A Deeper Dive into the 4 Types of Innovation: Disruptive Innovation

Disruptive innovation is likely a buzzword you have heard before, it is often used to describe a brand-new company, innovative product or technological development. The issue with a complex business strategy becoming common parlance is that a lot of the nuance of the theory is lost. In this article we will be explaining in more detail disruptive innovation: what it is, why it is important and why understanding it, is essential to your future career.

What is disruptive innovation?

Disruptive innovation has been widely misunderstood and used to refer to any scenario in which an industry newcomer creates instability within an established market, by offering a better, cheaper or faster version of the established competitors product or service. However, disruptive innovations are a lot more distinctive than just a new, groundbreaking product that the existing markets shake in their boots.

The term disruptive innovation theory first appeared in the Harvard Business Review in 1995, where Harvard Business School professor Clayton Christensen coined the term whilst explaining his research into the disk drive industry. Both computer technology and disruptive innovations have come a long way in the past 30 years, but the theory is still extremely pertinent.

The disruptive innovation business model is often used when the market and/ or customer base is well defined. This business model works most obviously when established competitors are relying on sustained innovation strategy and existing technology to improve their most popular products. The incremental change is used to ensure the majority of their customers continue to buy into the key product and remain satisfied. However, this often leaves an overlooked segment of their customer base and/ or the market generally.

This opening provides an opportunity for a new business to disrupt the market, hence the name disruptive innovation. Often, the new disrupter is offering more suitable functionality, and at a more affordable price. Although some consumers may view the so-called new kid on the block as a risk, the lower price point often entices them to try new technology.

When the entrants to the market who have utilized disruptive innovation, move upmarket, providing the wider customer base with a product/ service that outperforms the previous market leader in all areas, whilst maintaining the lower price, and the new company has encouraged adoption from mainstream customers, the disruption has been well executed.

What are the two types of disruptive innovation?

The first type of disruptive innovation is referred to as low-end disruption. This is when a company uses a low-cost business model to enter at the bottom of an existing market, undercutting established competitors who are already in the sector. Secondly, there is new-market disruption, which occurs when a new company carves out a new segment of an existing market and establishes themselves as a business serving a previously underserved customer base. Although these two forms of disruption are distinctive, they usually occur as part of the same process.

Why is disruptive innovation important?

Disruptive innovation is vital to advancing the market sector as a whole. It creates new and often groundbreaking products for consumers, and pushes established competitors in the market to be better, more efficient and achieve more.

Disruptive innovation is, of course, beneficial to the company enacting the strategy because they become the first, and for a while, the only, business offering the particular product or service. The exclusivity creates a brand advantage in the mainstream market and entices large numbers of first-time customers. However, the most difficult period of disruptive innovation to navigate, is creating brand loyalty with those same consumers, and ensuring they stick around, eventually displacing established competitors.

The established companies who may suffer losses from the brand using an innovative business model, are often slower to respond directly, because they are focused on their original source of high profit in their best-selling area, which is often the more demanding segment of the market, that hasn’t been disrupted.

What are some examples of disruptive innovation?

When discussing sustaining innovation Apple, Microsoft and Dyson were all names mentioned as brands that maintain customer loyalty through continuous and minute improvements of their headline products. However, at their incubation, these now established companies pioneered disruptive technologies in their industries that could be considered disruptive innovation. There is much debate as to what products and brands are truly disruptive innovators, and there is little consensus on the topic.

Airbnb is a useful example of a disruptive innovation business model that followed the theory laid out by Christensen, because the product offered by the new company, in this case Airbnb, undercut the established competitors’ prices by a significant margin, enticing mainstream customers to take a risk on the new unknown service. Alongside reduced cost for accommodation, Airbnb offered previously untapped resources for hotel guests, by giving travelers access to kitchens and parking spaces, which appealed to a variety of users.

Airbnb also used its marketing to appeal to mainstream customers who were seeking an alternative type of travel experience, not found in hotels, described by many as “more authentic”. Airbnb has grown exponentially since its launch (and more recently faced barriers of its own), but there is no doubt its creation disrupted the travel industry in huge ways.

The most successful companies combine disruptive innovation with other forms of innovation, to problem solve in various facets of their business and use experts in each field to ensure the brand has a long-lasting business advantage.

What business areas is disruptive innovation useful in?

Disruptive innovation takes place as a low-end disruption or a new market disruption, both forms of disruption are most likely to be adopted at smaller companies or startup firms looking to break into their chosen field with an impressive first offering. Therefore, it is often the size of the initial company that dictates the style of innovation its founders chose to adopt most fervently, opposed to the industry in question. It is of course easier to use new market disruption in a relatively underdeveloped industry or market.

It would be near impossible to create a disruptive new offering in the market of ride sharing apps, where Uber, Lyft and others are competing, often at a race to the lowest price point. However, industry areas that are working with AI technology and machine learning will be utilizing key disruptive technologies in the coming years.

Of course, if you are hoping to set up your own business, and create a new product or service that has never been done before, then understanding how to successfully disrupt established competitors using disruptive innovation will be very important. However, as a founding member of a start-up business likely with a small or no team at all, knowledge of all innovative business models including sustaining and breakthrough innovation will be required too.

If you don’t dream of running your own brand, and instead want to join an existing company who are working to create a new product or service, demonstrating your ability to think creatively and establish ideas of your own, will be very desirable.

How can I gain experience in disruptive innovation?

An MBA program is one of the best steps a person can take before entering the world of business, whether that world involves creating a new business from scratch or joining an industry leading firm. The MBA programs on offer encourage students to explore the full range of business innovation strategies that are in common use across real world businesses everyday. The welcoming and supportive environment of a program also gives you a secure space to discuss ideas, problems and solutions to hypothetical or real future business conundrums.

If disruptive innovation as an entrepreneur is something you feel passionately about, choosing an MBA program that has an established startup community or offers extra services and resources catered to you, is a great idea.

Three schools offering excellent MBA programs with a focus on entrepreneurship are:

• NUCB Business School, Japan
• IE Business School, Madrid, Spain
• University of Michigan’s Stephen M Ross School of Business

Harvard Business School offers an MBA program that gives students access to the Harvard i-lab, a resource they describe as providing “all the physical and intellectual resources current students need to develop and grow, including one-to-one advising, office hours with industry experts, workshops and an incubator program”.

The NUS Business School at the National University of Singapore offers candidates an MBA, with concentration in Innovation & Entrepreneurship. The school prides itself on the ‘Startup Runway’, a resource center that supports founders at the early and growth stage of business with a range of essential services including networking events and legal advice. 

Alternatively, if you are already a business leader looking to enhance your understanding of innovation, the Executive MBA for Entrepreneurship & Innovation at the Wharton School is an excellent choice. Its courses include, entrepreneurship through acquisition, venture capital and the finance of innovation.

Now you have understood disruptive innovation, you can explore other forms of innovation here, or take a look at our program finder to see what MBA options are available to you, no matter what part of the world you'd like to study in.