Harvard Business School professor Clayton Christensen first coined the term disruptive innovation. But he thinks that many people are making mistakes in understanding the meaning of the word.
Many people use the term “disruptive innovation” to describe an event that shakes up an industry and the industry leaders fail to respond. But Christensen disagrees with them. “That’s how the word gets used,” he told the Harvard Business Review.
In fact, the disruptive innovation process is used to refer to something more subtle than that.
Different Types Of Disruptive Innovation.
Disruptive innovation is the process by which a small company with few resources quickly captures the market and challenges the established large company.
At the beginning of this process, small companies start their business at the lower end of the market. Or they create a new market or class of buyers from whom profits come least. Since large firms are interested in higher profits, they do not compete with smaller firms for lower profits.
Then this new company increased their profits with better offers and started to capture the market. Then customers of the established company are attracted to the new company’s offering and the new company has a strong position in the market. And thus disruption occurs.
It is very important for traders to understand this entire process. It boosts the morale of new entrepreneurs and helps them realize the opportunity to cause disruption in the industry. On the other hand, it also helps established businesses to avoid disruption.
Two Types Of Disruptive Innovation.
In an online course on disruptive strategy, Christensen discusses two types of disruptive innovation. “Low End” and “New Market”.
When a company uses a low-cost business model to bring a cheaper version of a product to market and create a new class of customers, it is called low-end disruption.
Selling products to low-income buyers also results in lower profits. So top companies are not interested in these buyers. They focus on making more profit.
An example of low-end disruption is the small medical clinic in the healthcare sector. Major medicals offer everything from sinus infections to open-heart surgery. They have specialist doctors who are skilled in treating various complex diseases. Generally the more complex the illness or injury, the greater the cost burden for the patient.
For this reason many people prefer low cost retail or small medical clinics for minor problems. The convenience of being close to home and getting quick service are also important reasons behind this. Thus small clinics occupy the space of doctor’s chambers or medical centers.
According to the RAND Corporation, 90 percent of patients visiting a general clinic present with just 10 types of problems. These include diseases like sore throat, ear infections and conjunctivitis. But only 18 percent of patients bring these 10 types of problems to doctors and only 12 percent to hospital emergency departments.
Another finding from RAND’s research is that specialist doctors and general clinics provide the same quality of care for many problems. As a result, smaller clinics take over this low-end market.
Doctor’s chambers and large medical centers offer treatment for a wide variety of ailments that ordinary clinics cannot. Large medical centers mainly focus on profitable services, so they are not very motivated to capture the general clinic market.
But over time general clinics have developed themselves to provide more specialized services. Medical centers then saw their patients moving to smaller clinics for services. General clinics created a disruption in the entire health sector by capturing once specialized services and lucrative markets.
Another type of disruptive innovation is called new-market disruption. New-market disruption is when a company brings a cost-effective new version of a product or service to the market. Apart from affordability, another aspect of this disruption is that products are introduced with a customer segment in mind that no one has thought of before. This new customer group is created by offering cost-effective and readily available products.
An example of such new-market disruption is the transistor radio. Since the 1920s, the radio market has been dominated by large and expensive stereo sound system companies. Usually wealthy families would buy expensive stereo systems for use in their homes. These heavy machines are designed to fit in the living room. And their sound quality was quite good.
Then came the portable transistor radio. Introduced in 1954 by Texan Instruments, these radios were cheap and compact. Although its sound quality was not good. Larger radio consoles and high-fidelity systems attracted wealthy buyers who preferred to listen to music at home. Cheap transistors, on the other hand, were popular with buyers who could not afford radios. Especially for students or work people who have to spend a lot of time outside.
The quality of the large radio console was much better. But the transistor radio was cheap and it gave the user freedom. So this new product creates a new customer segment in the radio market.
Big companies had little interest in selling products to these new buyers. Because the profit here is less. So they let Texas Instruments out of this market without going into competition.
After that, the quality of portable radios got better over time. This happened especially after the arrival of Sony Walkman, MP3 player, Apple iPod and smartphones. On the other hand, the demand for expensive radio consoles for home use also decreased. Thus the Texas Instrument Company began disruption at the very bottom of the radio market, displacing the company that had once been at the top of the market.
Think Like An Innovator.
Whether you’re an aspiring entrepreneur or a seasoned trader, you need to understand both low-end and new-market disruption.
You can start a new business in an old industry or create a new market by applying Christensen’s theory of disruptive innovation. And this theory will help you strategize how you will disrupt the market.