Disruptive innovation is a process and theory introduced by Harvard’s Clayton Christensen, that describes how new market entrants (entrants) often exploit technological and business model innovations to disrupt and eventually replace established market leaders (incumbents). The process typically starts when new competitors enter a market by targeting lower cost segments with "good enough" products and services that are more convenient, accessible, and affordable than those offered by leading incumbents.
Incumbents engage new entrants by highlighting their products and services superior performance, quality, and reputation. This strategy often fails to stop their slide in market share because customers usually prefer competing products that are more convenient, accessible, and less expensive. Incumbents usually avoid price competition and lower margins by moving up market to segments with no pricing pressure and higher margins. Meanwhile, new entrants gain experience while serving the lower market segment and eventually move up market by using the same strategy, i.e., offering competing products that are more accessible, convenient, and less expensive. The original incumbent again attempts and fails to sustain their market share by stressing their product's performance, quality, and reputation. Pricing pressure and lower margins again entice the incumbent to exit and cede the segment to the new entrant. The cycle continues until the incumbent is squeezed into a small niche segment. The new entrant will then control most of the market and in many cases will merge and acquire what is left of the once dominant incumbent.
Waves of technological innovations since the early 1990s created waves of disruptions as innovative newcomers challenged and prevailed over incumbent market leaders. Most new entrants failed and went out of business, but those that succeeded often dethroned the incumbent and became the dominant market leader. Some markets experienced quick and recurring disruptions as the new dominant players were in turn disrupted by newer entrants exploiting the latest technologies and innovative business models. Companies like Kodak, Lucent, and many traditional newspapers lost their dominance during this period and ended up bankrupted and acquired by competitors.
In healthcare, lasting patient dissatisfaction and emerging innovative technologies, including physiological monitors and large language models, have made disruptions more likely. Many innovative technologies are relatively inexpensive, easy to deploy, and routinely outperform their legacy counterparts. They are ideal for new entrants with innovative business models and strategies that deliver more compelling patient value.
Disruptions are painful to leading incumbents who lose their market position and are often bankrupted and acquired. Disruptors transform industries by introducing alternative business models with more compelling value propositions that prove more attractive with customers. Disruptions are easy to explain retrospectively but are much more difficult to predict. That’s why we use illustrative examples, case studies, and strategy frameworks to help our clients identify impending disruptions and take steps to cope and profit from their impacts.
This post provides only a brief overview of technological innovation driven disruptions, which we cover more extensively in our training. Please contact us if you have questions and to schedule a private consultation.
References:
Christensen, C. M. (1997). The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business Review Press.
Summary: In this seminal work, Clayton Christensen introduces the theory of disruptive innovation, explaining how new entrants can disrupt established companies by targeting overlooked segments of the market.
Christensen, C. M., & Raynor, M. E. (2003). The Innovator's Solution: Creating and Sustaining Successful Growth. Harvard Business Review Press.
Summary: This book expands on the theory of disruption, providing strategies for companies to create and sustain growth through innovation while navigating potential disruptions.
Christensen, C. M., McDonald, R., Altman, E. J., & Palmer, J. E. (2018). Disruptive Innovation: An Intellectual History and Directions for Future Research. Journal of Management Studies, 55(7), 1043-1078.
Summary: This article provides a comprehensive review of the intellectual history of disruptive innovation theory, discussing its evolution and providing directions for future research.
Herzlinger, R. E. (2006). Why Innovation in Health Care Is So Hard. Harvard Business Review, 84(5), 58-66.
Summary: Regina Herzlinger discusses the challenges of innovation in healthcare, emphasizing the unique barriers to disruption in this sector and the potential for new technologies to overcome these challenges.
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