How to Capture a Market by Appealing to Neglected Customers
Imagine that you've got a great business idea to pitch to your boss, but you don't have the resources required to tackle the market leader head-on. Well, the good news is that "disruption" offers another potential way to win.
Learning about disruptive technologies can help you to understand how a small organization with a great idea can overtake a much bigger player.
"Disruptive" has become such a buzzword in business that it's important to know where it came from, and what it means. The term has taken on a life of its own, and it is used in ways that its creator never intended.
In this article, we explore the origins of the theory of disruptive technologies, and explain how it has evolved. And we examine a five-step process for identifying and working with disruptive technologies.
The Origins of Disruptive Technologies
The theory of disruptive technologies was developed in 1995 by Clayton M. Christensen, Professor of Business Administration at Harvard Business School. He described a technology that is able to gain a foothold in the low end of a market by appealing to overlooked consumers.
That low-end foothold exists because an existing provider of goods and services is focused on serving its most profitable, mainstream customers. It does this by refining its products, for example producing TVs with better picture quality. This opens the door to a disrupter that is focused, at least in the beginning, on providing the low-end market with a "good enough" product at a cheaper price.
The newcomer can then challenge, and potentially topple, the market leader by taking its products upmarket and winning over its rival's mainstream customers.
The Updated Theory
Christensen expanded his theory in 2015 to include "new market" disrupters. These are companies whose innovations create entirely new markets, rather than just appealing to the low end of an existing market. This means that they cater for customers who aren't buying the mainstream, market-leading product at all.
The updated theory focuses on "disruptive innovation," which recognizes that it is the business model that the new technology enables that disrupts the market.
For example, Christensen believes that the iPhone®, considered by many people to be a disruptive "game changer" in the cell phone market, was an incremental improvement on existing cell phones. He thinks that it sustained the market, rather than disrupted it.
However, when Apple introduced the App Store, it took the iPhone down a disruptive path. By promoting usability in its apps and creating a new forum for app developers, the smartphone competed with, and then replaced, the netbook/laptop as people's preferred method of getting online.
Popular Usage of the Term "Disruptive"
The term "disruptive" is now widely used to describe new products that transform existing markets as they move into a dominant position.
Using this interpretation, Uber® is a disruptive company because it has thrown the taxi industry into disarray. But, according to the original theory, Uber isn't disruptive, because disrupters must start by appealing to low-end or unserved consumers and then move into the mainstream market.
Christensen says that Uber has gone in the opposite direction, as it built its position in the mainstream market before appealing to historically overlooked segments, such as providing a limousine service to people who could not afford traditional "black car" services.
About the Tool
Christensen and his colleague, Professor Joseph Bower, developed a five-step process for assessing and cultivating potentially disruptive innovations. It was first published in 1995, in the Harvard Business Review. We have updated the advice contained within those steps to reflect Christensen's latest thinking on disruptive innovation.
The five steps are:
- Determine whether the innovation is sustaining (in other words, a development of something that already exists) or disruptive.
- Assess your innovation's potential.
- Identify the initial market for the disruptive innovation.
- Create an independent organization to follow the disruptive path.
- Keep the disruptive organization independent.
Applying the Tool
Work through these five steps to identify and work with a potentially disruptive innovation:
1. Determine Whether the Innovation Is Sustaining Or Disruptive
Innovation usually falls into one of two categories: sustaining or disruptive. As we mentioned earlier, sustaining is the term that Christensen and Bower use to describe the approach of incrementally improving existing products.
By contrast, disruptive innovations cater for customers who want a low-end product, rather than one with advanced or more expensive features. They may also cater to a market that isn't buying the mainstream, market-leading product at all.
To determine whether an innovation will likely be sustaining or disruptive, consider these questions:
- Is it based on offering an enhanced or modified version of a product that's already on the market? If so, it will likely be sustaining.
- Is it based on a product that has an obvious appeal to a large market? If so, it's probably not disruptive.
- Does it appeal to a market that is being overlooked by existing providers? If so, it could be disruptive.
- What do the technical experts in your organization think about your product? If they're excited by its future potential, it may be worth pursuing as a disruptive innovation.
- What do the managers in your organization think about it? If it makes them feel uncomfortable, that could be a good sign. Remember, disruptive technology is internally disruptive, too!
You can also discover how technologies and trends are perceived within your industry through social networking sites such as LinkedIn® and Twitter®. Connect with competitors, industry leaders, and consultants to keep up to date with what they're saying about technological developments.
2. Assess Your Innovation's Potential
This step is to find out whether your disruptive innovation is worth pursuing as something of strategic importance to your organization.
Some organizations talk to focus groups or customers about new technologies, and whether they would have a use for products based on these. However, this can be a mistake. Established customers are often not expert or interested enough to make objective judgments on technology. And disruption is about creating innovations that existing customers don't know they want yet.
Instead, talk to technical experts in your organization. How do they see this new innovation being used three to five years from now? What advantages does it present over the existing product or business model? What are the possible pitfalls? How will the product or service likely evolve?
Although it doesn't fit Christensen's definition, "disruptive" is also used to describe companies that don't make any products, but act as facilitators between the customer and a product or service that he or she needs.
For example, Facebook® generates profit from content that it doesn't create. Airbnb® makes money from room rental, but doesn't own any hotels or property. Uber has taken business away from taxi companies, despite the fact that it doesn't own any vehicles.
Their success comes partly from minimizing waste, whether it's time or any other resource. For example, Uber drivers generally earn less per journey than traditional taxi drivers, but they can potentially earn more because they spend less time waiting for fares. Airbnb offers rooms to travelers that were previously going spare in people's homes.
If your organization is considering such a facilitating service, think about ways that you can help users to minimize waste in an existing industry.
3. Identify the Initial Market for the Disruptive Innovation
Once you decide that a new technology could be disruptive, you need to identify its potential market.
Traditional market research may not help much here. Again, consumers may not have the expertise or vision to see the benefits of your proposed new products. Instead, use a tool like Market Segmentation to identify customers who are being overlooked by existing providers, even if that includes your own organization. Remember, your new technology may create a whole new market.
Therefore, you and your team need to brainstorm how this technology could be used, and who would be most likely to use it. You also need to identify groups of people who will value key aspects of the technology's performance. Here, you'll be looking for early adopters with specialist needs that are well served by the new technology.
Consider appealing to customers who currently do not buy the leading mainstream product at all.
4. Create an Independent Organization to Follow the Disruptive Path
If your organization decides to develop or acquire a disruptive innovation, it should create a new "spin-off" organization. This organization can be more nimble, like a startup, because it doesn't need to answer to the demands of mainstream customers and shareholders. It can focus on smaller markets, accepting both experimentation and failure.
Your spin-off organization may not be profitable for some time, so make sure that it has sufficient financial resources available to keep going during the development and testing phases.
Key managers in your existing organization should focus on the core business rather than on engaging in high-risk, low-revenue projects that may take a long time to deliver results. So send them a clear "business as usual" message by keeping this innovation separate.
5. Keep the Disruptive Organization Independent
If your independent organization succeeds in bringing its disruptive innovation to market and, if it continues to grow, it may eventually start to compete with the main organization.
It can be tempting to bring the independent organization back into the established one to share resources (and profits). This can be a mistake, however, because there are often clashes over resources when organizations merge. These could stifle the independent organization's growth, and prevent it from being flexible enough to respond to changing markets.
"Disruptive technologies" and, later, "disruptive innovation" are terms coined by renowned management thinker Professor Clayton Christensen. They describe a business model that allows newcomers to overtake incumbents by appealing to markets that they don't serve.
Disruptive innovations often start out very small, and have limited mass-market appeal. They are usually in the hands of small organizations that can respond rapidly to customer needs and, as a result, they're often overlooked by market leaders. However, as these disrupters move upmarket, they can become serious threats to the established order.
To assess potentially disruptive innovations and, where appropriate, exploit them, follow these five steps:
- Determine whether your business model is sustaining or disruptive.
- Assess your innovation's potential.
- Identify the initial market for the innovation.
- Create an independent organization to follow the disruptive path.
- Keep the spin-off organization independent.