A disruptive innovation is an innovative product or service that eventually overturns the existing dominant businesses in the market. The concept of business disruption comes from Harvard Professor of Business Studies. Clayton Christensen, whose research into what caused huge businesses with enormous resources and high-performing managers to completely miss market changes that badly damaged the incumbents, forced them out of lines of business and, in some cases, resulted in their eventual demise. The most recent example of course in the United Kingdom is Northern Rock, whose managers adopted a high-risk business model and then failed to anticipate or recognize changes in the market that made their model unsustainable. There was nothing wrong with a high-risk model. It worked perfectly and gave Northern Rock an excellent competitive position in the market - as long as the conditions on which the business model was based were in effect.
Their failure was not the risk level inherent in their model. Many other parts of financial services have equal if not higher levels of risk, for example derivatives trading. No, the failure was not seeing the effects of change of liquidity in the credit. For instance, Intel introduced the low-end Celeron processor within a separate business division in direct response to The Innovators Dilemma; e-Bay, itself a disruptor, not surprisingly, has a senior director of Platform and Disruptive Innovation. The theory of disruptive innovation is one of the few business theories in which scientific deduction has been used to identify the causal mechanism underpinning success. Most business theories take the examples of a few successful businesses, identify a few common traits and then recommend that all businesses adopt those traits - without identifying the circumstances in which, or the reasons why, those traits were associated with success. Only by determining the circumstances in which particular strategies are successful is it possible to predict when and how adopting those strategies will create success for others.
The financial industry has historically not been seen as being particularly vulnerable to disruption. In 2006 Business Week ran a cover story about the world's most innovative companies. Not one financial services company made it into the top 25, only one was in the top 50 and just two more struggled into the top 75. This suggests that either there is something about the structure of financial services that protects it from disruptive innovation, that few disruptive innovations succeed in financial services or that, to date, no disruptive innovations have been tried in this market. The lack of historical experience here is partly due to the breadth of scope of many financial sector businesses. Disruption affects individual markets and the larger financial institutions operate across many markets, so we have not seen the same failures of incumbents among large financial institutions that we have seen in other industries. However, large institutions have been, and will continue to be, chased out of significant global markets by disruptive businesses.
This will change - innovative companies such as specialist funds and the monoline insurers will be more vulnerable to disruption because they have no other markets to retreat into. Disruption is important to understand because disruption is often stealthy. The capabilities of a disruptor will often initially be far inferior to those of the incumbents, leading to dismissal as a competitive threat. Within financial services for example, this is evidenced by the growing trend for one type of intermediary to encroach on the activity of another type, for example brokers and custodians. Although in the period upto 2006 this occurred in a gradual, therefore non-disruptive way, the increasing development of utility style business models will, from 2008 onwards, allow for the explosive development of competitive business strategies. Disrupted companies tend to adopt visible stances.
Disruption cannot be adopted within the incumbents'business model, and attempts to do so only destroy what makes it disruptive. Only when it is too late to recover its position will the incumbent recognise its mistake. The disrupted tend to flee from the markets being disrupted rather than fight. Disrupted businesses may be absorbed by the disruptor to service the high-end of the markets it serves, may find a way to survive as a niche player or disappear entirely. Either way, the powerhouse that was a household name has been overthrown.
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. Regulations in the use of technology in financial services
All articles are property of their respective authors. Please read our Privacy Policy!
© 2009 ArticleInput.com.