How Disruptive Innovation is changing the face of new business strategies?
In the current uncertain times, many companies are facing the test of redefining their strategy in a very very short time frame, not even weeks but days. This is the only solution to not only the economic pressure but also the way the consumer has started to think. Getting a better understanding of disruption will help you define your new strategy of becoming a disrupter or avoiding being disrupted, or to better scan different opportunities and path your way to what’s next. How to put together technology, customer value and experience, new business and supply chain models and an out of the box approach as a whole.
We have set up a complete DISRUPTION series that brings a step by step perspective for you to deal with challenging times and define your new strategy. This includes tools and examples to distinguish between developments that will last and drive changes, versus developments that are fade away with the changing world.
The term “Disruptive innovation “coined by Clayton Christensen describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves upmarket, eventually displacing established competitors.
Disruptive innovations are not necessarily breakthrough innovations that dramatically alter how business is done. However, they consist of solutions that are simple to acquire and affordable at the least. These products and services often appear modest at their outset but have the future potential to transform an industry. Let’s explore in detail a couple of examples to better understand the meaning of disruptive innovation.
Why “Dollar Shave Club” is a Disruptive Innovation?
Dollar Shave Club was launched in 2011 and successfully disrupted men’s traditional shaving experience by offering a simple solution to their customer basic needs. If you don’t know what the Dollar Shave is all about, just watch this groundbreaking launch video
This video has 27 million astonishing views. Three years down the road, Dollar Shave claimed 48% percent of the online razor market, shaking up conventional market leaders Gillette and Schick. The company has grown to include a team of over 600 employees globally and has more than 4 million subscribers. In July 2016, Unilever acquired Dollar Shave in an all-cash $1 billion deal.
Let’s look at the reasons why the Dollar Shave Club is "disruptive innovation"?
Disruption is defined as a process where a service initially takes root in simple applications at the low-end market. This company identified what we call "a job to be done" in a specific segment. This translates into a reason why a customer will adopt their offer as they provided the service at the customer’s doorstep for one dollar every month (groundbreaking right?).
With dollar a month, they shattered most of the local and international competition. DSC created an affordable solution to a real, relatable problem shared by men (and even women). Instead of paying a minimum of $20 a month, they now paid just 4 a month. By doing so, they approached the bottom of a maker, with a less expensive and accessible offer.
Dollar Shave Club broke the value chain and disrupted the mold by creating an online platform and delivering the product directly to the consumer instead of the customer going to the local store.
Technology and internet penetration enabled Dollar Shave Club to create this new subscription model and leverage on data to improve its offer and explore new opportunities that created value for its customers.
In the beginning, competitors didn’t head much to the new model. However, Dollar shave Club took the core of companies as Gillette who were in their traditional model and couldn't disrupt themselves. For decades, Gillette was mostly alone, with just its lackluster drugstore aisle competitor Schick. DSC disrupted this model and made them think on their feet.
This combination enables DSC to create a great experience taking care of transforming this on monthly “delight”. DSC offered a new practice around the product, that customers didn’t know they wanted or could ask for. This became a user experience disrupted model.
Gillette is known for spending tens of millions of dollars a year on research and development. However, it wasn’t just about super mega innovative razors. Dollar Shave Club (acquired by Unilever for $1 billion in 2016) made a point by criticizing flaws in the existing business model of conventional men’s shaving products and purchase experience.
In his launch video, cofounder Michael Dubin mocked the incumbent’s practices. “Do you like spending $20 a month on brand-name razors?” ... Stop paying for shave tech you don’t need.” Gillette, the incumbent, was forced to react by reducing prices, launching a shave club of its own, and even venturing.
Why Netflix is a Disruptive Innovation?
The term “disruptive innovation” is misleading when it is used to refer a product or service at any one given time rather than over some time.
Netflix was launched in April 1998 as an unsuccessful movie-rentals-by-mail service model. This company grew its subscriber base by offering free trials and other deals that made convenient rental service popular. In 2019, Netflix’s annual revenue rose to 20 billion USD and today it held 182 million subscribers worldwide (800 million in 1999). This impressive growth demonstrates that Netflix successfully disrupted not only incumbents but itself without being displaced.
The salient features of their disruptive model include: -
Most innovations begin as a small-scale experiment. However, Netflix in the ’90s was a rental service that took ages to arrive. Netflix chose the path of technology and online viewing which was the major disruption in its business strategy. If Netflix had not eventually begun to serve a broader segment of the market, Blockbuster’s decision to ignore this competitor would not have been a strategic blunder.
Netflix came up with a less expensive, simple, and accessible model. As defined by Clayton Christensen, disruptive innovation occurs when a new entrant target overlooked segments with a new offering (and often a new business model). This is what Netflix did to Blockbuster. Its original mail order service didn’t provide the instant gratification that Blockbuster did, but it was far simpler and less costly (no late fees).
Then, the Netflix model evolved thanks to technologyby moving from DVD delivery to streaming even if at the beginning it underperformed. However, it was simpler, faster, and less costly, attractive to new users or existing users who were over-served by the DVD business. The technology was the real game-changer in this scenario as the internet, mobile, and streaming allowed Netflix to shift to streaming video over the internet, which transformed the business model and offered a wider selection of content to its monthly subscribers at a fixed cost.
Today, Netflix is one of the rare companies benefiting from the global pandemic. Netflix added 15.8 million subscribers in the first quarter of 2020, more than double the 7.2 million that was expected. A growth of more than 22 percent year over year. Now Netflix has a whopping 182 million subscribers worldwide.
Keeping the two examples explained above, these are the five takeaways about disruptive innovation meaning
It is a process by which a product or service initially takes in simple applications
Typically is designed to be less expensive and more accessible by creating a new business model to access the low-end market
They are hard to see coming and aren’t taken seriously for the incumbent.
It is not just about technology, it is a combination of market fit, technology, supply chain, value, and user experience.
This combination can eventually displace established competitors
Entrepreneurs are often the ones that develop new products or services to revolutionize an entire industry. They can start small in a niche market, and then scale the product to appeal to a wider group of people. They don’t necessarily need to be intimidated by bigger players either, as established companies are probably not interested in developing these low-margin products or solutions. However, it requires a good combination of all elements to get it pitch-perfect. It is not just about disruptive technology, but about market fit, value chain, customer experience, and evolutionary business model.
Disruption is a process. Seth Godin said in his blog “it takes about 6 years to become an overnight success”. Mark Zuckerberg’s Facebook took 7 years to become a cash flow positive company and Bill Gates took 11 years to land its first big deal with IBM.
For some incumbents, the belief is that companies should create a separate division that operates under the protection of senior leadership to explore and exploit a new disruptive model. This has worked in some cases in the past but it is a painfully slow process that may not even provide the desired results. The challenges that arise from being an incumbent and a new entrant simultaneously have yet to be fully specified.
However, in a face-off between disruption model and traditional incumbents, the modern era disrupters have a slight edge. This is based on the new era where responses, products, and services are required instantly by most users. Especially now during the pandemic, business models and strategies have faced a disruption themselves. Zoom, Skype, and Netflix are only a few examples of this argument.
We still have a lot to learn about instant “disruptive innovation” for running and new businesses. The reality is that a better understanding of Disruption and others' experience can help us in these challenging times to define our next position as an entrepreneur or entrepreneurs.