Disruptive innovation

Markus Perkmann
Professor of Innovation and Entrepreneurship

These slides are meant to provide pointers to

the content covered in the module rather than
being self-standing study materials. While
some of you find it useful to have them, they
are not needed for accessing or
understanding the course content.

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In this session

• What is disruptive innovation?

• Why is disruptive innovation a threat?
• How can you respond?

Pictured: Chotokool, low-cost

fridge by Indian company Godrej

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 Minicase: Minimills

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 Characteristics of disruptive innovations

Often simpler and cheaper

First commercialized in emerging or

insignificant markets

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What have the digital camera and Google Drive in common?
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 Characteristics of disruptive innovations

Often simpler and cheaper

First commercialized in emerging or

insignificant markets

Introduce a new dimension of

performance, usually around a
novel technological core

Lead customers unlikely to prefer the

new product: initially adopted by the
least profitable customers

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How can a cheaper and simpler product enter the market?

Create a new market Low-end disruption

Competes against non- Appeals to existing customer base

consumption. Appeals to which is currently overserved.
customers who previously lacked
money or skill to buy or use the
Performance improvement good
product.
enough along traditional metrics.

Lower performance in traditional

Uses new operating or business
attributes but improved performance
model
in new attributes.

New combination of lower profit

Business model makes money at
margins and higher asset
lower price per unit and smaller
utilization can earn attractive
volumes. Gross margins lower.
returns. Lower prices.
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How can a cheaper and simpler product enter the market?
Create a new market
Competes against non-
consumption. Appeals to
customers who previously
lacked money or skill to
buy or use the product.
Lower performance in
traditional attributes but
improved performance in
new attributes.
Business model makes
money at lower price per
unit and smaller volumes.
Gross margins lower.
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Low-end disruption Sustaining innovation
Appeals to existing Appeals to most
customer base which is profitable customers
currently overserved. (high WTP)
Performance Performance
improvement good improvement in
enough along traditional attributes most valued by
metrics. existing, most
Uses new operating or demanding customers
business model Profit from improving
existing processes and
cost structures based
on incumbent
competitive advantage
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Disruptive innovation over time

Performance

Market need
tomer)
ct (average cus
o du u ct
tp r d
en o
m b pr
u w
In c N e

Source: Christensen Time

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 Summary: Characteristics of disruptive innovations

Often simpler and cheaper

First commercialized in emerging or Over time, the product

insignificant markets improves along all
performance dimensions and
threatens incumbents

Introduce a new dimension of

performance, usually around a
novel technological core

Lead customers unlikely to prefer the

new product: initially adopted by the
least profitable customers

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Leaders are wedded into existing business model

“What use could

this company
make of an
electrical toy?”

William Orton, president of

Western Union, 1876

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Economic incentives

• Launch of new products cannibalise existing

sales - replacement effect
• Uncertainty: How will managers know, which
alternative technologies or product concepts
contain the seeds of disruption?
• R&D into new technology areas yields far less
than R&D into existing technology
• Margins for low segment customers are small,
and senior management committed to best
customers

Overall, the company may fail because it excels at what it is doing

(serving its best customers)!
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 Recognising disruption

The next few slides are about responding to (potential)

disruption by scanning the opportunity space within
any given product space. Opportunities may arise from
analysing:
a) Non-consumption
b) Overshooting

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Spotting non-consumption

Established companies often choose to compete against consumption – not

non-consumption
• The market looks considerably larger when you consider non-consumption
• Distinguish between constrained consumption and lack of interest
• Four constraints
1. Skill constraints
2. Wealth constraints
3. Access constraints
4. Time constraints

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Overshooting

Insulin example

“Overshooting”

ct
ro du
p
e nt
u mb
Performance

In c
Market need

u ct
d
w pro
Ne

Source: Christensen Time

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Monitoring for overshooting

Overshooting means that a product exceeds the expectations

of some customers in specific performance dimensions.
• Direct customer research: explore willingness to pay
• Customers do not pay anymore for improvements
• But perhaps another performance dimension is
becoming more relevant
• Margin, price and market share analysis
• Analysis of new product launches

“Who are my worst customers?”

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