The Nature and Effects of Disruptive Innovation. What Makes Innovation Disruptive?

Container ships and containerization invention had displaced or marginalized break cargo ships and stevedores.  Break cargo ships and stevedores were lacking certain features that customers were in dire need of.  For instance, containerization had provided a great opportunity to prevent pilferage and fits well in rail and transport when shipped across the globe and within a particular country.  Containerization has made break cargo and stevedores obsolete and has negatively impacted the profitability and value of stevedores.  “Disruptive innovations are those innovations that render established technologies obsolete and therefore destroy the value of the investments that incumbents have made in those technologies” (Danneels, 2004, p.248).  Manufacturers of break cargo ships have seen a decline in their profit margins due to the increasing demand for containers; what than are the difference between disruptive innovation and sustaining innovation?

First, disruptive innovation pushes incumbent firms and industries to produce and manufacture user friendly products and service, less complicated, and can withstand the test of all environments.  “Disruptive innovations challenge industry incumbents to offer simpler, good-enough alternative to an underserved group of customers” (Christensen, Baumann, Ruggles, & Sadtler, 2006, p.96).  This writer believes that customer loyalty is what firms need to sustain and maintain.  Customer loyalty can be sustained by adding value to the products and services organizations produce and more importantly by listening and conducting surveys in order to keep up with the changing needs of customer. “By describing the landscape of unmet customer needs and analyzing where new offerings have worked before, you can chart a path that will produce successful innovations time after time.” (Anthony, Eyring, & Gibson, 2006, p. 104).  Disruptive innovations are less expensive and convenient to customers. For instance, South West Airlines has been considered one of the disruptive innovators; the Airline’s low cost no frills flights has been disruptive innovation.  It wins leisure travelers whose options were to pay through the nose or not fly at all.  South West Airlines has pushed a lot of airlines to re-organize and re-structure their business strategies.  “South West Airlines has rapidly stole market share from established carriers while also brining new customers to air travel.” (Christensen et al. 2006, p.96). 

Second, whereas disruptive innovations provide new products that are user friendly, low costs, and convenient to customers sustaining innovations provide additional functionality to existing products. Firms provide additional functionality to existing customers just to sustain and maintain them. Why do some incumbents fail and others succeed with disruptive innovations?  Studies have shown that not all incumbents have failed in the wake of disruptive innovations.  Some scholars argue that incumbents lose their market leadership that is to their dominant market share when confronted with disruptive innovations; this is not the case with Charles Schwab an established financial industry incumbent.  “Charles Schwab is currently the leading online brokerage in terms of internet trading revenues which account for more than half of the company’s trades.” (Danneels, 2004, p.252).  Charles Schwab has not lost market leadership; disruptive innovations have even strengthened Charles Schwab’s management and leadership strategies and capability. Charles Schwab has taken over the online financial services industry from E*TRADE, a first mover into the online financial services industry.  What led to Charles Schwab’s financial success as an incumbent?

First, Charles Schwab was a "disruptor" itself.  “Charles Schwab disrupted Merrill Lynch, a full service brokerage by offering discount brokerage.” (Cohan, 2000, as mentioned in Danneels, 2004 p.252).  Second, Charles Schwab’s financial and management resources, its superior branding and finally, its experience in disrupting Merrill Lynch have contributed to the company’s tremendous success in online financial services.  This writer believes that the empirical research on the failures of incumbent firms in the wake of disruptive innovations has been overstated. 

In addition, Kodak and Fuji have a success story to share regarding disruptive innovations.  Kodak and Fuji were the first to introduce digital imaging; and today, Kodak and Fuji are still the industry leaders in the manufacture and production of digital imaging.  What are the signs of disruption?  Once a new entrant has identified a particular product or service to produce, the new entrant looks for services or products that are already in the market.  They may not show up in television advertising and magazines however, may show up in the following pattern as stated by Christensen et al. 2006.

·        Providing a lower cost, less functional alternative to a customer segment that is overserved or not served at all by the dominant provider.

·        The dominant provider is moving away from the new entrant’s offerings and toward a more profitable segment of the market.

·        The new entrant is continuing to improve its offering, expanding its market reach as the dominant player retreats, while others copying its model are beginning to emerge (p. 100)

MinuteClinics as well as the emergence of South West Airlines is a good example of market disruptors.  Disruptors quickly move into untapped business areas and try to provide good enough services at less cost. It is important to note that, both the new entrant and the incumbent must put in place effective strategies to manage disruptive innovation as well as sustaining innovation.  Developing and implementing potentially disruptive innovations require firms’ resources to be freed up to understand the needs of customers.  People from all functional areas within the organization must be involved in the process of identifying customer needs. Employees must be properly trained to understand the input needed to move innovation to commercialization. “The task of generating and then converting ideas into usable and marketable products requires high levels of inter-functional co-ordination and integration.” (Adams, Bessant, & Phelps, 2006 p. 38).  Cross functional personnel includes, marketing, human resources, finance, research and development, logistics and so on. 

This writer believes that both the incumbent and the new entrant must take innovation seriously.  Organizational culture and leadership determines how organizations value innovation and creativity.  It appears that disruptive innovations can even strengthen leadership strategies of incumbent firms and may put them in a better position to compete and force new entrants out of business.  This is exemplified in Charles Schwab’s leadership strategy.  Organizations must learn from their strategic mistakes and try to turn those mistakes into opportunities.  It is therefore recommended that incumbent firms must closely watch new entrants and if feasible, invest in those smaller firms that emerge as new entrants.  New entrants because of their smaller size are easily able to adapt to emerging innovations quicker than the incumbent firms.  Innovations appear to be disruptive to the incumbent firm if it perceived at the earlier stages and no action had been taken by leadership to counter it.

In summary, disruptive innovations have been thought to have disrupted the financial and leadership strategies of the incumbent organizations; however, it is not always true that disruptive innovation displaces and distorts incumbent organizations leadership decision making because of inadequate financial resources due to lack of sales.  Characteristics of disruptors have been examined and what firms can do to counter the negative impact of disruption.  Identifying and implementing disruptive innovation does not mean commercial success.  Organizations must involve all functional areas in order to ensure successful implementation of disruptive innovations.  To implement disruptive innovations, organizations must identify the additional product functionality that is lacking in the existing product; and this can be done through market surveys, customer interview, and direct use of the product and so on.  What is the best way to pursue disruptive innovations?  Should separate entity be formed to pursue disruptive innovations or just develop internal workforce to counter disruptive innovations.  These are research questions open for further research.   

References

Adams, R., Bessant, J., & Phelps, R. (2006). Innovation Management Measurement: A Review

            Journal of Innovation Management Vol. 21.