Disruptive Innovation

Disruptive Innovation
• A disruptive technology or disruptive innovation is an
innovation that helps create a new market and value
network, and eventually goes on to disrupt an existing
market and value network.
• The Innovator’s Dilemma (Christensen 1997) identified
two distinct categories-sustaining and disruptive-based
on the circumstances of innovation.
• In sustaining situations-when the race entails making
better products that can be sold for more money to
attractive customers-incumbents almost always prevail.
• In disruptive circumstances-when the challenge is to
commercialize a simpler, more convenient product that
sells for less money and appeals to a new or
unattractive customer set-the entrants are likely to
beat the incumbents.
 Theory of Disruptive Innovation
• The Theory of Disruptive Innovation explains the
process by which technology enables new entrants
to provide goods and services that are less
expensive and more accessible, and eventually
replace—or disrupt—well-established competitors.
• Disruptive Innovation denotes the process by which
technology enables entrants to launch less
expensive and more accessible products and
services that gradually replace those of well-
established competitors.
 Disruptive Innovations
• The outcomes of Disruptive Innovations are
typically products that initially perform poorly with
respect to existing options and are positioned
toward unserved or less attractive segments of the
market that are ignored by other businesses.
• These consumers are happy to purchase the lower
quality product because they have no adequate
alternatives.
• Value network is the collection of upstream
suppliers, downstream channels to market, and
ancillary providers that support a common business
model within an industry.
The Disruptive Attack of the Steel
Minimills
Two Types of Disruptive Innovations
 Sustaining Innovations
• Disruption theory differentiates disruptive
innovations from what are called “sustaining
innovations.”
• The latter make good products better in the eyes of
an incumbent’s existing customers: the fifth blade
in a razor, the clearer TV picture, better mobile
phone reception.
• These improvements can be incremental advances
or major breakthroughs, but they all enable firms
to sell more products to their most profitable
customers.
 Disruptive Innovation
• Disruptive innovations, on the other hand, are
initially considered inferior by most of an
incumbent’s customers.
• Typically, customers are not willing to switch to the
new offering merely because it is less expensive.
Instead, they wait until its quality rises enough to
satisfy them.
• Once that’s happened, they adopt the new product
and happily accept its lower price. (This is how
disruption drives prices down in a market.)
Disruptive Innovation
Distinguishing Characteristics of
Sustaining vs. Low-End and New-
Market Disruptions
Distinguishing Characteristics of
Sustaining vs. Low-End and New-
Market Disruptions (Cont’d)
The needs-satisfaction curve of a
technology
 Incumbents
Banks have two clear choices for market
maintenance:
1) Employ a sustaining strategy by adopting the
innovations that are launched by entrants, so
long as they build on existing performance, and
2) In the event that their business models cannot
profitably support new innovations, build an
independent business unit with fundamentally
different DNA from which to launch new products
or services.
 Payments
There are three categories of entrants in the
payments space:
• Those who offer solutions specifically for
consumers
• Those who offer solutions specifically for
merchants and
• Those who target both consumers and merchants.
Because entrants’ solutions rely on the incumbent-
controlled infrastructure, any success that entrants
have effectively keeps incumbents in business as
well. As such, disruption in payments is difficult.
 Wealth management
• Over the past decade, robo-advisors have emerged
as an alternative to human financial advisors. Robo-
advisors are software-enabled financial-advisory
services that help to manage wealth with minimal
human intervention.
• Previously, wealth management software was sold
to financial advisors and not to end users. With the
help of robo-advisors, however, users may invest
without ever talking to a human financial advisor.
 Lending
• Should peer-to-peer (P2P) lending gain significant
adoption amongst borrowers and retail investors, it
could serve as an alternative to bank-led lending in
many situations, thereby reducing banks’ power to
set interest rates.
• Many entrants are adopting a disruptive strategy.
Using capital from different sources, many are
attempting to create an alternative value network.
• Additionally, they are implementing new credit
models and using new kinds of data on potential
borrowers—including reviews—to extend financing
to segments of the market that are unattractive to
existing institutions, such as small businesses and
individuals struggling with a shortage of credit.
 Ikea and Job to Be Done
• Most people go to Ikea when they have the job of
furnishing their homes quickly. With that in mind,
Ikea has designed itself in such a way that it lends
itself entirely to addressing the social, emotional
and functional issues associated with furnishing a
house.
• At Ikea, a customer may choose from wide choice
of furniture in one single store, may visualize how
the furniture will appear, and can relax at the
restaurant with a companion after a long day of
shopping.
Steps of individual-to-business
payment transactions
Types of entrants
Entrant roles in the individual-to-
business payment transactions
Example of a conventional credit
scoring model
Analysis of entrant business model
 Robo-advisors
• Robo-advisors are algorithms that invest and
manage money on behalf of an investor, based on
the goals and time horizon of the investor.
• The way these systems work is simple. The
algorithm asks the investor a set of questions to
understand some basic parameters related to the
objectives of the investor, such as expected returns
and risk-taking capacity.
• Using the customer’s unique answers, the
algorithm then works out an optimal investment
strategy and recommends the asset classes that are
most likely to help the investor achieve his or her
goals.
• Investments are made in exchange traded funds
(ETFs) and an algorithm monitors and churns the
allocation periodically to achieve the target set by
the investor.
• Each of these ETFs follows a certain index and holds
a variety of different asset classes such as stocks
and bonds.
• The appropriate ETFs are picked from a set of
predefined ETFs that help achieve the targets for
the investor.