The term disruptive innovation originated in the mid-90s through an article by a Harvard Business School professor, Clayton Christenson. In the most basic sense, this term can be defined as a new technology or business model that disrupts an established business niche.
Elaborating on it further – when a new technology or a radical new approach enters a market, it enters at the very bottom of the pile. Hardly anyone is interested in it and the established companies, or the reputable incumbents, ignore them because they deem the endeavors as posing no risk to their businesses. They can also disregard them if they are not impressed by the quality of the goods and services produced by the innovators.
However, as time moves on these new setups increase in scale and many times surpass the incumbents that ignored them earlier. Thus disrupting the sector by revolutionizing its make-up.
One of the best cases would be Toyota who had been disrupting the Detroit auto-makers for almost three decades. They started off in the 1960s with a low-end car called the Corona. When it entered the market it was termed as quite crummy – it rusted easily, and it didn’t have many high-end features. However, compared to the gas-guzzling, expensive automobiles that Detroit auto-makers made, it was a revelation. Corona was one of the most fuel-efficient and affordable cars in the market at that time and this ensured that it didn’t go off the radar.
Once the Toyota captured a market share, they went down the continual improvement – the automobiles models improved radically after Corona as Tercel, Corolla, Camry and likes. The response from Detroit wasn’t quite up to the scale of the disruption. Ford and GM would send out a Pinto or a Chevette – both though affordable were plagued with numerous technical issues. Thus the Detroit automakers quickly ceded ground to the new entrants and had to reinvent their companies through bankruptcies and bailouts.
Interestingly enough, Toyota has also been subject to a disruptive innovation for the past several years. Hyundai, the Korean auto-maker, is taking direct aim at Toyota’s Lexus line through their high-quality and significantly less pricey cars in the bracket. While until a few years ago, Hyundai was made fun off because of lack of quality but they have caught up to Toyota in recent times and have been winning quality awards left and right. Since 2011, they have been the fastest growing car brand.
The taxing-hailing app, Uber, completely revolutionized the transportation market with its launch. Compared to an outmoded taxi company, they have a lot less risk. With their business model, there is no need to make a significant capital investment to build up assets in order for significant demand to show up. So, the cost and the revenues see proportionate changes– if there is an increase in taxi ride demand, they invest in bringing in more drivers on board. On the other hand, if there isn’t any significant demand, they have limited liabilities in terms of fixed costs.
So, Uber’s disruptive innovation is that their business model copes with the risk associated with demand in a better manner than a conventional cab service.