Disruptive innovation is slaying established giants while crowning new kings of the markets. Let’s explore with help from the book “The Innovator’s Dilemma” by Clayton M. Christensen, recommended by billionaires Jeff Bezos and Mark Cuban.
Two Types of Innovation
Sustaining innovation is improvements of previous versions of a product. It improves on the same criteria that was important in the previous version of the product. An example of this, is how computer hard disks gets faster and cheaper (success criteria in mainstream market) with innovation in the area.
Disruptive innovations is often worse performing than already established products when compared on old market success criteria. This is why disruptive innovations, technologies and products do not appeal to the mainstream in the beginning of it’s life cycle. Customers of the big companies typically won’t be interested. However, disruptive innovations kicks ass on NEW criteria, often highly valued by a different group of people. The consequence of this, is that disruptive innovation often finds its foothold in niche markets serving a relative small target group. From here it grows to challenge the big boys and mainstream markets.
Internet and Newspapers
An example of this is how the internet in its early stages looked as a disruptive technology to the newspaper publishing industry. The internet back then was clunky and hard to use. Loading a webpage took ages and putting pictures on a newspaper site only made it slower. Can you imagine how a lot of managers of traditional newspapers dismissed the internet as an inferior technology that served a special, weird and unprofitable group of people (mostly hardcore nerds)? The average newspaper customer would not use a internet newspaper back then. It was simply not user friendly. However, this all changed as the disruptive technology of the internet evolved to satisfy the demand of the mainstream consumer in user-friendliness, thereby posing a great threat too the paper press.
- Central Banks
- Payment networks
Disruptive to Central Banks
Bitcoin brings to the world global decentralized money. The mainstream disregard the currency bitcoin as “not being backed by a government” and as “way too volatile to be a store of value” which is one of the three core properties of money. In other words: bitcoin like any other disruptive technology in its early life, can’t serve mainstream customer demands. Bitcoin can’t compete on the same criteria as national currencies (yet).
However, bitcoin performs better than national currencies on new criteria such as: transparency, exchangeability and independence/censorship resistance. These characteristics are not important to the mainstream consumer, but it’s crucial to several niche markets. One niche market is wealth protection in developing countries with huge inflation like Venezuela. The people of Venezuela lost 60% of their purchasing power in one month. To them, the volatility of bitcoin is not as big of a problem as the lost trust in the government and central bank. If bitcoin can help them protect their savings, this is a real “early stage” use case. Remittances is another niche use case. Remittance is hugely expensive and bitcoin might be able to shave of some of the cost of sending money abroad due to it’s global nature.
Imagine the creative destruction if bitcoin evolves into meeting mainstream customers demands of stability in price and trust.
According to the Clayton, incumbent companies beat newcomers in sustaining technologies but loses when it comes to disruptive technologies. Startups win because large companies are dependent on customers for resource allocation. Why is this important? It is because the disruptive innovation often appeals to completely new markets and completely different customers. This makes it very hard for established companies to invest in, as it is not what their customers want. The promise of a lot of uncertainty, much smaller markets and smaller profit margins isn’t super sexy.
When disruptive innovations and technologies begin to look interesting, with clear use cases and profitable markets, it’s often too late for the large established companies to make a move and the new technology or products could be far ahead.
The established large companies will often react by trying to acquire promising startups and if out in good time, make early stage investments in startups.
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