Question

Consider a startup that has developed an innovative solution based on new technology that it is the basis for a new venture that it has launched. Suppose the startup is quickly acquired by an industry incumbent not long after launching the venture. What type of innovation does the new venture most likely have under Clayton Christensen's theory of disruptive innovation? Explain.

Answer 1

In General,The term “Disruption” can be defined as a process where a small company having few resources is able to challenge the already established incumbent businesses. They gain advantage by targeting those areas (say segment) not targeted by incumbents.As we know, Incumbents focus on improving their products and services for their most profitable customers, and this result in exceeding the needs of some segments and on the other hand ignoring the needs of others. Entrants that prove disruptive begin by targeting those overlooked segments.They charge lower price for the products and services. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.

As per Clayton Christensen,

Disruption can be of two types:- LOW END or NEW MARKET.

Low end disruption includes businesses that come in at the bottom of the market and start serving customers in a way that is good enough.Generally,these are the lower profit markets for the incumbent and when these new businesses enter, the incumbents move further upstream.We can say that they put their focus on where the greater profit margins are.

New Market disruption includes businesses that compete against non-consumption in low margin sectors of a market. Here also the products provided are seen as good enough like in low end market and the emerging business is able to be profitable at these lower prices. The main difference is that new market disruption focuses on ''UNDERSERVED'' customers and low-end disruption focuses on ''OVERSERVED'' customers.

Christensen is of the view that it takes time to determine whether an innovator’s business model will succeed or not.

As per Christensen's theory,there are three types of innovation that the new venture mostly like have:-

EMPOWERING:-  "Empowering" innovations transform complicated, costly products that previously had been available only to a few people, into simpler, cheaper products available to many. For Example:- The Ford Model T was an empowering innovation. Empowering innovations create jobs for people who build, distribute, sell and service these products.

SUSTAINING:- "Sustaining" innovations replace old products with new. Sustaining innovations replace yesterday's products with today's products. They keep our economy vibrant--and account for the most innovation. But they have a zero-sum effect on jobs and capital. Example:- Toyota Prius hybrid is marvelous,yet every time a customer buys a Prius, a Camry is not sold.

EFFICIENCY:- "Efficiency" innovations reduce the cost of making and distributing existing products and services.For example:- Toyota's just-in-time manufacturing in Car making and Geico in online insurance underwriting. Efficiency innovations almost always reduce the net number of jobs in an industry, allow the same or more amount of work to get done by few people. Efficiency innovations also emancipate capital for other uses. Without them, much of an economy's capital is held captive on balance sheets, tied up in inventory, working capital, and balance-sheet reserves.