How Disruptive Innovation & Technology challenging Incumbent’s Business Model?

“Disruption” is a word we are hearing quite often in any businesses. The way technology is changing, and innovation is taking place, the whole business model landscape is changing rapidly. This rapid change enabling the business to scale their business to whole new level.

This rapid changing landscape with the help of technology innovation is often misunderstood for disruption in innovation, technology and business model.

In this article we will look at, what really is a disruption in a business landscape. The disruption we are going to look at, are in terms of innovation, technology & how it impacts incumbent business.

Incremental Innovation:

Any existing processes or actions takes place in a business value chain undergoes steady phase of optimization and innovation exercise. For example, innovation in inventory handling techniques, innovation in adding new high-end features to a product to improve customer experience. These are called incremental innovations which is for an existing product or service and for an existing market.

The industry incumbents who are major players in their market, spends high cost to apply this incremental innovation to provide high end products or services to its customers. This enables them to sustain their competitive advantage.

Disruptive Innovation:

A new entrant comes up with a low-end product or service with less or just acceptable quality. This product or service uses an innovative technology which is not available in the market. This product or service also would be inferior to Incumbent’s mainstream product or services.

This creates a new customer base who are interested in this innovation. This also creates a new market for this new entrant. The customers of mainstream players would ignore this innovation by sticking with incumbents. This new entrant would still make profit from the low sales because of the low overhead costs.

The mainstream players would ignore to respond to this low-tech offering by the new entrant. This is because, their cost overheads are already high with their high-tech products or service, and they cannot make profit in this low-tech product or service.

Slowly this innovation process would catch-up in quality and receives mainstream market customer acceptance and eats up incumbent market. Once the new entrant start becoming highly competitive, it will become disruptor of the incumbent market.

We could see from above discussion, that the disruptors business model is different form incumbent business model.

Disruptors start very small, in new market areas with low-end offering which incumbents avoids serving. This disruptive innovation when succeeds will force the incumbents at competitive disadvantage.

Steps for Incumbents to handle this Disruption challenge,

  1. As soon as you see a new technology innovation, determine whether that is an incremental or a disruptive innovation.
  2. Not all disruptions would succeed. Carefully validate the strategic importance of the potential innovation. If this innovation is here to stay and might become a high substitute for your business model in the future, then this is of a strategic importance
  3. Experiment the new product in that new market where the disruptive innovation happening
  4. Most importantly operate this potential disruptive business as a separate business unit/entity with independent performance measures. This should not be overlapped with mainstream business and its performance measures. This is because the outcome of the potential disruptive innovation will not be same as mainstream’s bottom line.

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