaper, better or more efficient. To illustrate, let me share with you a little example from our business. Unfortunately, Accodex employees (including our CEO Chris) need to take the rubbish from our office to the dumpster every few days. Being the geeks that we are, we mapped the process (or algorithm) and it looked something like this:

  • If rubbish bin is full, remove garbage bag from bin.
  • Tie a knot in garbage bag.
  • Walk down to the basement with garbage bag.
  • Throw garbage in dumpster.
  • Return to office.
  • Walk to cupboard in kitchen.
  • Get fresh garbage bag from underneath the sink.
  • Place fresh garbage bag in garbage bin.

This process worked okay but we found that sometimes when employees executed the process, they would stop after step 5. We decided to innovate. We moved the fresh garbage bags to a new location: inside the garbage bin but underneath the bag in use. Our process now looks like this:

  • If rubbish bin is full, remove garbage bag from bin.
  • Tie a knot in garbage bag.
  • Take fresh garbage bag from bin and place around rim of bin.
  • Walk down to the basement with garbage bag.
  • Throw garbage in dumpster.
  • Return to office.

This is an example of incremental process innovation, the process is two steps shorter which translates to a saving in time but further, it also increases the quality of the process by removing some steps that were previously neglected.

falcon_9_launch_and_landing_streak500

Put simply, innovation is the act of making a product, service, process, technology or business model faster, cheaper, better or more efficient1.”

 

Disruption and Disruptive Innovation

In casual business conversations, people often talk about markets being disrupted which can happen in many ways: changes to legislation, new competitors, government subsidies, environmental factors or new innovations. Disruption in this sense refers to the common English definition of disruption but the phrase ‘disruptive innovation’ gained popularity in the mid 1990s as shown in the graph below.

 

Popularity of Disruptive Innovation as a common term since 1900.

The Oxford English dictionary defines disruption as, “disturbance or problems which interrupt an event, activity, or process.”

I think most people are familiar with this definition of disruption: something that causes a disturbance. To understand disruptive innovation however, I would ask that you forget this common English definition because although disruptive innovations do tend to disturb the market (hence the name), other factors and types of innovations can also disturb markets. Disruptive innovations have a much more specific definition according to the seminal thought leader in this area, Clayton Christensen. Disruptive innovations are ones that enable the business to offer a lower quality, cheaper product that is generally purchased by the least profitable consumers within a given market. The theory states that these customers are usually over serviced and are forced to buy products that over satisfy them, in other words, these consumers at the lower end of the market would be happy to purchase an inferior product in terms of quality, feature set, aesthetics, etc if it satisfied one other criterion – perhaps convenience, portability or price.

 

 

From the graph above, you can see the high end and low end of the markets represented by the red sloping lines. At a given time the high end of the market demands a higher performance than the low end and the performance demanded by both increases over time. Next let’s look at an incremental (or sustaining) innovation, these generally improve the given product at a rate that will satisfy (and eventually over service) the high end of the market as the business tries to capture more of the most profitable customers in the high end of the market. Now let’s look at a disruptive innovation, notice that when it is introduced (before point A) it does not even satisfy the low end. The disruptive innovation may need to be sold into a different market or to customers who only value the one criterion that the disruptive innovation outperforms the incumbent products. Now notice the slope of the the incremental and disruptive innovations, generally the disruptive innovation will improve at a faster rate than the sustaining innovation, over time claiming more and more of the market.

Herein lies the innovator’s dilemma, if a disruptive innovation is being introduced downmarket and is only competing with a business’s least profitable customers, then good management would dictate that you do not spend resources defending your least profitable customers, instead, spend those resources securing your most profitable customers. This then grants the disruptive innovation a foothold at the bottom of the market and if that innovation is information-enabled it will follow Moore’s Law and improve exponentially, with each iteration able to service more and more profitable cohorts of the market.

How do you defend against a disruptive innovation? That may have to be the topic of another blog.


 

Written By: Patrick Deruvo

Chief Innovation Officer

 


 

Recommended Readings

  • The Innovator’s Dilemma by Clayton M. Christensen, 1997.

 


 

Image References

  1. SpaceX’s Falcon 9 Launch and Landing Streak.

 


 

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