AMCHAM: In the literature of digitalization, quite often Disruption or Disruption Innovation is a common definition/process that jumps out of the pages. Would you define the term?
Angela Nickel: Disruption is not just a word that can acquire multiple meanings according to people’s convenience, as it is performing in the popular culture. Disruption is part of a body of ideas that have been deeply studied and is now an important concept in the digital-changing world we are witnessing today.
The theory of Disruptive Innovation was introduced in 1995 by the Harvard Business School Professor Clayton M. Christensen and has been called the most influential business idea of the early 21st century.
A troubling concern of the theory is that too many people who speak of “disruption” have not read a serious book or articles on the subject. Too frequently they use the term loosely to invoke the concept of innovation in support of whatever it is they wish to do. Many researchers, writers, and consultants use disruptive innovation to describe any situation in which the industry is shaken up and previously successful incumbents stumble. But that’s much too broad usage. The problem with conflating a disruptive innovation with any breakthrough that changes an industry’s competitive pattern is that different types of innovation require different strategic approaches. To put it another way, the lessons we’ve learned about succeeding as a disruptive innovator (or defending against a disruptive challenger) will not apply to every company in a shifting market. Let’s explore the basic tenets of disruptive innovation and examine how we can apply it to our business —or if it is even applicable.
Disruption describes a process whereby a smaller company with fewer resources can successfully challenge established incumbent businesses.
Disruptive Innovation is an innovation that creates a new market and value network and eventually displaces established market-leading firms, products, and alliances.
What is (isn’t) Disruptive Innovation
It is a process, not a product or service, that occurs from the nascent to the mainstream.
Originate in low-end (less demanding customers) or new market (where none existed) footholds.
New firms don’t catch with mainstream customers until quality catches up with their standards.
Success is not a requirement, and some businesses can be disruptive but fail.
New firm’s business model differs significantly from an incumbent.
Disruptive innovations tend to be produced by outsiders and entrepreneurs in start-ups, rather than existing market-leading companies. The business environment of market leaders does not allow them to pursue disruptive innovations when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from sustaining innovations (which are needed to compete against current competition). Small teams are more likely to create disruptive innovations than large teams. A disruptive process can take longer to develop than by the conventional approach and the risk associated with it is higher than the other more incremental or evolutionary forms of innovations, but once it is deployed in the market, it achieves a much faster penetration and a higher degree of impact on the established markets.
Disruption is a process. The term Disruptive Innovation is misleading when it is used to refer to a product or service at one fixed point, rather than to the evolution of that product or service over time. The first minicomputers were disruptive not merely because they were low-end upstarts when they appeared on the scene, nor because they were later heralded as superior to mainframes in many markets; they were disruptive by virtue of the path they followed from the fringe to the mainstream. Because disruption can take time, incumbents frequently overlook disrupters.
Disrupters often build business models that are very different from those of incumbents. One high-profile example of using an innovative business model to define a disruption is Apple’s iPhone. The product that Apple debuted in 2007 was a sustaining innovation in the smartphone market: It targeted the same customers coveted by incumbents, and its initial success is likely explained by product superiority. The iPhone’s subsequent growth is better explained by disruption —not of other smartphones but of the laptop as the primary access to the Internet. This was achieved not merely through product improvement but also through the introduction of a new business model.
Some disruptive innovations succeed; some don’t. A third common mistake is to focus on the results achieved —to claim that a company is disruptive by virtue of its success. But success is not built into the definition of disruption: Not every disruptive path leads to a triumph, and not every triumphant newcomer follows a disruptive path.
Not all innovations are disruptive, even if they are revolutionary. For example, the first automobiles in the late 19th century were not a disruptive innovation, because early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. The market for transportation essentially remained intact until the debut of the lower-priced Ford Model T in 1908. The mass-produced automobile was a disruptive innovation because it changed the transportation market, whereas the first thirty years of automobiles did not.
The mantra “Disrupt or be disrupted” can misguide us. Incumbent companies do need to respond to disruption if it’s occurring, but they should not overreact by dismantling a still-profitable business. Instead, they should continue to strengthen relationships with customers by investing in sustaining innovations. In addition, they can create a new division focused solely on the growth opportunities that arise from the disruption. The existing research suggests that the success of this new enterprise depends in large part on keeping it separate from the core business. That means that for some time, incumbents will find themselves managing two very different operations.
Disruptive Innovation 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.
These are uncertain and challenging times for traditional organizations across every industry. The digital economy is turning the traditional rules of the game upside down, as a scan of business press headlines illustrates. “Since 2000, 52% of companies in the Fortune 500 have either gone bankrupt, been acquired or ceased to exist”. “Uber Valued at $40 Billion in $1.2 Billion Equity Funding.” “Is Silicon Valley the Future of Finance?” “How Bitcoin can and will disrupt the financial system.” This small sample of recent press headlines reveals why the leaders of traditional organizations might feel a strong sense of disquiet.
Disruption can happen at any time, in any sector, and its effect on traditional organizations can be fundamental. This previous sentence is implying the challenges incumbents are facing when disruption presents itself.
Digital Innovation is shaking the core of every industry and incumbents are struggling to respond.
Three-Quarter of Incumbents Responded Late to Digital Disruptions.
As the world increasingly becomes software-driven, competitors will emerge from adjacent industries rather than just the ‘home’ industry of the incumbent. Incumbents need to constantly revisit their business model to ensure it is not outdated.
The current wave of disruption is different. Today’s digital technologies are comparable to the introduction of commercial electric power in the early 20th century. During the next few years, the technologies associated with the current wave —including artificial intelligence, cloud computing, online interface design, the Internet of Things, Industry 4.0, cyberwarfare, robotics, and data analytics —will advance and amplify one another’s impact. Products and processes will routinely learn from their surroundings; markets will converge to an unprecedented extent.
The revolutionary digital technologies are telling us that the pace of change can have different velocities, but it cannot be stopped. Disruption will, eventually, reach its destination. This was the essence of Christensen’s original argument: that disruptive innovation is at first applied to a small, unattractive niche, and it seems easy to ignore. Gradually it matures, improves in quality, and then switches over to the mainstream. In the early stages of its advance, it will seem to many people as though nothing is happening. By the time the shift is felt, it will seem sudden, and it will continue changing the world.
3 important characteristics of Disruptors
- Significant Lower cost.
- Better use of assets.
- A more effective approach to customer demand
As we all can see, the definition opens up to an immense field of knowledge and debates. For instance, we often face valid questions helping us to understand this process in its widest aspect.
Most digital theoreticians don’t see Uber as a disruptor, but they see Netflix as one (this is a fascinating debate we should put more attention to it if we want to see the real scope and potential of disruption).
I am closing my long answer with 2 definitions: a home-made definition on digitalization and disruption as its by-product and/or disruption in its context of digitalization: it is a great discovery that endangers the existence of the dominant economic powers represented in businesses and industries: communication, banking, publishing, transportations, hospitality, central banks, central governments, etc.
The second definition by the author Tony Saldanha: Digital disruption is the effect of the Fourth Industrial Revolution in the corporate and public sector landscape. Increasingly pervasive and inexpensive digital technology is causing widespread industrial, economic, and social change. This explosive change has occurred only in the past decade or two.
AMCHAM: Digital transformation is an existential threat for most organizations in the Fourth Industrial Revolution, where the lines between the physical, digital, and biological worlds are becoming ever more blurred. But fully 70 percent of digital transformations fail. Do you have a formula or suggestion to avoid that massive failure?
Today, amid the Fourth Industrial Revolution, the question regarding digitalization is no longer “whether to transform” but more “how to transform”.
I don’t have the formula to avoid the massive failure we are seeing, but I can offer some suggestions. So, let’s first take a brief look at the context. First, there are different shades of transformations possible, and we need to be diligent in targeting a complete sustainable transformation during these disruptive times. Second, the surprising reason, according to some experts, why as many as 70 percent of all digital transformations fail is lack of discipline. And third, it is possible to apply proven failure-reduction approaches, like the disciplined checklist model from the aviation industry, to significantly improve the odds of success in digital transformation.
But now let’s see our broader context via de concept of industrial revolutions
- First Industrial Revolution: the evolution of society in the 18th and 19th centuries from mostly agrarian to industrial and urban, which was mostly driven by mechanical innovations such as the steam engine.
- Second Industrial Revolution: The explosive growth of industries from the late 1800s to the First World War. This was driven by mass-production techniques, electric power, and the internal combustion engine.
- Third Industrial Revolution: The widespread change beginning in the 1980s with PCs and the Internet, due to new electronic technologies.
- Fourth Industrial Revolution: The combination of the physical, digital, and biological worlds today. The major driver is the availability of massive computing capacity at negligible and further plummeting costs. Thus, what used to be physical (e.g. retail stores) can be digital (e.g. online shopping), or what used to be purely biological (traditional medicine) can be biotech (personalized genetic medication).
For an industrial revolution-driven transformation to take off, you need a different, disciplined, new business model game plan. Thus, the creation of a new and different business model is just the price of entry. The disciplined execution is equally important.
Let’s go to the airport and try to fly a small plane. For a safe takeoff, we need to go through a detailed and disciplined checklist: fluids, flaps, altimeter, auxiliary fuel pumps, directional gyros, fuel gauges, instruments and radios, flight controls, etc.
The proper and disciplined execution of the checklist is able to deliver a predictable execution. As different from 50 years ago, we can see that 99.99 percent of aircraft takeoffs are successful. In grand part this success is the result of the disciplined implementation of the checklist. On an unrelated topic, only 30 percent of digital transformations can claim success.
In our digital transformation, we need a similar checklist approach. We need to make sure that we are checking every possible gauge, every possible instrument, and every possible variable allowing us for a successful takeoff.
Building on the flight analogy, a successful takeoff must be followed by sustained flight. What would be the point of a successful takeoff and a fatal crash just after that takeoff?
As anybody can guess, this is not an easy topic where we can have a ready-to-made formula. A company embarking on a digitalization transformation, if it wants to beat the odds, must do deep research on the meaning and variables on this complex –often complicated process. The idea of going digital alone is obviously not enough to guarantee success. We need to dig deep on the experience of the winners to be able to follow the applied principles in their success and dig deep as well in the experience of the losers to be able to avoid their mistakes. Then, we need to adapt and adjust those lessons to our own business context.
Angela Nickel is the founder and CEO of COMO Global, an automated payment institution, proprietary of iBAN-X a regulated financial institution. They are part of the COMO Group.
Many thanks to Angela Nickel for this interview!