There has been a lot of talk in entrepreneurship and innovation communities over the last fortnight about disruptive innovation. This was driven in large part by Jill Lepore’s New York Time article The Disruption Machine. Lepore explores, with the benefit of hindsight, the theories around business and innovation Clayton M. Christensen outlined in his 1997 book The Innovator’s Dilemma.
Lepore is critical of the theory of disruptive innovation as described by Christensen. She points out that many examples of disruptive innovation described in the book have not held up in the long run – some of those who disrupted were in time surpassed by those who were disrupted. Lepore also believes that many businesses – both large and small – have misconstrued Christensen’s theories to establish a new business framework and model for success, a model that potentially never was.
We sat down with Mark Paddenburg, the CEO at the Innovation Centre Sunshine Coast to get his insights on disruptive innovation, his take on Jill Lepore’s article, and hear his insights on what a startup can take away from all of the discussion.
Can you explain disruptive innovation in lay terms?
Disruptive innovation is innovation that helps create a new market and value network, and eventually disrupts the status quo. We now regularly see nimble, entrepreneurial startup entities bring a new product, service or business model to the marketplace that creates significant disruption – generally impacting positively for consumers and negatively for the incumbent’s marketshare. This is something that has been ramping up over the last two decades – enabled by the ease of establishing a startup, much lower technology costs and effective global platforms like Amazon.
Uber, for example, has given a new perspective on how taxi services could be provided. Airbnb has done the same thing – it’s an accommodation booking service, but not as we’ve traditionally known it.
For the successful startup businesses, they will only disrupt if they can scale the innovation and quickly grow the team, market share and profits.
Is all innovation disruptive?
No – both words do get over used. What many people call an innovation is usually just a “very good product” and for an innovation to disrupt it must do just that. There are also a lot of innovations and inventions that are not really that useful to society – like the 250th version of the mouse trap.
There’s also incremental innovation – improvements and developments that advance a product, service or business model, but that keep within our expected scope. There were a lot of incremental innovations that improved the CD player over time, for example. However, this industry was disrupted by the arrival of digital music tracks and players.
Many businesses have implemented strategies to address the need for the development of both incremental and disruptive innovation. Both are important – incremental innovation increases revenue opportunities by increasing competitiveness and margins; while disruptive innovation gives you the potential to be a market leader, stay ahead of the curve and stave off emerging competitors.
Large companies with well-funded research labs and streams of new products are usually focused on sustaining innovations-the kind that satisfy existing customers. Truly disruptive innovations – the dramatically cheaper, simpler innovations that attract new users and create entirely new markets – are associated more with startups than with established businesses.
Many large companies with strong balance sheets will simply outsource or acquire most of the innovations they need. Some of the incumbents will, through mergers and acquisitions, try to buy the small, potentially disruptive startups and bolt their solutions on to their existing business. This model is most pronounced in Tel Aviv where Google, Facebook, etc. have teams on the ground for the M&A pipeline.
There are various models, but the incumbents either ignore the startups at their peril, or they try to buy them out. Some will monitor the startup’s success when they start to make an impact on their revenue, then make the assessment on whether to compete aggressively or simply buy them out.
There are lot of challenges around being first to market. It seems to me that a disruptive innovation will always be first to market, and therefore, always have those inherent challenges. How do these new businesses maintain success in the long term, especially off the back of a disruptive innovation that’s changed the landscape?
It’s interesting to consider example Lepore describes with Seagate and Miniscribe. Seagate continued focusing on the 5.25-inch disc because it suited their existing customers like IBM, without regard for companies like Miniscribe who were developing the more compact 3.25-inch discs.
When Seagate eventually did turn to 3.25-inch discs, it became a hugely profitable arm of their business despite their late entry.
Their existing revenue streams and business structures enabled them to quickly compete in that area and they overtook the smaller, newly established businesses.
Miniscribe meanwhile struggled through the valley of death experience – they didn’t have enough revenue to bring their version to market as easily as Seagate, and struggled to get enough market share. Hence, they burnt through their cash and couldn’t survive. They probably would have benefited from the lean startup methodology.
So having disruptive innovation doesn’t guarantee success?
What were your overall impressions of Jill Lepore’s article? What were your thoughts on her criticisms of disruptive innovation as it is framed as a theory?
I think Lepore’s article shows clearly that not everything about innovation is black and white. Lepore argues that the theory of disruptive innovation is about why businesses fail – I think this is true for complacent incumbents like Kodak and the new paradigm is that disruptive innovation does allow some startups to be incredibly successful (ie. Pintrest, Wotif, Uber, AirBNB, etc).
Startup businesses can also fail and they do have a high failure rate. But I think, particularly for business incubators like ours, we have to nurture and assist startups through an effective ecosystem.
I like Lepore’s closing paragraph which relates to the unreadable novel and indicates that the future of disruptive innovation is as unreadable as the future itself.
We don’t know what the future holds but we do know that disruptive innovation is becoming more prevalent. New technologies are enabling startups with disruptive ambitions to access global markets much more quickly, meaning that penetration of new ideas – and in turn, rejection of old models – can happen very rapidly.
But equally, many startups can have some success but then fail spectacularly and as Lepore alludes to, quite often the bigger incumbent business might appear uncompetitive in the short term and that they’ve lost their grip on the market – but you can never discount them or write them off. Companies like Bucyrus seemed on the brink of failure then reinvented themselves. If you look at the big mining sites around the world, you’ll still see plenty of their equipment.
In summary, entrepreneurs with disruptive innovations will ensure there will be some exciting times ahead and as Daniel Petre says, it’s never been easier to start up a business and have a global impact.
It seems that we’re often talking about disruptive innovation being driven by startups. Is that correct?
Yes, startups are often the drivers of disruptive innovation. These startups don’t have existing customers, products or models to adhere to. They have flexibility which allows them to pursue high-risk strategies. Comparatively, established firms usually choose more conventional approaches – often because they need to meet existing customer demands or the expectations of the board and shareholders.
So while small firms fail more frequently, they are also more likely to introduce more innovative products. Like the Seagate example we’ve already discussed, new firms are better at creating new disk drives or software, while established firms have a comparative advantage in extending existing product lines.
You also have to consider the appetite for innovation. Many large firms are notorious for offering employees little more than a gold watch for major discoveries. Some major innovations have been shelved indefinitely by the big corporates. There is a big contrast between the very limited incentives at large corporate firms and their research labs and the incentives offered by startups – stock-option-heavy compensation packages, for example.
In part two of this interview, we talk more with Mark about the value of disruptive innovation and how a startup can prepare to both disrupt and be disrupted. Part two will be released shortly.