The Idea in Brief
The threat of disruptive innovations is all too real. Witness Digital Equipment Corporation post the advent of personal computers, or U.S. automakers after Japan’s economic rise.
What is a disruptive innovation? A technology, product, or process that creeps up from below an existing business and threatens to displace it. Most disrupters initially offer lower performance, less functionality, and lower prices (think transistor radios) then gradually improve until they displace the incumbent.
A key challenge in dealing with disruptions is identifying them. Since most nascent technologies don’t become competitive threats, many companies understandably ignore them until they become obvious—when it’s too late to fight back.
But insurgents’ displacement of incumbents isn’t inevitable—especially if you detect and respond to potential disruptions early, using the new analytical tool presented in this HBR article. While not foretelling the future, the tool does harness your company’s collective wisdom and helps managers think systematically about potential threats. Its rigorous approach can spell the difference between flailing and prevailing in the face of danger.
If your firm is an incumbent, the tool can help you identify potential disrupters and either formulate preventive responses or turn them into new business opportunities. If you’re an insurgent, you can use it to plan—or conceal—an attack.
The tool benefits any company seeking to assess multiple investment opportunities and dedicate resources wisely.
The Idea in Practice
The Disruption Process
Disruptive innovations encroach on markets in a surprisingly predictable, six-stage process:
1. foothold market entry
2. main market entry
3. customer attraction
4. customer switching
5. incumbent retaliation
6. incumbent displacement
But disruptions can fail at any stage, so it’s well worth studying each stage carefully.
The tool helps managers collectively analyze how likely an innovation will move through each stage, and determine the appropriate actions—if any—to take.
Using the Tool
1. Define. Identify and describe potential disruptions, including how far out (one year? three? five?) they might be.
2. Enlist. Assemble a team comprising an executive champion; a process leader, a well-respected, visible individual (often from strategic planning) with some technical background, broad understanding of competitive dynamics and evolving customer needs, and strong facilitation skills; and 6–10 members from diverse perspectives—engineering, marketing, sales, new business development, and customer service, for example.
3. Train. Familiarize the team with the tool by reviewing several retrospective disruptions and practicing with a live example from another industry.
4. Tailor. The tool provides a list of factors that may contribute to the likelihood of the disruption succeeding at each stage. For example, contributing factors for Stage 1, foothold market entry, include:
- populations who previously lacked the skill or money to buy
- underserved segments
- low-end, previously unprofitable markets
- opportunity to market stripped-down products
Customize the list of contributing factors for the specific disruption your team will be analyzing.
5. Score. Score the innovation’s potential disruptiveness using the following steps. This process generates valuable discussion that exposes managers’ assumptions about industry conditions and dynamics.
a. Rate and weight the contributing factors within each stage of disruption:
- Each team member individually rates each contributing factor on a 7-point scale of disruptiveness. For example, answer the question “Can an insurgent gain a foothold in the market below our main one?” by rating each factor (see #4 above) from highly unlikely to disrupt (e.g., small underserved markets) to highly likely to disrupt (e.g., large underserved markets).
- Each team member now individually weights each factor based on its perceived level of influence.
- The team leader assesses the level of disagreement among members’ ratings and weights. This exposes lack of clear definition, differing assumptions, or insufficient information. Collect more information, when necessary, to make the process as fact-driven as possible.
b. Develop a majority or consensus for each factor’s ratings and weights.
c. Calculate the total score of each stage of disruption.
6. Interpret. Create a disruptiveness profile by graphing the final scores for all six stages of disruption.
Then develop a response plan. Some profiles suggest immediate action. For example, if you’ve determined that many customers use little of your product’s functionality, consider offering a simpler product at a lower price.
Other disruptiveness profiles suggest different responses. For instance:
- No factors are judged as highly likely or highly unlikely to disrupt. In this gray area, disruption is possible but not assured. Your response? Initiate modest action. If the potential revenue displacement is low, monitoring the situation may be sufficient. If it’s high, consider investing in a preventive effort.
For example, commission a more thorough analysis of the disruption, start an in-house development effort, or explore potential partnerships with emerging players that have a valuable technology or market position.
- Some or all factors are judged as highly likely to disrupt. You’ll, of course, need to take substantial action—especially if the innovation seriously threatens future revenues. This might take the form of an acquisition or the launch of a dedicated internal group with sufficient authority and resources to put the organization on the map quickly.
Example:
Determining that the low- and middle-market data-storage segments might experience rapid growth, EMC took aggressive action. It created a presence in the middle segment in 1999 by acquiring Data General’s midmarket storage business. In 2001, it formed an alliance with Dell to supply EMC’s Clarion systems to the small-enterprise market. Recently, it took the daring step of porting its coveted storage-management software to competitors’ hardware systems.
7. Sell. Present the group’s suggested actions to senior managers and their constituent groups. The team and its executive sponsor may well need to serve as evangelists for the plan.
We’ve all heard the stories about corporate giants who ignored disruptive innovations and paid a steep price in the end: Think Digital and the personal computer, or Detroit and Japanese economy cars. These stories have become part of the business lore, and big companies now spend a substantial amount of time and money trying to make sure they, too, don’t get blindsided by smaller, leaner companies.
