Disruption is Good When Innovating

For most people disruption is an unwelcome thing. Bad weather disrupts air travel and naughty children disrupt classrooms. But there are some disruptions that are, for the most part, positive and welcome. Thought leaders and academics tend to think of these as disruptive innovations.

If you work in the high-tech space, or if you are plugged into technology trends, you will be well aware of disruptive innovations. But do you know what a disruptive innovation really is? Clay Christensen, the author of the Innovators Dilemma defines a disruptive innovation quite clearly as; The transformation of a product that has historically been so expensive and complicated that only a few people with a lot of money and a lot of skill could access. He continues, A disruptive innovation makes it so much more affordable or usable that a larger group of people have access to it.

An obvious example of disruptive innovation is the PC which all but ended the useful life of mainframe computers. The mainframe computer cost several million dollars to buy and took years to train people to use which meant that the largest corporations and the largest universities could have just one. In contrast, the PC was highly affordable and easy to use leading to rapid and broad adoption. Today there are around two billion computers in offices, universities, homes, and in peoples pockets as they go about their lives.

The disruptive model can really be visualised in three tiers and its very well explained in this YouTube video. In the middle you have the mainstream where incumbent businesses are comfortable selling to their loyal customers. Above is the high-end where many businesses aspire to be for the increased margins available, and at the low-end you have the non-customers who cant afford what you have to offer.

As time passes, and as all businesses innovate and improve on their products, the offerings tend to get better while the businesses retain their same positions in the market. For example, Mercedes invented the motor car in 1886 and has been innovating ever since. Mercedes was the first to put brakes on all four wheels, the first to include crumple zones for crash safety, the first to introduce traction control, the first to introduce seat-belt pre-tensioners and the first to introduce air bags. As these innovations have trickled down to cheaper models in the Mercedes range and eventually to cheaper models from other manufactures, Mercedes has raised the bar further to maintain its prestige lead. This is called sustaining innovation.

Now the problem with sustaining innovation is that prices continuously creep up to fund improvements and balance the increased cost base. This inflation puts distance between the improving products and the lower end of the market thus creating space for a new disruptive entrant to reset the bar. To continue the automotive theme Ill explain what this meant for the US automobile industry. When Toyota first started to attract serious attention at the cheaper end of the market in the USA, Ford and General Motors had to decide if they were going to go down market and compete with Toyota at the low-end where margins were small and risk was high, or if they were going to continue developing cars for the mainstream.

History shows us that Ford and GM got it wrong. By deciding to largely ignore Toyota, Ford and GM allowed Toyota to enter the market by selling to non-consumers, but through the lens of history we now know that Toyota didnt stop there. Over time Toyota went up-market and built an enviable reputation for quality and reliability which caused many mainstream buyers to desert Ford and GM, transforming Toyota into the worlds largest car manufacturer.

And the cycle continues; in recent years Toyota has become the victim of disruptive innovations from Korean car manufacturers Hyundai and Kia. Both have offered more for less to the consumers that couldnt quite afford Toyotas prices. Today Hyundai and Kia are moving up-market and taking mainstream share.

According to Clay Christensen, the solution is to introduce internal autonomous competition to serve the low end of the market with an offering that your existing customers would not buy. Thus underpinning your loyal customer base and filling the hole to prevent new disruptive competition from entering and eroding your market.

Closer to home I see Autodesk as a good example of a successful market incumbent that risked cannibalising its own mainstream revenues by offering a cheaper alternative for non-customers. AutoCAD had originally entered the CAD market at the low-end. But then over time, AutoCAD capabilities grew and the product moved up market to become mainstream leaving a gap behind which many new disruptors tried to fill. Recognising the danger to its mainstream market dominance, Autodesk introduced LT, a stripped-down low-cost AutoCAD alternative for non-customers. The result: Autodesk built an even bigger revenue stream from an even larger market sector.

FARO also made their disruptive move brilliantly when they launched their Focus 3D laser scanner. For two years a FARO team had worked in a separate building, with windows covered, and new electronic security that was isolated from the rest of the workforce to maintain total secrecy. And their subterfuge paid off. When the FARO Focus 3D launched, it was a complete surprise to all including many within FARO. At half the price and half the size (with no loss of quality or features) of the outgoing FARO laser scanner the Focus 3D was an instant hit with a brand new market. Fast-forward 18 months and FARO has extended its manufacturing capability; yet still it sells more 3D laser scanners than it can manufacture. For FARO, the Focus 3D has proven to be the very best kind of disruption