According to Clayton Christensen, an innovation can be called “disruptive” if it has one of two qualities: a lower end market foothold or technology which is easily accessible to the masses. Constantinos Markides in a 2006 article differentiated disruption into business model innovation, product innovation and technological innovation. The three are not the same — they have different origins, differing effects and demand dissimilar incumbent-responses.
A small organisation overthrows a big one because the latter as a business strategy follows “sustaining innovation” (pleasing the high-end customer with more features and benefits while ignoring the majority who just want a low cost product).
They focus on profitability by increasingly adding features and benefits which nobody wants to pay for. This is where the disruptive innovator comes in and offers a low cost, easily accessible alternative and before long, the market is theirs. The leader often remains oblivious to the changing situation.
Sustaining innovations fulfil current customer needs. Disruptive innovations are about future markets. Google Maps overthrew expensive navigation apps with their free-for-everybody service. Netflix outdid video rental companies with low pricing and unlimited number of movies. Wikipedia taught a lesson to costly encyclopedia products and airbnb gave hotel managers business insomnia.
Redefining the market
From a marketing strategy point of view, disruptors redefine markets and customer value. It focuses on satisfying niche customer needs today which may evolve into future business streams. Disruptive innovations often start off pretty badly with a lot of defects. They may even seem to get everything wrong at first. They then improve quickly to become the preferred option.
Call it the “Success Curse” of the dominant firms, if you will. When a company becomes successful there is tremendous pressure to continue doing what it has always been doing. There is resistance and trepidation in trying out niche, unproven ideas. While “sustaining innovation” is the preferred approach of many large and successful companies, they end up ignoring the small, unremarkable market segments.
Big firms’ dilemma
The dominant firm is often stumped by the situation of a disruptor coming at them from the bottom end of the market. Intel and GM have faced it. Should the threatened firm go downwards and produce inferior products with lower profitability and kill the upstarts before they win the market? Or should the firm move up the value hierarchy and cater to their most profitable customers with increasingly better products?
Disruptive innovation marketers come in at the bottom of the market with comparatively lower quality products at comparatively lower prices and then work their way upwards displacing the more well established higher priced incumbents.
The Chinese smartphone companies took the disruption route and with their affordable products they successfully upended the domination of the more well-known brands. Toyota, Kia, and Hyundai had muddied the waters for the Big Car Brands starting from the bottom of the market and moving upwards.
Whatsapp was a disruptive innovation with its free-to-all messaging service, encryption-driven security and the ability to have voice and visual elements. Its mass adoption was not a surprise. It effectively ousted or weakened snail mail, email, the telephone, mobile services and even Skype. It won because the customer experience was brilliant in its simplicity and security.
Those aspiring to be Disruptive Innovators must understand the psychology behind mass migration of users from one product to another. A sense of outrage is a powerful trigger for mass user migration. That’s what Whatsapp is currently facing and Signal is likely to benefit from.
A sense of outrage helped mass citizen migration in India from a once-strong political brand to a disruptor brand of politics which has out-maneuvered all the incumbents and gained centre-stage. A sense of getting a lot for very little helped Zoom be a disruptive product which had waited in the wings for a long time before “its time came”. Being mostly free of cost, easy to use, and having multiple features which suited the bottom of the market, it gained much more acceptability than similar apps from large established companies.
The challenge of disruptive innovation as a marketing strategy is that large companies find it a problem in investing in the development of products which are unsure of a future and catering to a small market. In the Sustaining Innovation context, it was always the large incumbent organisations which were winning in the marketplace — be they computer firms or automobile giants, airline companies or cargo handling firms. In the Disruptive Innovation context however, it is almost always the new entrants which are the podium finishers.
As a marketing strategy, an attempt at adopting the disruptive innovation route requires overcoming inbuilt inertia to try the untried and the risk involved therein. When a company is making large profits, to go after something new, with a bottom of the market positioning, and having low profitability potential, is a leap of faith for most C-suite managers.
One way to straddle these seemingly contradictory strategies is to set up a smaller separate company as a spin-off to go after the small, unprofitable markets while the main ship continues on its profitability course.
So, what can established firms do to adopt disruptive innovation as marketing strategy? A few things seem non-negotiable:
1. Assess managers and the firm on risk taking capacity at regular intervals.
2. Assess managers and the firm on their ability to build simpler processes and products rather than more complex ones.
3. Ensure that a fixed percentage of every SBU’s profitability must come from new products, new business models or new technology that satisfy lower end niche markets, are simpler to use and are lower priced.
4. Listen carefully to your worst customers because they are not the most profitable for the firm today (but may become the trigger that will disrupt the industry and the firm).
5. Watch the start-ups in the industry very intently. Then pre-empt or respond actively.
The writer is Professor, Great Lakes Institute of Management, Gurgaon