Disruptive Innovation is a concept coined by Clayton Christensen, a professor of Business Administration at the Harvard School of Business. It refers to the sort of disruption that can occur in the marketplace where industry leaders find that their core products and services are being threatened by new innovation. It is useful for companies to keep an eye open for potential disruptive innovators because they can threaten incumbents' business model and viability. By recognizing disruptive innovators, companies will have more time to determine a method of response.
In a normal environment, many companies will focus their r&d efforts on improving their core products and services. In this way, they will be able to service their most sophisticated and profitable customers, while raising barriers of entry for competitors. But over time, companies may find that their core products and services are too sophisticated or expensive for mainstream users. Although this may still allow the company to be profitable, it also opens doors for new entrants at the lower end of the market.
Disruptive innovation is more than just seeing a company enter an industry at the low end. Most industries will see players at both the high and low ends: consider Singapore Air versus Ryanair in the airline industry, or Neiman Marcus versus Ross in apparel retailing. No, disruptive innovation refers to a new technology or business model innovation that delivers a substituting product or service offered by incumbents. In the beginning, the disrupting technology is not mature, so it will typically be offered to entry-level users and at low prices in order to establish a foothold in the market. But over time, if the economics of the new innovation are solid, innovators may begin to take more and more market share from incumbents.
Ken Olson, founder of Digital Equipment Corporation, said famously in 1977 that "there is no reason anyone would want a computer in their home." At the time, mainframe computers costing over a million dollars were the domain of corporate and governmental agencies. However, when the personal computer revolution began, so did the demise of mainframe computing. Over time, personal computers increased in power such that mainframe computers are now obsolete.
Another example is cellular phone technology versus traditional land lines. Although land-line technology had been improved for many decades, with call quality still the best overall, it could not compete with the portability and convenience of cellular phones. Although landlines still represent a significant portion of revenue for telecom operators, they have been displaced in usage and business consideration by cellular technology.
We can also find an example of disruptive innovation happening in today's market. Western Union has for decades served as a money wire service, allowing relatively small amounts of money to be sent overseas, for purposes such as remittances or purchases. Fees for both usage and currency exchange can take 10-20% out of the value of the funds sent. Bitcoin is a new technology that allows money to be sent anywhere in the world for a nominal fee of around $.05. Although there are some risks in using the service, mainly in the form of currency rate fluctuation, but as the service matures, it is possible to see how it could be a disruptive innovation for Western Union's wire transfer service.
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