Definition
Disruptive Innovation is a finance term that refers to a new technology, process, or business model that disrupts the existing market and displaces established market-leading firms, products, or alliances. It often initially targets a market segment that is overlooked by industry incumbents before spreading to a wider market. The concept is heavily associated with Clayton M. Christensen’s theories and works in business administration.
Key Takeaways
- Disruptive Innovation refers to a groundbreaking revolution in the industry that introduces new ways or methodologies which significantly alter traditional market landscapes and behavior.
- Disruptive innovations are typically initiated by smaller companies or start-ups, who, by addressing under-served or not adequately served segments of the market, gradually go on to take market share from larger, established competitors.
- Even though disruptive innovations might take time to gain full acceptance and it could initially seem less profitable or effective than current methods, in the long run, they have the potential to surpass existing market practices and become the industry standard because of their efficiency or cost-effectiveness.
Importance
Disruptive Innovation is a critical concept in finance and business because it refers to a new development that dramatically changes the way a market or industry functions, often creating new markets and value networks.
This term, coined by Clayton Christensen, can lead to the downfall of established products or companies that fail to adapt or keep pace with these innovations.
Disruptive innovations often bring about improved products, services, or processes, leading to a significant shift in consumer behavior and market dominance, subsequently affecting future investment decisions.
Understanding disruptive innovation allows businesses to be prepared, adaptable, and proactive in a rapidly evolving market, thus maintaining their competitiveness and profitability.
Explanation
The fundamental purpose of Disruptive Innovation, as per the concept coined by Harvard Professor Clayton M. Christensen, is to transform an existing market or create a new one by introducing simplicity, convenience, accessibility, or affordability where complication and high cost are the status quo. More often than not, it accomplishes this transformation by leveraging technological advancements or business model innovations.
These disruptions often lead to the displacement of established market-leading firms, products, or alliances. Disruptive Innovation has shown its profound impact across various industries, from technology and healthcare to finance and retail, proving to be a cornerstone of forward-thinking strategies and modern business development. In finance, Disruptive Innovation is employed to enhance financial services and create more efficient and cost-effective solutions.
For instance, through technologies like blockchain, artificial intelligence, and decentralized systems, companies are able to offer products and services that were traditionally monopolized by banking and financial institutions. Innovations such as mobile banking, peer-to-peer lending platforms, robo-advising, and cryptocurrency are reshaping finance, offering new alternatives for investors, consumers, and businesses. These changes not only provide swift and simplified financial processes, but also reduce costs and widen the access of financial services to underserved communities.
Examples of Disruptive Innovation
Netflix: Netflix began as a DVD rental-by-mail service, representing a disruptive innovation that eventually toppled Blockbuster, the then-giant of video rentals. As streaming technology improved, Netflix again harnessed a disruptive innovation by pioneering on-demand, online streaming of movies and TV shows, upending traditional cable and pay-per-view systems.
Uber and Lyft: These ride-sharing services represent disruptive innovation in the taxi and transportation industry. By using a smartphone app and GPS technologies to connect riders with independent drivers in a quick, easy, and often cheaper manner, they have significantly disrupted and transformed the traditional model of taxi services and public transportation.
Mobile Banking: Traditional banking methods were significantly disrupted with the emergence of mobile banking. Many fintech firms such as Square, Venmo, and Chime offer mobile wallets, simplified transaction methods, fee-free banking, peer-to-peer transactions, and accumulate data that traditional banks were slow to offer. These disruptive innovations changed the expectation and usage of financial services for millions of customers around the world.
FAQs about Disruptive Innovation
What is disruptive innovation?
Disruptive innovation is a term used in business and technology literature to describe an innovation that significantly alters the way a sector functions by introducing simplicity, convenience, accessibility, and affordability.
Who coined the term Disruptive Innovation?
The term Disruptive Innovation was first coined by Clayton M. Christensen in his research on the disk-drive industry and later popularized by his book “The Innovator’s Dilemma”.
What are examples of disruptive innovation?
Some examples of disruptive innovation include online banking, digital photography, and streaming services. These innovations have significantly changed their respective industries.
Are disruptive innovations always successful?
No, disruptive innovations are not always successful. It often depends on how it is implemented and market receptiveness to the new technology or practice.
What is the relationship between disruptive innovation and financial markets?
Disruptive innovations can significantly alter financial markets by introducing new products, services, or ways of doing business that can change the valuation and competitive landscape of industries.
Related Entrepreneurship Terms
- Technological Advancement
- Startup Venturing
- Business Model Innovation
- Market Disruption
- Value Networking
Sources for More Information
- Harvard Business Review – Provides analysis, research and expert articles related to business and management, including disruptive innovation insights from top-tier researchers and professionals.
- Clayton Christensen – A well-known strategist and Harvard Business School professor who writes about disruption innovation, his website contains a wealth of resources.
- McKinsey & Company– Serves as a go-to source for professional reports on a wide range of financial subjects, including disruptive innovation.
- Forbes – Known for its ranks and lists on everything financially related, also provides expert insights and articles about disruptive innovation.
