Understanding Disruptive Innovation

Disruptive innovation is a pretty recent term, used the first time by Clayton Christensen while describing a situation in which a firm starts with a low-complexity product at the bottom of the market and then slowly makes its way up, taking out better positioned players.

Disruptive innovation is a lengthy process, but one which brings great changes on a certain market. Everything starts with a rapidly evolving industry. Companies compete among themselves to innovate and provide their customers with increasingly complex and advanced products and services. Of course, the more cutting-edge a technology is, the higher the prices, making the products prohibitively expensive for a certain category of customers, while other customers simply realize they are not interested in the features of these state of the art products. Companies too decide to shift away their attention from these ‘budget customers’ and towards the top of the market, where profit margins are higher.

This is when new competitors enter the market. They realize there is unmet demand at the bottom of the market, and they develop more affordable products which are to be delivered to customers willing to buy an item with fewer features, and perhaps slightly lower quality components.

The result is the technological equivalent of ‘social change’. Exclusive products now become accessible to the masses and, although the newcomers maintain lower profit margins, because sales figures are high, they turn high profit, and slowly expand their line of products to offer budget solutions to customers with higher expectations.

In conclusion, disruptive innovation businesses start small. Their priority is to keep prices low, which is done at the expense of the company’s profit, but also at the expense of product quality and performance. As time goes by, they slowly consolidate their position and start making a name for themselves. This gives them the confidence to expand their operations, in the detriment of their more performance focused competitors.