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July 6, 2016

Which to Choose: Innovation, Disruption?

Summary:

Ask if your market faces unpredictable changes. Then determine how much control you have over those changes.

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Most executives are averse to risks but, ironically, create the risk of being leapfrogged by unforeseen competitors. Executives focus on innovation but only look for a new idea, device or methodology that incrementally provides greater efficiency or effectiveness, like the fifth blade in a razor or higher-resolution HDTVs.

This sort of innovation, sometimes referred to as a sustaining innovation, is not the same as out-of-the-box thinking that leads to disruption.

To be sure, sustaining innovation can sometimes produce great success. Google displaced Yahoo as the de facto search engine and web mail provider through incremental, in-house innovations, not through a disruptive strategy.

Nevertheless, most companies, including insurers, are now being forced to change their products, service models or delivery systems because of threats from outside the mainstream in the industry.

Management and marketing efforts have traditionally touted incremental, continuous improvements — using words like “faster,” “bigger,” “better” or “more efficient” — as a reason why clientele should remain loyal and why business should even expand. The incumbent mature market leaders, no matter how visionary they think they are, often ignore opportunities to invest in disruptive business strategies. Netflix beat Blockbuster in the consumer video market starting in 1997 by coming up with a new business model for DVDs  by mail and by investing in the nascent technology of on-demand, downloading of video content while Blockbuster stayed with its traditional business model of renting DVDs in stores and kiosks.

See also: Does Your Culture Embrace Innovation?

Disruption is created through inventions or processes that transform and overturn the way we think, behave, buy products, communicate, travel and go about our daily business. It doesn’t have to be based on new technology. Disruption, unlike incremental innovation, displaces an existing market, industry or technology by reimagining something more efficient and wildly better. Disruption looks at the underlying principles and values of a product or service, then rethinks solutions.

Disruption is aimed at a set of consumers whose needs are largely ignored by industry leaders. A disruptive innovation trades off performance along one dimension for performance along another, such as simplicity, convenience, values, ability to customize and transparent pricing.

Initially, some disruptive models from a niche market (like Uber or Lyft) may appear unattractive to consumers or inconsequential to industry incumbents, but eventually many of these disruptive or enlightened approaches to business opportunities completely redefine the industry. New brands have turned their industries upside down. In fact, smaller companies with fewer resources have knocked many brand name incumbents out of business. Once mainstream customers start adopting an entrepreneurial entrant’s offerings in volume, disruption has occurred.

Shilen Patel, founder of business accelerator Independents United, says: “Simply put, innovation is rational whereas disruption is irrational.”

Most outrageous business ideas have had loud critics. Not disruption. Companies like Google (Alphabet) thrive by taking crazy ideas called moonshots at a devastating pace and seeing if they can make them believable, deliverable and profitable, knowing that just a small percentage of the ideas will work.

So how does a business decide if it needs to innovate or reinvent itself to remain competitive?

Corporate executives must ask themselves if their industry is facing unpredictable changes, then decide how much control they have over that change. As Mark Zuckerberg once said: “If we don’t create the thing that kills Facebook, someone else will.”

Companies now run the risk of cross-industry disruption, where a high-tech company takes over autonomous transportation or even an industry like insurance. Amazon did just that with retail and is now considering its own drone delivery system, its own shipping fleet and 3D printing to disrupt certain supply industries.

See also: 6 Key Ways to Drive Innovation

The University of Southern California in 2014 began offering a program for entrepreneurs referred to as “a Degree in Disruption.” Venture capitalist Josh Linkner’s book, The Road to Reinvention, argues that “fickle consumer trends, friction-free markets and political unrest…along with mind-numbing technology advances,” mean that “the time has come to panic as you’ve never panicked before.” Twenty years ago, the disruption in manufacturing was offshoring. Now, the disruptions are technologies like 3D printing, artificial intelligence, transportation innovations and robotics — and are bringing manufacturing jobs back to home markets. 

Investments in sustaining innovations obviously make sense for most companies, but some may choose to strengthen their ultimate market position by investing in enterprises that don’t necessarily align themselves with their core business strategies.

Partly because of disruptive innovation, the average job tenure for the CEO of a Fortune 500 company has halved from ten years in 2000 to less than five years today. Eventually, foothold market companies may have to decide on the strategic choice of taking a sustaining, traditional path versus a disruptive one. The same forces that lead incumbent industries to ignore early-stage disruptions also compel disrupters to ultimately disrupt.

But if a company’s innovations do change consumer behaviors and force a redrawing and expansion of market boundaries that separate its new business from the culture and processes of old ones – then you really have something.

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About the Author

As a renown workers’ compensation expert and industry thought leader for 40 years, Jeff Pettegrew seeks to promote and improve understanding of the advantages of the unique Texas alternative injury benefit plan through active engagement with industry and news media as well as social media.

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