Do you know disruptive innovation when you see it?

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February 25, 2016

Breathe the words “disruptive innovation” and you’ll attract a captivated crowd. Take, for example, the recent Kellogg on Growth Forum hosted at Northwestern’s Kellogg School of Management. Students flooded the auditorium to hear PwC Partner Alex Kandybin explain that executives are overusing the term. The danger is that executives will fail to recognize and respond to true disruption when it’s lurking on the horizon.

“Talk to a room full of executives charged with innovation in one form or another and you’ll hear the word disruption tossed around a lot,” said Kandybin. “Most of the time they are describing sustained, breakthrough or incremental innovation. Pointing out the overuse of the term may seem like unnecessary parsing of terms, but precision in language is incredibly important to a company’s growth strategy when it comes to innovation.”

The Difference Between Breakthrough and Disruptive Innovation

Each type of innovation serves different purposes, poses unique challenges, and requires a unique strategic response. Businesses that don’t understand the type of innovation challenges they are facing can make strategic blunders that alienate customers and erode market share, Kandybin noted. Treating breakthrough innovation as disruptive, for example, can spell disaster.

The most common mistake companies make is to use the terms breakthrough and disruption interchangeably.  Here are the hallmarks of each:

Breakthrough Innovation

  • Does not create a new market or customer base
  • Dramatically improves an existing product or service that is superior to the competition
  • Allows competitors time to respond even after the innovation begins to impact market share

Disruptive Innovation

  • Creates a new market, often having a different customer base, but is not the most profitable initially
  • Focuses initially on the least profitable (i.e., the most price-sensitive) customers or on non-customers.
  • Initially provides as an inferior product or service that evolves over time
  • Flies under the radar of incumbents and allows little time for them to respond – once the incumbents’ market share is impacted, it is too late to respond

Companies misdiagnose disruptive innovation at their peril. Consider these examples:

  • The telephone upending the telegraph business is one of the most cited examples of pure disruption in play. Westinghouse is an example of a company that saw the slow-moving iceberg coming from a mile away, but thought it would melt before doing any damage.
  • Mainframe computer manufacturers saw microcomputers as toys. By the time those “toy makers” had turned into tycoons, mainframes were being scrapped for parts.
  • Southwest Airlines made air travel affordable for many more people and changed the nature of transportation in the process. By the time the incumbent airlines were able to respond, their market share had shrunk and consolidation was their only option.

Options for Responding to Disruption

To anticipate disruption and respond in time, you need to explore emerging technologies and potential demand discontinuities. If you wait to act until the disruption is eating your market share, you’re too late.

When dealing with disruption, the last thing you should do is change its main product line, according to Kandybin. There are three viable approaches you can take:.

1) Do nothing. Focus on core markets and keep your fingers crossed. If disruptive innovation roils the industry, incumbents may become extinct. However, this may be a viable strategy if the disruption is limited to only a portion of market. Here, the focus is on preserving market share.

2) Acquire a disruptor. This is a common strategy for companies that wish to disrupt their industry. The challenge lies in managing the acquisition after the merger to ensure success.

3) Disrupt your own company and industry: This is a rare response. Fear is likely what holds companies back, but “disrupt “doesn’t mean “destroy.” You can still preserve your business while starting something new.

Although the term “disruption” carries a certain cachet, it may not be the innovation strategy of choice for every company. What’s clear, however, is that regardless of industry, it’s critical to understand what types of innovation support your strategic goals, while keeping an eye on the horizon.

 

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