Coined by Clayton M. Christensen, the term ‘disruptive innovation’ refers to a new entrant into a market who eventually disrupts and outperforms the established players. The process begins with a new company addressing a gap in the market, where a segment of the population has traditionally been overlooked. By offering an alternative product or service that is usually more convenient and affordable, the new company is able to reach consumers who had previously been ignored.
Over time they build a foothold in the market and through a process of continuous improvement and innovation, break into the competitive market that they were previously not involved with. Usually equipped with a better product and understanding of customer experience, the new company is able to push the established players out of the market. Often these larger companies tend to make the mistake of initially overlooking the new entrant, perceiving them to be operating in a different realm. Here we look at three examples of disruptive innovation and how each company used it to transform their industries.
Netflix is a textbook example of successful disruptive innovation. Starting out as a company supplying DVD mailouts, Netflix offered a cost effective and convenient product to an area of the market that was previously overlooked. Targeting people who were movie buffs but not necessarily interested in new releases, Netflix was providing a tailored product to a specific group of people. Netflix did not originally pose a threat to the likes of Blockbuster, operating in a distinctly different segment of the market.
However, following this initial success, Netflix made the bold move to disrupt its own business model, moving away from a safe space and breaking into streaming media. Disruptive innovation usually involves a startup disrupting an established player and this is exactly what happened with Netflix. The new move nudged them into the same competitive space as Blockbuster, eventually pushing them out of the market. Their latest disruptive endeavour was in 2013 when Netflix entered the production business. A roaring success so far, Netflix have proved that they know how to disrupt, innovate and succeed.
The year of 2001 saw the release of the first iPod, a portable media player that could hold an average of 1,000 songs. In itself, the iPod was not an attempt at disruptive innovation. A range of other such devices already existed and although the iPod was considered a better product than the majority of these, it did not target a new market. Crucially, it was the combination of the iPod and the simultaneous release of iTunes that brought a fresh disruption, opening up new ways of buying and playing music.
iTunes is both a media library and music marketplace. It locked iPod users into purchasing music from the iTunes store but more importantly, it offered convenience and a lower price point. By integrating the Internet into the music curation process, Apple used disruptive innovation to change the very foundations of the way consumers listened to music. As a result, Walkmans, CDs, MP3 players and record stores are generally considered ancient artefacts in today’s market.
Recent years have seen a seismic shift in the structure of the grocery market, spurred by the invasion of discount retailers Aldi and Lidl. In particular, Aldi is leading the warpath to market domination and has achieved the success it has through a series of disruptive innovation moves. Aldi tore up the rulebook of the established players and carved its own path. With a focus on high-quality produce at temptingly low prices, Aldi has been gradually winning over the British consumer.
Aldi have been able to achieve the invaluable combination of high quality and low prices by restructuring the traditional food retail business model. By moving away from a preoccupation with established brands and by educating consumers that unknown brands are certainly not synonymous with low quality, Aldi have redefined the way consumers shop.
It is notable that Aldi were the first to champion the absence of bags, encouraging customers to bring their own or invest in a reusable one. Furthermore, the modest size of their stores combined with their in-house distribution network and avoidance of 24-hour operation, has meant further savings which can be passed onto the customers.
Each of these examples has featured a world famous brand that is known by vast numbers of people. You would think that businesses everywhere would be following in the same footsteps of disruptive innovation, yet it is still a seriously undermined business process. Despite the incredible success of these companies, it is very rare to see businesses disrupting themselves – it goes against all natural business instincts and many companies choose to remain in a safe space. Yet the dissolving of established players like Blockbuster only goes to show that staying safe can be just as dangerous, if not more dangerous, than taking a few intelligent and calculated risks with disruptive innovation.
- Disruptive innovators begin by servicing an overlooked area of the market, gain a foothold and then move into the mainstream to disrupt the established players.
- Careful judging of exactly what the consumer wants, even if they do not know it themselves, is crucial in executing a successful disruptive innovation strategy.
- As an established player, ignoring any new entrants to your market area is risky and should encourage innovation to alleviate the threat.