Almost every time a radical new product or service is announced the word ‘disruptive' appears, frequently in the commentary from industry pundits but also occasionally in the PR from the businesses themselves. In almost every case the word has been misapplied. Clayton Christensen himself noted this phenomenon when he changed the use of the term from ‘disruptive technology' to ‘disruptive innovation'. There really is no such thing as a disruptive technology. Instead, most new technology can be applied in a disruptive or non-disruptive, or sustaining, way. It is the business model that the technology is employed in that is disruptive. This is why low-cost airlines like EasyJet and discount shops like Wal-Mart are disruptive - they employ exactly the same technology as the incumbents, but within the context of a different business model. Similarly, an incumbent can often adopt a new low-cost technology in its own business model, such as the incumbent telecommunications operators are doing with Voice over IP. Disrupting mobile commerce infrastructure technologies, like the Internet, are themselves neither sustaining nor disruptive. Each can be used in either a sustaining or disruptive way.
Equally, in financial services, GlobeTax's development of V-STP is a business model founded on a unique combination of standards, outsourcing, networks and messaging. It is a disruptive innovation inasmuch as it removes the need for any financial services firm to engage directly in the costly area of tax reclamation. Some financial firms are/will be disruptors by using this innovation to radically reduce costs and improve service levels, giving them an unchallengable market position. Others will be subject to the disruption and eventually suffer loss of client base and market reputation and probably leave this market segment to those who have effectively created the utility for the industry rather than the less than palatable ‘do-it-yourself' business model.
Disruptive innovation is really three separate but related issues. The first issue is the concept of disruption itself. To be disruptive an innovation must target either non-users - which is a new market disruption - or must be a low-end innovation which provides existing customers in the market who are increasingly overserved by the functionality of the mainstream product, with sufficient functionality to meet their needs at a much lower price.
The second issue is centred on Resources, Processes and Values. This deals with why incumbents fail to recognise and respond to disruptive threats. The incumbents' resources - the assets it controls and the people that work for it, its processes, how it transforms its inputs into outputs of greater market value and its values - the criteria that the company uses to allocate its scarce resources, all determine the opportunities that the incumbent sees as attractive in terms of return on investment.
The final issue is Value Chain Evolution. This exposes another type of disruption, which is an inevitable shift of the highest profits within the value chain as products change from Not Good Enough to Good Enough. Essentially, firms should seek to control the activities in the value chain that affect the attributes of the product that are important to customers.
For the finance industry, a new automated trading exchange technology could be used to sustain an existing exchange business or to create a lowend disruptive model. To be disruptive the low-cost model must either underperform the incumbent, attracting only the low-volume exchange users not willing to pay premium rates for a bells-and-whistles service, or must find a new market among the unserved, perhaps introducing them to the attractions of trading for the first time. New market disruptions will tend to become low-end disruptors over time. This approach creates an asymmetry of motivation - the incumbents are motivated to flee in the face of the disruption towards the more profitable, underserved customers. New entrants will almost always fail if they target the mainstream customers of the market incumbents. The incumbents will be motivated to fight and will have better processes, products and resources to do so. An example of a low-end disruptor is Dollar Financial which is targeting underbanked, low-waged customers that are largely ignored as unprofitable by the larger banks such as Bank of America.
Bank of America is motivated by its profitability and growth strategies to innovate with new high-margin products for its most demanding customers. Dollar Financial instead sees the low-waged as a market that can be profitably served by a low-cost, no frills model which is completely unattractive to Bank of America's mainstream customers. The incentive for Dollar Financial is to improve its profit margin by innovating within its low-cost business model to attract the next tier of overserved customers. By removing the low-profitability customer base from Bank of America, Dollar Financial is actually helping Bank of America to reduce its costs and improve its profitability - for a while. An example of an innovation that started as a new market disruptor is Grameen Bank, a microcredit provider. Grameen originally provided small loans with no fixed repayment scheme, delivered to villages by mobile bankers on foot or bike and enforced by a communal structure that limits loan amounts within groups based on the group's repayment status.
With a Grameen loan a poor villager may be able drill a new well or buy a goat while building a credit history without getting trapped in a cycle of spiralling debt. Most of Grameens' loans are from pennies to a few hundred dollars, but they free poor communities from poverty, for which Grameen's founder, Muhammed Yunus, was awarded the 2006 Nobel Peace Prize. By the start of 2007 his bank has served over five million borrowers and lent over $6.5bn, with a 98% recovery rate. It has financed the building of over 650,000 houses and deployed almost 300,000 village phones. Before Grameen these communities could not obtain credit from normal institutions - all they could get were high-interest rate loans from loan sharks.
Our website is not responsible for the information contained by this article. Articleinput.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.
Note: This article was sent to us by: Joyce A. at 01182010
1. How to use technology in business
All articles are property of their respective authors. Please read our Privacy Policy!
© 2009 ArticleInput.com.