What is 'Disruptive Innovation' ?
Do you think Tesla or Uber is disruptive innovation?
Most people will answer the above question as a YES. The reason for that is the trite usage of the term ‘innovation’ in the startup fancied world. Generally, any process or product that introduces significant enhancement over an existing one or creates a new segment is considered innovative and sometimes also addressed as a disruptive innovation.
The Disruptive Innovation theory is one of the most misunderstood theories in the business world that leads us to incorrect causations about products.
What is Disruptive Innovation?
The most profound definition quoted on Google is that it refers to innovations and technologies that make expensive or sophisticated products and services more accessible and affordable to a broader market.
A simplified pragmatic explanation can be a process in which a new entrant with limited resources challenges the incumbents. As incumbents focus on the most demanding (or profitable) customers, they continuously improve their offerings for this segment, ignoring the need of other customers. This is where new entrants find an opportunity to garner traction, win over the overlooked customers by providing affordable product options. But notice, till now disruption has not occurred yet.
When the new entrants begin consolidating, and start moving to the incumbent`s customer segment, the first traces of disruption begin to appear, and if the new entrant successfully dents this segment and wins over the incumbent`s customer segment, the disruption has occurred.
Now the BIG question is, why do the incumbents ignore these new entrants?
Contrary to popular belief, disruptive innovation is a continuous process rather than a ripple in time, which takes time. In the early 2000s, incumbents were even more relaxed as they understood the low foothold business disruption is unlikely, and it would take time even if it happens. But a few years later, the speed at which technological disruption began cut short the time to disruptive innovation.
Another reason why incumbents ignore the new bees is a strategic move to hold and acquire the entrant when it begins to show signs of disruptive innovation. Like what Facebook did with Instagram or Google did with YouTube, both businesses, hallmarked as one of the best acquisitions in the modern business era.
Now coming back to our initial question- Is Tesla a disruptive innovation? The answer, according to the theory, would be NO.
The reason is that most disruptive products start at the lower end of the price segment and gradually move up to the priced customer segment. Tesla has followed the diffused innovation model, building the low demand premium car first and reinvesting the revenue to create an affordable mass-market vehicle. If Tesla can do that in a few years, that could affect a disruptive innovation. Till then, not SO MUCH. Sorry! :D
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