A look into what it means to be disruptive, and why rational investors don’t like it.
By: Michelle Foun
BOSTON, MA. “Be the next disruptor”, those are the first words you’ll see when you visit BizTechClub.com, but what does it really mean? We all have a bit of an idea; we definitely hear it enough from some of the biggest tech influencers and it is one of this generation’s most popular buzzwords. So what actually classifies as a disruptive innovation, and what makes it so different from other innovations?
Innovation comes in many types, there are 5 pillars that most innovations will classify into.
First off, a sustainable innovation is one that impacts the performance of products that already exist in the market. A disruptive innovation however, has a much narrower and specific definition, coined by Harvard Professor, Clayton Christensen. A disruptive innovation is one that targets products that have been made so complicated and expensive by large companies that it is nearly inaccessible to new customers. This happens when companies are innovating their products at a faster rate than most consumer’s needs, leading to products that really only interest pre-existing customers, aka, sustaining innovation.
As companies do this, new inventors are creating ways to bring the same product or service to a new market in a cheaper, simpler and more accessible way. However, disruptive does not mean that existing technologies get destroyed or replaced. Instead, it targets this niche market of emerging consumers who previously didn’t use the complicated technology anyway. This brings in new companies because the big name companies who invest in sustaining innovation are less willing to give up their high margins and loyal consumer base for these typically low margin, simpler products.
Let’s look at an example, I’ll take something we all know pretty well, Netflix. We also know that Netflix is one of the main reasons why Blockbuster Video went out of business. (Side note, you can follow their hilarious parody twitter account @loneblockbuster) So how can we apply disruptive innovation to this example? Many of you may recall Netflix’s initial stages, you had to wait for movies to come in the mail, and you really didn’t have the best selection. Therefore this service didn’t interest Blockbuster customers who went to the video rental retailer for the instant gratification and wide selection available. However as Netflix improved their business model and introduced streaming services, it disrupted the movie rental industry eventually forcing Blockbuster into bankruptcy.
In short, the original Netflix didn’t take away Blockbuster customers, but rather appealed to a niche market of viewers who preferred the home delivery service. Blockbuster didn’t feel the need to compete with Netflix because they had different target markets, not to mention they were the biggest name in the industry, there’s no way they’d fall, right? But Netflix had a great business model, without needing brick and mortar locations, they made it easier and cheaper for customers everywhere to get access to movies. They charged a few dollars a month to get subscribed and pretty soon, everyone was hooked. Blockbuster didn’t even have a chance.
So does disruptive innovation matter? In a word, yes. So why are investors so hesitant to invest in these new innovations? There are a few reasons, a big one being risk. Rational investors are risk averse and nothing holds more risk than a completely new innovation being introduced to a completely new market with no promise of success and what’s more, low gross margins. But more and more, big VC’s and sharks are taking a bite out of these disruptive innovations hoping they’ll succeed one day.
So there you have it, the real deal with disruptive innovation. If you want to learn more, check out the book: The Innovator’s Dilemma by Clayton Christensen, or watch this quick YouTube video: https://youtu.be/qDrMAzCHFUU
I’d love to hear your questions or thoughts! Comment below!