Transformation•Nov 03, 2021
The Power of Disruptive Innovation Part 2: Defending Against Disruption Doesn’t Have to Be Hard
In part 1 of this series, we discussed what disruptive innovation is, what it looks like across two different industries, and why incumbent companies regularly struggle to respond effectively. In this post, we will discuss what specific factors incumbents should remain wary of in competitors, a basic model for defensive innovation, and how bringing Credera in can help you retain your competitive edge.
Nearly every established company is at risk of disruption, no matter the industry or length of incumbency—the ruthlessness of the market will always pick off unsuspecting prey. Defending against disruptive innovation needs to be a priority for every company hoping to maintain its position.
Even though creating and enacting a plan to defend against disruption is important, it doesn’t have to be hard. By regularly analyzing the environment for a few key factors and building the right preemptive organizational structures, a company can recognize and mitigate against a potential disruptor before it’s too late.
What Should a Company Look for to Preempt Disruptive Innovation?
Incumbent companies should remain vigilant of upstarts along three dimensions:
New players in related but (counterintuitively) less profitable market offerings
Players that introduce new customer experience paradigms
New venture-backed players that gain momentum
Dimension #1 of Potential Disruptive Innovators: Less Profitable Market Sector
A construction worker handling rebar, the lowest quality and profit margin of steel products. This is what mini mills first produced.
Often, incumbent company initiatives aim to increase the volume of their highest margin products. It’s an appealing opportunity—find the part of your company that already makes you the highest ROI and increase its volume. That should be where you spend all your time optimizing and ignore the other areas, right?
Wrong. The lowest profit margin sectors of a business are often the most likely soil for the seeds of disruption. When established companies turn their focus away from the less profitable sectors of their product mix, startups can seize control of an audience.
In the mid 1970s, almost 100% of American steel was produced in integrated mills. Integrated mills are the traditional behemoth structures that can process huge amounts of iron ore into steel. The other way to create steel was using a new electrically fired scrap melter called a mini mill. The mini mills initially created low-quality, low-margin steel for rebar that the integrated mills were happy to cede to them—why would a company work to protect the lowest profit margin part of their business?
As mini mills grew off the fruits of rebar steel, they improved their process and technology so electrically fired mills could produce higher quality steel at prices impossible for integrated mills. The same process occurred for each higher tier of steel until the disruptive mini mills fully overtook integrated mills in 2000.
Ignoring the least profitable market sector of a business creates blind spots for potential disruption. Incumbents working to stay ahead of the curve need to pay close attention to innovations at the edges of their business.
Dimension #2 of Potential Disruptive Innovators: New Customer Experience Paradigms
Magritte's “The Treachery of Images” (1928) is a commentary on how people have been struggling to recognize when an object does not physically align with its representation for far longer than the iPhone.
Sometimes a great idea or product disrupts industries that weren’t on the initial radar for the business because they take such a novel perspective to delivering customer experiences. For example, Apple’s original iPhone offering directly contradicted the idea of watching a less profitable market sector for disruption—why did the cheaper Nokia lose to the more expensive iPhone?
The iPhone, as an object, was a cell phone, but what it represented was a novel perspective on the experience that customers had previously come to expect from laptops. Previously, if a user was interested in the upcoming weather forecast, they would have to pull out a bulky computer, power it on, log in, open a browser, navigate to the weather website, and find their local weather forecast. With the iPhone, powered by millions of apps in the App Store, small snippets of information (like the weather) could be found almost instantly. The experience was streamlined to simply unlock and open the app.
The iPhone set a new bar for how customers interacted with their mobile devices. It permanently changed customer behavior and established a new experience paradigm. Other companies, such as Nokia, attempted to defend their territory by fighting Apple with the same toolbox they had used before without realizing they weren’t facing the same enemy they traditionally had faced. No matter how inexpensively they could produce a flip phone, it would be extremely difficult to capture the smartphone user market.
The iPhone wasn’t just a disruptive innovation in the cell phone field; it was a brand-new experience and more seamless path to information and communication than what laptops had offered. Disruptors often do not find their foothold by meeting existing customer needs; disruptors create and introduce their own customer paradigm and set a new bar for incumbents. In order to defend against disruption in this field, incumbents must always be open-minded about how to improve customer experience.
Dimension #3 of Potential Disruptive Innovators: Venture-Backing Drives Momentum
As disruptive companies grow, many of them find that fast initial growth spurs and feeds future expansion by acquiring outsized funding, guidance, and specialized workforce talent to further improve product quality.
Another focus point for incumbents looking to protect against disruption is to pay closer attention to broader venture patterns across their industry.
Venture backing is influential in that it creates a virtuous cycle of positive effects. One notable outcome is that startups can acquire high-quality talent easier than less flashy incumbents. The promise of more creative and digital roles, equity-based compensation plus outsized returns, and the entrepreneurial culture becomes a draw that incumbents struggle to compete with.
The influence of workforce talent has become especially pronounced as technology plays a larger role in every industry, and the best employees are likely an order of magnitude more productive in creative and inventive jobs than an average employee.
Other reasons to monitor venture capital (VC) activity are that VC-backed firms tend to grow at much faster rates than organically funded businesses. An increase in VC funding is a solid signal that market space is ripe for disruption. Finally, in highly regulated industries, these entrants can more easily bypass regulatory burdens that incumbents must address. These VC-centric factors drive momentum and accelerate the pace of disruption.
What Should Companies Do With Their Innovation Strategy?
Establishing a systematic approach to countering disruption does not need to be hard. By reframing the context, interpreting the right signals, and taking action, incumbents can better prepare to handle disruptive headwinds.
First, establish a frequent cadence to scan the landscape for new opportunities. Evaluate key trends and see what technology breakthroughs are emerging and what new business models and profit pools they could enable. Employing an opportunity rather than a threat lens to studying these signals can facilitate participation in disruption rather than defending your current business model.
Second, observe how customer behavior is shifting. Are customers enthusiastically embracing these changes and is it solving a real and lasting customer need? Fresh insights can be a compelling leading indicator to understand sweeping ecosystem changes.
Finally, act on what you’ve learned. Carve out the right organizational spaces to encourage experimentation and create cross-functional structures to dive deeper and explore how the company could participate in a potential new market. Ensure you are allocating key talent to the highest-value initiatives and create adequate room to learn, grow, and apply that knowledge. Leadership vision and intention should be communicated transparently and regularly so downstream teams are empowered to act.
Taking Your Next Step Into Disruptive Innovation
If you’re interested in having a conversation around disruptive innovation, landscape assessment, maturity model assessment, innovation organizational design, or corporate innovation strategy, then reach out to our innovation leaders at email@example.com.