Disruptive business models disturb the market by addressing the repressed demands ignored by the leading suppliers and manufacturers in the industry. They provide solutions which the current industry has failed in or is incompetent to deliver. The key in this business model is disruptive innovation, which helps create new niche markets within an existing market, or create a new market altogether by creating, refining, reengineering, or optimizing a product and/or a service. Today, most successful companies have their roots in disruptive innovation, though many have long-since abandoned the approach. This once separated them from the other players, who work within a homogenous market with a mediocre offering.
"The enemy of great is not bad; the enemy is good." -Jim Collins
Disruption is based on understanding the market --in particular, the opportunities --which the current market players have been ignoring. It must be supported by an innovative strategy --a [hopefully] foolproof plan to outperform the competition. Only innovation, which solves current key challenges, at a justified cost, can form the base of the disruptive business model. Once the market niche has been found, developing a business model and becoming a pioneer brings in a lot of public's attention and plays a vital role in marketing. The very best businesses acquire customers "organically" without advertising. Great products and word of mouth drive adoption and sales at these companies. In contract, companies with huge advertising budgets are losing their edge in the age of internet.
The reality of the economic landscape demands that every business must figure out how to create new markets for its products and services or reshape an existing one to stay relevant. In essence, a business model must either disrupt or run the risk of being disrupted within its industry. Companies that use disruptive business models make a tangible impact because they shake up their respective industries by addressing an unmet need. By focusing on small markets rather than trying to steal away the mature customer base of established companies, disruptors are able to be flexible in their market approach. Through this flexibility, disruptive companies eventually find the right combination of market and business model that they need to innovate, and they eventually disrupt the business of larger companies.
Typically, it is easier for new market entrants to be successful with a disruptive business model, but that does not mean that it would be impossible for established businesses to become disruptive. The industry leaders with resources and large budgets should be able to figure out how to disrupt, but startup businesses actually have the advantage because of their willingness to pursue unproven opportunities. Market incumbents are also haunted by the Innovator's Dilemma.
The Innovator's Dilemma is a concept introduced by Harvard Business School professor Charles Christensen. It explains why established companies have a hard time getting innovation right. Stable businesses can fail because they focus on making improvements to existing products and services based on the demands of their current customer base. Keeping current customers happy in established markets by meeting their demands for product performance improvement is called sustaining innovation --which works well in the short term. At first glance, this seems like the right course of action for growth, but by following this path, the incumbent is not setting itself up to be disruptive. It is merely following convention.
(If you are not sure if your own organization has fallen victim to resting on its laurels, a good pulse check is to review whether the company's vision or strategy is based on responding, reacting, and/or keeping up with competitors.)
Disruptive innovations, on the other hand, create entirely new value rather than just improving on what already exists. These innovations usually address the needs of customers that do not just want a better version of a product or service; they desire a completely different one or way of doing things. Disruptive innovations hold appeal because they are often more productive, flexible, accessible, and/or cost-efficient.
Established companies typically do poorly at executing disruptive innovations because they do not see good cause to deviate from the business models that have allowed them success in the past. Putting time and effort into sustaining innovation makes sense because it satisfies customers' needs. Market leaders also hesitate to invest in niche, unproven offerings, because it seems that the risk of failure is too great. This fear of change hurts them in the long run because disruptive innovations ae necessary to tap into customers' future needs.
"If you decide that you're going to do only the things you know are going to work, you're going to leave a lot of opportunity on the table." -Jeff Bezos
Another challenge is the budget limitation. Companies can spend either on something that has worked well in the past with an established customer base or on something that has never been tried in a new market. The perceived safe choice for risk-averse established companies is to stay the course and spend limited resources on sustaining innovations.
Industry leaders do not fear new entrants because they operate initially low-performing products in small markets that are not affecting their customer base. But as new companies improve their innovations, they begin to take on larger markets. The next thing an incumbent knows, their customers are being taken by small companies that they once did not take seriously.
"Frugality drives innovation, just like other constraints do." -Jeff Bezos
At this point in time, in an era of data explosion, existing industries are searching for ways to scale in concert with potential demand, and those prior hesitancies and predisposition to sustaining innovation are showing the costs unknowingly incurred. It is a bigger problem to fail to experiment than it is to experiment and fail. This [technical] fact is helping to pave the way for greater numbers of markets to be disrupted.
"Typically, our most egregious mistakes fall in the omission, rather than the commission, category. That may spare [Charlie] and me some embarrassment, since you don't see those errors, but their invisibility does not reduce their cost." -Warren Buffett
Jeff Bezos is quoted as saying, "Your margin is my opportunity." He sees a competitor's love of margin and other financial "ratios" as an opportunity for Amazon, since the competitor will cling to them while he, instead, chooses to focus on "absolute dollar free cash flow." The comment is meant to question whether others are focused on the right numbers for business or are more worried about hitting metrics that someone else (sometimes outside of the company, like an analyst) said matter.
To Bezos' point, when one is measuring investments in innovation, historical data is not meaningful. It is a contradiction; there is no concept of gathering trends to predict anything as volatile as the future. However, with the wealth of information available, what should provide better decision-making capabilities is having the opposite effect. Companies are focusing more on making choices based on the data gathered, and that is good, but are forgetting that the customers are the best source of data. Those "unmet needs" are there, waiting to be discovered.
"You can't outperform the market if you are the market. Similarly, you must adopt a non-consensus view and be right about that view to beat competitors." -Tren Griffin
Fostering a questioning culture is a disruptive business model in itself. Disruptive innovation can put a company in the forefront of the market and open new ones, while enabling those skills to adapt easily. Thus, a company can become future-proof, flexible enough to continue generating business.
Instead of relying on one solution, product, or approach, and clinging to curated metrics to justify those actions, companies have an unprecedented opportunity to not only see the data there, but question what isn't there. If today's incumbents don't, someone else will.
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