In the current uncertain times, many companies face the test of redefining their strategy in a short time frame, not even weeks but days. This redefinition had become the only solution to economic pressure and the way the consumer has started to think.
Getting a better understanding of disruptive innovation will help you define your new strategy of becoming a disrupter or avoiding being disrupted or better scanning different opportunities and path your way to what’s next. Not easy to answer, how to put together technology, customer value and experience, new business models and value chain models, and an out of the box approach as a whole?
We have set up a complete DISRUPTION series that brings a step by step perspective for you to deal with challenging times and define your new strategy. These series include tools and examples to distinguish between developments that will last and drive changes versus stories that are fade away with the changing world.
What Is Disruptive Innovation?
The term “Disruptive innovation, “coined by Clayton Christensen describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves upmarket, eventually displacing established competitors.
Disruptive innovations are not necessarily breakthrough innovations that dramatically alter how business is done. However, they consist of solutions that are simple to acquire and affordable at the least. These products and services often appear modest at their outset but have the future potential to transform an industry.
Let’s explore a couple of examples to understand the meaning of disruptive innovation better.
Why “Dollar Shave Club” is a Disruptive Innovation?
Dollar Shave Club was launched in 2011 and successfully disrupted men’s traditional shaving experience by offering a simple solution to their basic customer needs.
If you don’t know what the Dollar Shave is all about, watch this groundbreaking launch video.
Three years down the road, Dollar Shave claimed 48% percent of the online razor market, shaking up conventional market leaders Gillette and Schick. The company has grown to include over 600 employees globally and has more than 4 million subscribers. In July 2016, Unilever acquired Dollar Shave in an all-cash $1 billion deal.
The reason why the Dollar Shave Club is “disruptive innovation.”
- Disruption is a process where a service initially takes root in simple applications at the low-end market. This company identified “a job to be done” in a specific segment. This translates into why customers will adopt their offer as they provided the service at the customer’s doorstep for one dollar every month (groundbreaking, right?).
- With dollar a month, they shattered most of the local and international competition. DSC created an affordable solution to a real, relatable problem shared by men (and even women). Instead of paying a minimum of $20 a month, they now paid just $4 a month. By doing so, they approached the bottom of a maker, with a less expensive and accessible offer.
- Dollar Shave Club broke the value chain and disrupted the mold by creating an online platform and delivering the product directly to the consumer instead of going to the local store.
- Technology and internet penetration enabled Dollar Shave Club to create this new subscription model and leverage data to improve its offer and explore new opportunities that created value for its customers.
- In the beginning, competitors didn’t head much to the new model. However, Dollar shave Club took the core of companies as Gillette, who were in their traditional model and couldn’t disrupt themselves. For decades, Gillette was mostly alone, with just its lackluster drugstore aisle competitor Schick. DSC disrupted this model and made them think on their feet.
- This combination enables DSC to create a great experience of transforming this on monthly “delight.” DSC offered a new practice around the product that customers didn’t know they wanted or could ask for, which disrupted the user experience.
Gillette is known for spending tens of millions of dollars a year on research and development. However, it wasn’t just about mega innovative razors. Dollar Shave Club (acquired by Unilever for $1 billion in 2016) made a point by criticizing flaws in the existing business model of conventional men’s shaving products and purchase experience.
In his launch video, cofounder Michael Dubin mocked the incumbent’s practices. “Do you like spending $20 a month on brand-name razors?”… Stop paying for shave tech you don’t need.” Gillette, the incumbent, was forced to react by reducing prices, launching a shave club of its own, and even venturing.
Why Netflix is a Disruptive Innovation?
The term “disruptive innovation” is misleading when used to refer to a product or service at any given time rather than over some time.
In April 1998, Netflix was launched as an unsuccessful movie-rentals-by-mail service model. This company grew its subscriber base by offering free trials and other deals that made convenient rental service popular. In 2019, Netflix’s annual revenue rose to 20 billion USD, and today it held 182 million subscribers worldwide. This impressive growth demonstrates that Netflix successfully disrupted not only incumbents but itself without being displaced.
The salient features of their disruptive model include:
- Most innovations begin as a small-scale experiment. Thus, Netflix in the ’90s was a rental service that took ages to arrive. Netflix chose the path of technology and online viewing, which was the major disruption in its business strategy. If Netflix had not eventually begun to serve a broader segment of the market, Blockbuster’s decision to ignore this competitor would not have been a strategic blunder.
- Netflix came up with a less expensive, simple, and accessible mode. As defined by Clayton Christensen, disruptive innovation occurs when new entrant targets overlooked segments with a new offering (and often a new business model). This is what Netflix did to Blockbuster. Its original mail order service didn’t provide the instant gratification that Blockbuster did, but it was far more straightforward and less costly (no late fees).
- Then, the Netflix model evolved thanks to technology by moving from DVD delivery to streaming even if at the beginning it underperformed. It was still simpler, faster, and less costly, attractive to new users or existing users who were over-served by the DVD business. The technology was the real game-changer in this scenario as the internet, mobile, and streaming allowed Netflix to shift to streaming video over the internet, which transformed the business model and offered a wider selection of content to its monthly subscribers at a fixed cost.
Today, Netflix is one of the rare companies benefiting from the global pandemic. Netflix added 15.8 million subscribers in the first quarter of 2020, more than double the 7.2 million expected. A growth of more than 22 percent year over year. Now Netflix has a whopping 182 million subscribers worldwide.
Keeping in mind the two examples explained above, these are the five takeaways about disruptive innovation, meaning
- It is a process by which a product or service initially takes in simple applications
- Typically, it is designed to be less expensive and more accessible by creating a new business model to access the low-end market
- They are hard to see coming and aren’t taken seriously for the incumbent.
- It is not just about technology, it is a combination of market fit, technology, supply chain, value, and user experience.
- This combination can eventually displace established competitors
Entrepreneurs are often the ones that develop new products or services to revolutionize an entire industry. They can start small in a niche market, and then scale the product to appeal to a broader group of people. They don’t necessarily need to be intimidated by bigger players either, as established companies are probably not interested in developing these low-margin products or solutions. However, it requires a good combination of all elements to get it pitch-perfect. Disruption is not just about technology, but about market fit, value chain, customer experience, and evolutionary business model.
In his blog, Seth Godin said, “it takes about six years to become an overnight success.” Mark Zuckerberg’s Facebook took seven years to become a cash flow optimistic company, and Bill Gates took 11 years to land its first big deal with IBM.
For some incumbents, the belief is that they should create a separate division that operates under the protection of senior leadership to explore and exploit a new disruptive model. This model has worked in some cases in the past. However, it is a painfully slow process that may not provide the desired results. The challenges that arise from being an incumbent and a new entrant simultaneously have yet to be fully specified.
However, in a face-off between the disruption model and traditional incumbents, the modern era disrupters have a slight edge. A new era where responses, products, and services are required instantly by most users. Especially now, during the pandemic, business models and strategies have faced a disruption themselves. Zoom, Skype, and Netflix are only a few examples of this argument.
We still have a lot to learn about “disruptive innovation” for running and new businesses. The reality is that a better understanding of Disruption can help us to define our next position as an entrepreneur or intrapreneurs.
P.S. My book is coming soon!
Yo ho ho! I’m currently working on the final details of my book to help you harness the power of disruptive innovation.