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Making products and services unique and different in order to distinguish them from those of competitors
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Warby Parker (vintage-inspired prescription eyeglasses)
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Cost competition
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Offering products and services at a lower cost than competitors
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Walmart
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Scope
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Competing in all markets around the globe, rather than merely in local, regional, or national markets
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Apple iDevices
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Focus/market niche
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Competing within a narrow market or product segment
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Bonobos (men's clothing)
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Customer intimacy
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Developing strong ties with customers
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Amazon; Netflix
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spawning entirely new firms and value chains (Schumpeter, 1942). When new technologies are at the core of a change in the way business is done, they are referred to as disruptive technologies. When the technology involved is digital, the term digital disruption is used. Usually it is not the technology per se that is disruptive—in fact, it can be rather ordinary and commonplace. Instead, the disruption occurs when an innovative firm applies the technology to pursue a different business model and strategy than existing firms, perhaps discovering a whole new market that existing firms did not even know existed (Johnson, Christensen, and Kagermann, 2008; Christensen, 1997; Bower and Christensen, 1995). For instance, personal computers using off-the-shelf inexpensive processors and technologies disrupted the market for mainframe and minicomputers. All the eight elements of a business model identified previously can be affected by disruptive technologies, from the business value proposition to the revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management. In short, it’s a whole new world that often confuses and surprises successful companies who tend to ignore, dismiss, and/or mock the early disruptive products. For instance, the entrepreneurs who introduced personal computers identified an entire new market of customers that had been ignored by the large computer firms, along with new price points, competitive factors, and market strategy, using new organizational, management teams, and employees with different skills. Many existing firms could not compete, and dissolved. Similar dynamics can be found in communications (disrupted by e-mail), data storage, music, photography, publishing, and transportation (Lepore, 2014). For instance, on-demand services firms such as Uber and Airbnb have had a significant impact on the taxi and lodging industries.
Not all technologies are disruptive (Christensen et al., 2015; King and Baatartogtokh, 2015). In fact, most successful companies use technology to sustain their current business models, industry structure, processes, and strategies. This use of technology is referred to as sustaining technology because it helps companies to cope with competitive pressures and improve their products, and serve their customers with less expensive,
more powerful, or unique products. But the same technology can be used by innovative entrepreneurs (disruptors) to destroy existing business models. Here’s how it works.
Successful companies use whatever technology is available to incrementally improve their products, focusing on the customer by improving quality, price, and service. The incumbent and dominant firms seek to maintain the status quo in an industry, and their firms. In the first disruptive stage, disruptors, often funded by new sources of finance, introduce new products that are less expensive, less capable, and of poorer quality. The first personal computers used relatively unsophisticated technology compared to mainframe computers of the 1970s. These early products nevertheless find a niche in a market that incumbents do not serve or are unaware of. In the second stage, disruptors improve their products at a rapid pace, taking advantage of newer technologies at a faster pace than incumbents, expanding their niche market, and eventually attracting a larger customer base from the incumbents’ market. When word processors, and eventually Microsoft Office, were married to the more powerful PC of the 1980s, they attracted a new market of business managers and professionals that was not served by incumbents. The concept was entirely new at the time. The successful incumbents never thought business professionals, let alone people working at home, would like to have a computer at their desk to create documents, build spreadsheets, and make presentation slides. The people and companies that developed personal computers were outsiders to the mainframe computer industry. They were disruptors. They had the vision.
In the third stage, the new products and business model become good enough, and even superior to products offered by incumbents. In the fourth stage, incumbent companies lose market share, and either go out of business or are consolidated into other more successful firms that serve a much more limited customer base. Some incumbents survive by finding new customers for their existing product, adopting some of the newer products and business models in separate divisions of their firms, or moving into other often nearby markets. For instance, mainframe computers are still made by IBM, but they are one of the few survivors. They survived by sustaining innovation in their traditional market of large-scale computing for Fortune 500 firms, moving into computing services, data centers, enterprise software, and most recently cloud computing, business analytics, data mining, and machine learning. As for the PC industry, it is currently being disrupted by smartphones and tablet computers, created by outsiders who played a small role in the personal computer world, and who have identified huge consumer markets that incumbent PC manufacturers did not realize even existed. They have the vision, for now, but they face new digital disruptors sure to follow.
Why don’t the existing companies realize the changes that are coming, and take steps to compete directly with the disruptors? Successful incumbents usually have enormous capital reserves, in-depth technology and intellectual skills, and access to prestigious management consulting firms. Why didn’t Kodak see the transition to digital photography? Why didn’t Canon see the smartphone camera as a powerful competitor to digital cameras? Why don’t firms disrupt their own business models? The answers are complex. Incumbent technologists and professionals may be trained in an unfit fitness, having the wrong skills for the current environment. Shareholders expect returns on investment, not destruction of a firm’s historic and cherished profitable products. The existing customer base comes to expect continuous improvement in existing products— not a business disruption, but business as usual. These powerful practices, all of which
make good business sense, prevent incumbent firms from meeting the challenges of business model disruption. It is unclear at this time if the two most innovative firms in the current e-commerce environment, Apple and Google, will prove any different from previous incumbents.
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