From The Harvard Business School:
Innovation is on the minds of professionals across industries, and rightfully so. Strategizing for innovation can enable businesses to provide customers with continued value, create new market segments, and push competitors out of segments they once owned.
According to a recent McKinsey Global Survey, 84 percent of executives feel innovation is extremely or very important to their companies’ growth strategies. When formulating a business strategy, understanding the different types of innovation can help you conceptualize your business’s place in its industry, identify what your current innovation strategy is and if you’d like to change it, and recognize competitors’ innovation strategies.
These insights can inform innovation strategies that drive purposeful, proactive product decisions to disrupt an industry or avoid being disrupted by another organization.
The two types of innovation are sustaining and disruptive. Here’s a breakdown of each, the key factors that differentiate them, and the importance of incorporating disruptive innovation into your strategic mindset.
What Is Sustaining Innovation?
Sustaining innovation occurs when a company creates better-performing products to sell for higher profits to its best customers. Typically, sustaining innovation is a strategy used by companies already successful in their industries. The motivating factor in sustaining innovation is profit; by creating better products for its best customers, a business can pursue ever-higher profit margins.
One example discussed in the online course Disruptive Strategy is the introduction of laptops in the computing industry. Laptop computers were a sustaining innovation that followed the personal desktop computer. The computers’ qualities and abilities were roughly equal, with the laptop offering novel portability. This leveled-up version of the same product catered to desktop users willing to pay for the increased flexibility the laptop provided.
In a vacuum, relying on sustaining innovation is a sound strategy that involves continually creating better versions of your product to gain higher profit margins from customers who are willing to pay. Yet, some of the most successful companies built on sustaining innovation fail.
“Why is it that good companies run by good, smart people find it so hard to sustain their success?” Harvard Business School Professor Clayton Christensen asks in Disruptive Strategy. “In our research, success is very hard to sustain. The common reason why successful companies fail is this phenomenon we call ‘disruption.’”
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What Is Disruptive Innovation?
Disruptive innovation—the second type of innovation and the force behind disruption—occurs when a company with fewer resources moves upmarket and challenges an incumbent business. There are two types of disruptive innovation:
- Low-end disruption, in which a company uses a low-cost business model to enter at the bottom of an existing market and claim a segment
- New-market disruption, in which a company creates and claims a new segment in an existing market by catering to an underserved customer base
Both types of disruptive innovation cause the incumbent company—which relies on sustaining innovation—to retreat upmarket rather than fight the new entrant. This is because the entrant has selected a segment (either at the bottom of the existing market or a new market segment) in which profit margins are relatively low. The incumbent company’s innovation strategy is driven by higher profit margins, causing them to pull out of the segment in question and focus on those with even higher profit margins.
As the entrant’s product offerings improve, it moves into segments with those higher profit margins. Once again, the incumbent company is motivated to retreat upmarket rather than fight for the lower-profit market segments.
Eventually, the entrant pushes the incumbent out of the market altogether, having improved its product so much that it claims all existing market segments or renders the incumbent’s products obsolete.
Returning to the example of the computing industry, the introduction of smartphones was a disruptive innovation, specifically new-market disruption. Smartphones catered to a new market segment of customers who didn’t need the level of capabilities offered by a laptop—basic, convenient internet access at a fraction of the cost of a desktop or laptop computer was enough. As the quality of smartphones improves, the laptop and desktop may be pushed further upmarket and, eventually, into obsolescence.
Link to the rest at The Harvard Business School
PG has been interested in disruptive technology/innovation ever since he first heard the term a very long time ago.
The term disruptive technology was originally coined by Harvard Business School professor Clayton Christensen in 1995 and further expounded in his book The Innovator’s Dilemma in 1997. In the follow-up work, The Innovator’s Solution, he replaced the term with disruptive innovation.