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Disruptive Innovation

Updated on March 19, 2024
Article byPallabi Banerjee
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Disruptive Innovation?

Disruptive innovation is how small companies enter the market with the same type of goods supplied by big businesses but at reduced prices. This innovation is helpful for the market segment, which big companies previously ignored due to a lack of affordability or skill.

Disruptive Innovation

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This process disrupts the existing market by eventually capturing the maximum number of customers from established companies. The new entity continues to increase, attracting mainstream consumers and displacing the services of business leaders, which keep focusing on the more profitable market segments. Thus, the innovation reaches a more extensive value network through this business model.

Key Takeaways

  • Disruptive innovation theory refers to how small entities enter the established market of big companies and gain market share by supplying the products at reduced prices.
  • The market leaders focus on high-level consumer segments, ignoring those who need help to afford or need to be more skilled in using their products or services.
  • The new entrants slowly capture this new consumer segment and move up, eventually attracting many consumers.
  • This business model affordably uses innovation, increasing the customer base and making a profit.

Disruptive Innovation In Business Explained

Disruptive innovation technology refers to how small companies grab the more significant companies’ market share by innovating products and services that were previously unaffordable for some consumers. They introduce an improved technology of the same goods at lower prices, capturing segments that established businesses ignore due to lack of affordability.

This tool results in the slow but steady downfall of powerful entities. Effective use of this strategy helps new entrants to capture the maximum market easily and, in the process, drive out competitors without fighting them.

Companies with disruptive innovation try to exploit the conservative attitude of established entities and commercialize a simple idea with a reduced price so that unexplored consumers also get the chance to buy them. But it is necessary to understand whether a business idea is disruptive. Then managers should create a proper strategy since all disruptive strategies may not succeed. A good innovation should be able to optimize a product least expectedly.

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Characteristics

Let us look at some characteristics of disruptive innovation.

  1. Useful technology- A company looking to disrupt the market will always exploit helpful technology that appeals to mass consumers.
  2. Low prices – The product prices are low compared to big companies. These criteria help companies with disruptive innovation to penetrate the existing market slowly.
  3. High risk – There is an increased risk for new small businesses looking to disrupt because all disruptive ideas may fail.
  4. Change in product value – There is a change in the product’s value because now the product has become more affordable to mass consumers.
  5. New or existing product/business model– The process might lead to a new product and services or modification of a technology already in existence.
  6. Slow start – The new company has to penetrate the market, which cannot happen overnight. It is a long process that will take time due to the existence of a big competitor.
  7. Exponential growth after a certain level – After a specific period, the new entrant can expect exponential growth, resulting from the ability to capture the maximum market segment.

Types

The various types of innovation that disrupt the market are as follows:

  1. Free offer – Companies provide accessible facilities to use products and services that attract customers.
  2. Subscriptions – Companies offer customers to subscribe to selected services through monthly or yearly payments, which helps gain and sustain a customer base.
  3. Sharing access/ownership – Intangible or physical assets can be shared or accessed through limited rights.
  4. Better user experience – This applies only to high-value products with excellent user experience. Companies disrupt to attract the premium segment.
  5. Top-down approach – In the top-down approach, companies first enter the market with a high price and product features but gradually lower prices to access all levels of customers.
  6. Bottom-up approach – In this approach, the company enters with innovative and improved features at a low cost. Gradually, as they gain a market base, they increase prices.

Examples

The concept can be explained with the help of some examples.

Example #1

Pure Water Ltd manufactures water purifiers for homes, offices, etc., and has successfully expanded business at a global level. The purifiers come equipped with the latest technologies like RO (reverse osmosis), UV (ultraviolet) purification, UF (ultrafiltration) technology, etc. It has captured a significant market share due to the high consumer demand for pure water. However, most purchasers are either companies or educational institutions. It has been unable to penetrate the household sector due to its high price, making them unaffordable to most families.

Here enters Aqua-Pure Ltd, with the same product and the same technology but at a much lower price. It immediately started capturing the household sector, a significant chunk of any city. As the name of Aqua Pure Ltd grew, the customer base expanded to include offices and educational institutions. Thus, Aqua-Pure Ltd used the disruptive innovation framework and slowly disrupted the ready market base of Pure Water Ltd and emerged as the new leader.

Example #2

Amazon has won the hearts of people around the globe through its various disruptive innovation framework. It is believed that people are so fond of its services that sometimes they need to pay more attention to the fact that the benefits are paid, not free. For instance, Amazon delivery will be free if the subscriber has paid for prime services. But the point of free delivery appeals to consumers more than the payment for the premium subscription. Amazon has a high score for being disruptive and creative.

Example #3

Working from home in the corporate world is a vast disruptive innovation theory, which has proved to be highly acceptable and advantageous to the global workforce. The pandemic has changed the way people look at their job environment. This change has touched every part of a business, and it is here to stay. But it has disrupted the work procedure to a considerable extent.

Advantages And Disadvantages

The disruptive innovation process has some advantages and disadvantages, as follows:

Advantages

  1. It transforms the product or service into something useful but more affordable.
  2. It helps in reaching out to the previously unexplored market segment.
  3. The market changes with the effect of innovation and technological development.
  4. Consumers access good quality goods at lower prices.
  5. It changes or improves people’s lives.

Disadvantages

  1. It causes big entities to lose business to new entrants, resulting in a loss of profit and customer base.
  2. Not all disruptive ideas will necessarily succeed.
  3. Continuous innovation should be there to sustain in the market.
  4. Due to low prices, the quality of goods new entrants supply might eventually go down.
  5. Initial operation for a new entrant will be a low profit margin due to the existence of a big competitor.

Disruptive Innovation vs Sustaining Innovation vs Incremental Innovation

Disruptive innovation means meeting the customers’ needs through a change in products and offering them at a lower cost. Sustaining innovation means any idea that strives to maintain quality and good performance, and incremental innovation seeks to increase the competitiveness of existing goods or services. The primary differences between them are as follows:

Disruptive InnovationSustaining InnovationIncremental Innovation
It offers better creation of existing products.It helps to maintain the quality and performance of products through innovation.It helps to maintain the competitiveness of products through innovation.  
Price is lowered to enter the market. There is a technological improvement to sustain quality. Cost is reduced, and new features are added to remain competitive.
Failure can be avoided with proper planning.There may be an initial failure during the testing phase due to risk and uncertainty.Failure can be avoided with proper planning.
It is introducing a new business model or innovation in the old one to disrupt the market.It involves a sudden and drastic change in product features to reduce defects or shortcomings.It is a gradual and continuous process.

Disruptive Innovation vs Radical Innovation

Disruptive innovation refers to meeting the customers’ needs through a change in product or service at a lower cost. In contrast, radical innovation refers to introducing a new product to change people’s lives. The fundamental differences between them are as follows:

Disruptive InnovationRadical Innovation
It improves on an existing product or service.It brings complete innovations into the market. 
It improves the current market and increases the customer base. It creates a new market to improve people’s lives. 
It studies the gaps in the existing market.It explores the gaps in the current products. 
There may not be a failure if proper planning is done. Initial failure is inevitable because the idea is entirely new. 
It involves using business strategies to upgrade existing applications at a lower cost.It consists in trying out some recent applications of current technologies.

Frequently Asked Questions (FAQs)

1. How useful is the theory of disruptive innovation?

This theory is beneficial because it helps cater to consumers who usually need help accessing or affording products and services given by big companies despite their usefulness and ability to meet their needs. Moreover, this kind of innovation also upgrades the features of existing products.

2. How does disruptive innovation impact an organization?

Suppose the organization is small and plans to implement disruptive ideas. In that case, it can have a positive impact, provided the strategy is well-planned and can attract customers through the latest technology. In addition, it should make products more meaningful and affordable. For big companies concentrating only on premium market segments suitable for their product, such innovation will negatively affect them since they might lose their customer base in the long run.

3. What is disruptive innovation in education?

Using disruptive innovation technology in education can identify the need for changes in the education system and learning process. It further leads to professional development. It allows teachers and students to develop innovative ideas for better educational practices.

This article has been a guide to what is Disruptive Innovation & its meaning. We explain its types, & advantages, and comparison with sustaining, incremental, & radical innovation. You may also find some useful articles here –

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