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What Is Disruptive Innovation?
Disruptive innovation is a market-altering business approach that transforms sophisticated products into affordable, accessible solutions for broader markets, previously untapped. Amazon and Netflix are major disruptors in their respective industries and displaced established market leaders. For example, Amazon, launched as an online bookstore in the mid-1990s and became a marketplace powerhouse driven by transformative technology.
Key Takeaways
- Disruptive innovation transforms high-end products into affordable, accessible options for a broader audience, disrupting established markets.
- Companies like Amazon and Netflix are prime examples of using disruptive innovation to reshape industries.
- Successful disruptive innovations often require enabling technology, innovative business models, and a supportive value network.
- Unlike sustaining innovations, which improve existing products for current customers, disruptive innovations target untapped markets.
- The internet and digital streaming are examples of technologies used in disruptive innovations, fundamentally altering industries.
Investopedia / Candra Huff
How Disruptive Innovation Transforms Markets
Disruptive innovation involves technologies used to make products easier to use or access and available to a larger, non-targeted market. Note that it does not involve the process of improving or enhancing products for the same target market. An example of disruptive innovation is the introduction of digital music downloads, which have, by far, replaced compact discs.
Clayton Christensen popularized the idea of disruptive innovation in the book The Innovator’s Solution, which was a follow-up to The Innovators Dilemma published in 1997.
Christensen posited that there are two types of technologies businesses deal with. Sustainable technologies allow a business to incrementally improve its operations in a predictable timeframe. These technologies and the way they are incorporated into a business are primarily designed to allow companies to remain competitive, or at least maintain a status quo. Disruptive technologies and the way they are integrated—the disruptive innovations—are more difficult to plan for and potentially more devastating to companies that do not pay enough attention to them.
Investing in a disruptive innovation can be complicated. It requires an investor to focus on how companies will adapt to disruptive technology instead of focusing on the development of the technology itself.
Note
Companies like Amazon (AMZN), Google (GOOGL), and Meta (META) have focused significantly on the internet as a disruptive technology.
Companies that didn’t adopt internet-based disruptive innovations have been left behind as the internet became integral to modern life. Artificial intelligence (AI) and its potential to learn from employees and perform their jobs may be a disruptive innovation for the job market as a whole soon.
The internet was disruptive because it was not an iteration of previous technology. It was something new that created unique models for making money that never existed before. Of course, that created losses for other business models.
Using smartphones for computing needs like browsing and streaming, instead of laptops, is another example of disruptive innovation. Technological enhancements have enabled cell phones to be equipped with small processors, chips, and software applications that support these functions.
Key Components of Successful Disruptive Innovation
Disruptive innovation requires access to ignored or overlooked markets and technology that can transform a product into a more accessible and affordable one. To be disruptive, the network of partners—suppliers, contractors, and distributors—also must benefit from the new, disruptive business model. Certain core requirements include:
- Enabling Technology: In business, enabling technology is defined as the technologies and innovations that substantially change or improve processes or how people do things. Specific to disruptive innovation, enabling technology is the technology or innovation that makes possible the affordability and availability of a product to a broader market. Basically, the speed with which a market can be disrupted depends on how quickly the technology is developed and subsequently improved upon. However, the speed of the disruption is not necessarily a metric used to gauge the success of the disruption.
- Innovative Business Model: The innovative business model is a business model that uses innovations to target new or bottom-tier customers. These segments generally don’t drive profits for established companies nor do they buy their offerings because they either could not afford them or the products were too sophisticated for use. This business model—a model not adopted by incumbents because of the disruptor’s initial low-profit margins—seeks to present easy-to-use, economical solutions.
- Coherent Value Network: The coherent value network includes the upstream and downstream business partners that benefit from a successful disruption. Distributors, suppliers, and vendors might need to change processes or reorganize to fit the new model. Members of the network must subscribe to the new business model to prevent failure. Otherwise, outdated processes will fail by not aligning with the disruptive goals.
Comparing Disruptive and Sustaining Innovation
Disruptive innovation is an innovation that simplifies and makes more affordable products and services to undesirable or ignored markets. Established firms often enhance products for current profitable customers, ignoring untapped markets’ needs. This lack of attention gives smaller companies or new entrants ground to target this ignored population with simpler, more affordable options.
Sustaining innovation, on the other hand, is the process of innovating to make existing products and services better for the existing customer base, either based on customer or market demands. Sustaining innovation does not target untapped or ignored markets; rather, it’s innovating to remain relevant and competitive. CD makers making CDs with the capacity to hold large volumes of music that are scratch-resistant is sustaining innovation. A company introducing digital downloads via the internet, making CDs obsolete, is disruptive innovation.
Illustrative Examples of Disruptive Innovation
Disruptive innovation is differentiated from disruptive technology in that it focuses on the use of the technology rather than the technology itself. Two well-known examples of this are Amazon and Netflix.
Amazon
A classic example of the disruptive innovation of the internet being unleashed was the restructuring of the bookselling industry. The big bookselling chains lost out to Amazon (AMZN) because it could display its inventory without owning a physical store in every town and then ship the book to the buyer’s home. Before online shopping became popular, books were sold in traditional bookstores, such as Barnes & Noble and the now-defunct Borders.
Amazon’s popularity grew along with its profits and market share, moving many bookstores to the back of the shelf or out of business. Since its launch, Amazon has successfully used the internet to create an online shopping platform, whereby most of what’s offered in a physical store—including groceries—can be ordered from Amazon’s website. And it all began with a small, garage-born company using the power of the internet to attend to the needs of a niche market of online shopping, book enthusiasts.
Note
The Model T wasn’t seen as disruptive innovation because it improved existing tech and wasn’t widely adopted initially. The auto industry didn’t take off until mass production reduced prices, moving the entire transportation system from hooves to wheels. In that sense, the system of mass production does meet the criteria for disruptive innovation.
Netflix
Netflix (NFLX) became a disruptive innovator by catering to online shoppers when video rentals from stores were popular. Utilizing the growing power of the internet, it offered consumers the ability to peruse their catalog of DVDs, rent unencumbered by someone else’s choice to rent the same selection, and have their selections sent directly to their home.
Fast Fact
After Netflix disrupted the media industry, Blockbuster went from having more than 9,000 Blockbuster brick-and-mortar stores to one.
Not long after offering mail-delivered DVD rentals, it revised its business model, finding an avenue to disrupt itself in the market by providing online-streamed entertainment. However, competitors have successfully duplicated this business model, taking away from Netflix’s market share. Time will tell how long Netflix can remain dominant, but there is no doubt about the disruption it brought about.
What Is the Meaning of Disruptive Innovation?
Disruptive innovation refers to the process of transforming an expensive or highly sophisticated product, offering, or service into one that is simpler, more affordable, and accessible to a broader population. It explains the process of how innovation and technology can change markets by presenting affordable, simple, and accessible solutions and after doing so, disrupts the market from which its predecessors were born.
What Are Examples of Disruptive Innovation?
Amazon provides a clear example of disruptive innovation. Jeff Bezos, in 1995, subscribing to the notion that the internet could significantly boost commerce, launched Amazon to sell books to a growing, but largely ignored online shopping community. In doing so, he forced many bookstores to go out of business. Netflix is another prime example. After it disrupted the media industry, the dominant player, Blockbuster, went from having 9,000+ brick-and-mortar stores to one.
What Are the Key Requirements for Disruptive Innovation?
To be a successful disruptor, the network of partners—suppliers, contractors, and distributors—must also benefit from the new business model. Certain core requirements include having enabling technology, an innovative business model, and a coherent value network where upstream and downstream business partners benefit from a successful disruption.
The Bottom Line
Disruptive innovation creates access to complex or costly products and services by implementing innovative processes to make them more available to a larger, untapped audience. It displaces companies with long-held market control. It contrasts with sustaining innovation which involves improving existing products for existing customers. Disruptive innovation’s key elements are enabling technology, innovative business models, and a supportive value network for successful implementation of the market-changing process. Amazon and Netflix are examples of market disruptors that began as new entrants in industries dominated by well-known, established companies.
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