Disruptive innovation is a process that begins in a small, low-profile niche industry. Based on a new technology or new business model, products or services are developed that initially target only a small number of customers. This offer then gains momentum, becomes the dominant market factor and eventually displaces many established companies and their products. Disruptive innovations disperse established markets and alter the rules of the game for entire industries. They usually arise through trial and error.
Clayton M. Christensen’s landmark theory
The patterns of the development of disruptive innovations were described by the US economist Clayton M. Christensen, who is a Harvard Business School professor and renowned author and innovation expert. He describes the development of the process whereby a product or service first takes root in simple applications at the ground of the market then moves steadily up the market, eventually displacing established competitors.
These breakthrough innovations are rewriting the rules of entire industries. For example, digital cameras have become an innovation that began competing with film cameras about 20 years ago in quality and price. Kodak engineer Steve Sasson invented the digital camera in the 1970s, but the company gave it up. Today, mobile phone cameras have disrupted the entire photography market and fundamentally changed the idea of what it means to take a picture and who has access to technology.
The Internet, in particular, has enabled completely new business models in many other industries. Mostly it is small start-ups that profit from it. Large, established groups, on the other hand, are rarely the drivers when it comes to disruptive innovations.
Large companies vs. small companies
Large companies often don’t risk catching up with emerging breakthrough innovations of smaller companies or positioning new products on the market on their own initiative. Why? There are some reasons for this. First, they meet the needs of their large and important customers. Also, they pay too little attention to trends and new customer segments. They do not recognize niche offers. And they consider the growth potential of niche offers to be too low and expect too small contribution margins and too low returns.
As a result, they prefer to leave the risks of market entry to small, low-profile companies. They rely on still being able to enter if the market for disruptive technologies is large and attractive enough. Or they secure their share of the new growth markets by acquiring small companies and their groundbreaking innovations.
Disruptive innovations examples
From traditional mobile phone to smartphone
An often example of market disruption is the iPhone, which, as a greatly improved smartphone, declared the end of the traditional mobile phone and ultimately led to the collapse of the mobile phone manufacturer and former market leader in this product category, Nokia.
The initial success of the iPhone was attractive product features, which shortly afterwards made the iPhone a new market disruption for the entire mobile phone industry, as it was increasingly used by consumers as a PC replacement, for example, to surf the Internet in an uncomplicated way and to send short messages and e-mails quickly. APPLE has continued to promote flexibility by providing better software through the App Store and its ecosystem.
This successful new business model, in turn, increased the popularity and sales of the iPhone. Nokia overlooked these developments and was unable to oppose this new platform-based business model. Rather, it attempted to bring better products to market through evolutionary innovations and thus became a victim of the innovator’s dilemma.
From DVD rental to video streaming service
The same applies to video streaming services. With the invention of the video formats for the digitalization of films, completely new possibilities developed to bring video from the “movie makers” to the “user”. For many decades this was only possible with the help of video rental stores like a market leader Blockbuster and cable TVs. What happened next..: Netflix came and virtually erased video stores. Not just Blockbuster’s, but all of them as well. Blockbuster finally filed for bankruptcy in 2010. Netflix’s current market value, on the other hand, continued to climb. And currently stands at 44 billion dollars.
When the faster Internet came, video streaming finally became state-of-the-art. This brought new competitors such as HBO, Amazon Prime Video and videos could now also be streamed in HD quality.
DVDs are gradually becoming a rarity and more and more video libraries are having to close. In addition, their services also affect conventional television. Many people prefer to watch movies without commercials, and especially at any given time, rather than following the daily schedule.
From barter transactions to digital payments
If we look at the development of payment methods, it becomes clear that from the earliest times, quite simple barter transactions were the usual payment method. In the 17th century, heavy coins became a threat, and we switched to banknotes. That’s the money we still use. The free circulation of a centrally controlled currency has been established since the 18th century, but it is basically based on a relatively simple system of value exchange.
A similar instance had to be created for banknotes, now known as payment by cheque, which was first introduced into the economy by London bankers and had been common practice for a long time. However, it was clearly advantageous that the payment was secured and could only be used by the recipient.
Finally, Visa enters the credit card terminal and networks for card payments came into being, the basic idea was to have less cash to carry and still be able to pay almost anywhere. When the Internet appeared and electronic POS terminals were introduced, they became so easy for customers to use that cards were quickly accepted by consumers as payment vehicles. And digital payments let the system to recognize you and the value of the money you have.
The aim of modern payment traffic has always been to speed up and personalize the transmission – unlike previous payment methods where this was not yet possible.
In the 21st century, digital payments have developed rapidly. Escrow payments, one-click payments, electronic wallets, and crypto-currencies are just some of the new concepts in today’s payment industry. Digital payment is the ultimate payment method for today’s world. The system is intelligent enough to recognise the customer and at the same time to solve all the problems that have arisen in this area in recent years. It is even easier than cash because no material exchange is required.
The ultimate goal of the new technologies in today’s payment system is to make payments attractive and to make their processing smooth and “invisible”. However, cash, check and credit card payments are still part of our daily activities.
Radical innovations are not so much the result of defined, successive steps, but rather of a lengthy trial-and-error process. A high level of fault tolerance is advantageous for this purpose – which does not mean fault tolerance in production at the expense of product quality, but fault tolerance with regard to research and development.
Innovators and rule-breakers in an industry examine new opportunities for their potential. They observe and pay attention to details – inspect customers, suppliers, and other companies to identify their needs or trends and like to experiment constantly. Apart from that, they want to gain experience, discover the possibilities of their industry and network with people and companies from other fields.