Ever since Harvard Business School Professor Clayton Christensen, author of The Innovators Dilemma, first championed the theory of disruptive innovation in the 1990s, entrepreneurs have been interested in harnessing the power of disruption. In the book, Christensen describes disruptive innovation as the process by which smaller companies with fewer resources challenge established or incumbent businesses by addressing an underserved need in the market. This approach to innovation can be highly successful for startups or those with new products or services, as it allows them to gain an advantage over large competitors they’d otherwise struggle to compete with. Think Netflix and Blockbuster or Uber and the taxi companies.
But how do you develop the strategic capability to know what to do when? Well, awareness is the first step. Knowing that there are key things to learn and skills to develop is critical. It’s not going to happen in a dream or just fall into your lap. You have to work to develop your strategic skills. Here are three things you need to learn.
The ability to spot opportunities. While quite a few of potential entrepreneurs will look at the marketplace in a tactical way, a few will look for deep trends forming that will give them an advantage in the marketplace over incumbents. Another key thing to look for is large marketplaces where customers have either ‘tolerated’ a product or service or been underserved. Great example here again is Uber where for years people felt they never really received a consistent level of service from disparate taxi companies. Or the way Gen Z feels about physical bank branches when they just want seamless mobile apps to help them conduct easy transactions online.
You are not the customer. To identify opportunities for disruption, entrepreneurs must better understand customers’ needs and evaluate their underlying motivations for purchasing a product or service. To develop customer insights, observe current customers, conduct user interviews, discover why former customers left or Identify customer workarounds they utilize to get the job done. Customers won’t always tell you want they need so you have to work to spot it.
Implementing the right strategy. Beyond defining a clear strategy to address an underserved need in the market, a key aspect of successful disruptive innovation is knowing how and when to use it. In the early days of a startup company focused on disruption, you need to utilize an emergent ‘rapid growth’ strategy to ensure your employees feel empowered to surface and elevate new ideas quickly. However, once you have taken market share and are still growing rapidly, you should transition to a deliberate strategy, one that arises from repeatable processes. At this point, the company is now in a growth but sustaining phase, and effective execution is critical.
So, once you understand that you need to be more strategic, then you can evaluate tactical business models to help you in your disruption strategy. Here are five business models that could be utilized to disrupt an industry and take market share rapidly.
The marketplace model. This is basically to create a free-standing marketplace when you see a niche growing rapidly or customers struggling to sell their products. Think eBay or Etsy. You will make your money on commissions or a percentage of the sale.
The free model. This is a business model where the core product is given away for free to a large group or users. Then premium products are sold to a smaller fraction of users who want premium features. The trick to excel in using this business model is to make sure that the product or service you are giving away is of high value to the customer. Think next generation of social media, the new Ai apps, or even next generation music services.
The freemium model. This business model will disrupt by providing digital sampling. The users will pay for the basic service with their data and not money. The business will then charge them a fee to upgrade to a fuller offer. For the users to access other features or an upgraded version they will have to pay a set fee to the business. Spotify has successfully implemented this business model.
The subscription model. In this business model, a business takes a service or a product that consumers could have easily in the past had access to and locks it in. So, the only way for the consumer to get access to the service is by paying some amount, usually monthly, for subscription. This model was pioneered by newspapers and magazines but is now being used by other businesses. Companies like Netflix use this business model.
The ecosystem model. By implementing this model, the business will offer different products that are integrated and the consumers get used to using one company to satisfy a certain need. This is a locked system where the business will limit customers’ choice and will therefore eliminate any completion. Apple, Google, Airbnb, Nespresso, Amazon are all using this business model.