Disruptive technology is a phrase we’ve been hearing a lot lately. While the concept of business disruption is nothing new, it is an accelerating trend that shows no signs of slowing down anytime soon.
Disruptive innovation or technology was formally defined by Harvard Business professor Clayton Christensen in a 1995 HBR article and subsequent book entitled Innovator’s Dilemma. In short, disruptive innovation is a concept, product, or service that disrupts an existing market or creates a completely new market segment. Disruption occurs when an existing market’s value drivers significantly change.
Warren Black illustrates this point in a talk on the Fourth Industrial Revolution when he says:
Electricity wasn’t invented to improve the performance of the candle.
What typically happens is a company enters a particular market with a new technology and/or business model that provides different and better value than more established firms. Note that “disruption” doesn’t just include technology but business processes as well.
One example of a disruptive technology is the SaaS or “software as a service” business model, which is something we all have become more familiar with in recent years. Rather than paying a hefty price tag for software programs on an individual computer or on-site server, the SaaS model delivers software for a small monthly fee.
Salesforce’s customer relationship management (CRM) tool was a pioneer in the SaaS space. Although struggling at first, Salesforce’s availability, flexibility, and ease of maintenance, or a combination of new technology and a unique business model, ultimately led to widespread adoption and displacement of older firms.
How does disruptive technology go from initial concept to displacing established market players?
Contrary to what you may think, disruptive technologies start off slow and are typically not profitable in the beginning. The new technology, like SaaS in the early 2000s, only appeals to a small market niche – the early adopters – who are looking for new solutions, because they feel the existing solutions don’t effectively meet their needs . Therefore, most established companies will opt to focus their resources on “sustaining innovation” (i.e., improving existing technology), especially considering that the existing customer segment is the most profitable.
Disruption begins to take place when the needs and preferences of consumers becomes more in alignment with what the new technology offers.
Established companies eventually catch on but it is often too late…
While they are quite good at meeting the needs of customers through improvements to existing technology, most fail to anticipate what customers in the future will demand. Larger more established firms rarely pioneer new technologies that initially only appeal to small, niche markets.
After all, this sort of innovation can be hard to justify since it means diverting resources from meeting the needs of current customers and fending off competitors to creating something new for an insignificant or (currently) nonexistent market.
While established companies by and large do a great job of focusing on their existing customers, they are also often oblivious to up and coming technologies in emerging markets. According to a 2017 survey from Innosight, many executives see existing market players as their biggest competition and not new entrants to the market. I imagine that is what the executives of giants like Borders, Sears, and Kodak thought…until they were unable to reverse the downhill course of their companies.
Although bureaucracy, arrogance, and short-term thinking does play a role in a company being disrupted, the core reason leading companies are displaced is that they stay too close to existing customers. Executives rely too much on past successes and fail to appreciate the abilities of new entrants to the market until it’s too late.
Avoiding this fate requires established companies to not be reactionary but instead take informed risks…
Taking a reactionary approach to the adoption of disruptive technologies can lead to “shiny-object syndrome.” A client fell victim to this mindset…there were no principles or goals guiding its technology investments. A solution sounded fantastic when discussed, but implementation led to extremely inefficient processes, staff overwhelm, and dissatisfied customers.
A recent article exploring disruptive technology though suggests a very blanket, reactionary approach, thus prompting today’s topic. Technologies like machine learning, AI, and block chain may be disruptive for some industries, but AI for example has been used in retail for a long time.
As I’ve mentioned in previous posts, including this one on remote work, taking a proactive, strategic approach instead of a reactionary one is crucial for organizations to adapt and thrive in the decades ahead. It is also a key difference between traditional risk management and ERM.
In his book Prepare to Dare, author and former strategic risk manager for LEGO Hans Læssøe summarizes the different levels of risk management from basic to progressive.
He explains that to survive and thrive in the onslaught of change expected in the years ahead, companies need a certain level of disruptive capability. These companies will seek ways to leverage key risks into opportunities and look for areas of disruption or business development in a deliberate and systematic way. As Hans states:
The actions and decisions applied for doing disruptions or disrupting your industry may not be seen as risk management as such – and so be it. However, it is all the tools and processes of risk management that enables an organisation to do it successfully.” [emphasis added]
Business development and disruption is a more advanced use of risk management tools. Not every organization is equipped to do this right out of the gate as there are different foundational elements that must be in place first. However, once these are in place, a few questions (from Hans’ book) you can ask to gauge your company’s level of disruption capability include:
- Do you actively scout for disruptions made by others – in other industries?
- Do you actively and broadly scout for options of creating disruption?
- Do you actively seek the opportunities of applying your business strengths into other industries?
- Does your development strategy embed explicit risk taking?
I also highly recommend Dr. Christensen’s original article for ideas on what your company can be doing to monitor business disruptions and act before being displaced by an insurgent competitor.
The story of human advancement has been one of disruption, whether it’s Gutenberg’s printing press, Henry Ford’s assembly line, or the more recent growth of Amazon, Uber, and Airbnb.
Simply reacting to these changes will inevitably lead to irrelevance, but by taking a methodical, strategic approach, your company will be well-equipped to survive and thrive in the 21st century.
Is your company harnessing risk management in pursuit of disruptive technology?
The pace of disruption will only intensify in the years ahead. To share your thoughts on this trend and where the future may be headed, please don’t hesitate to leave a comment below or join the conversation on LinkedIn.
And if your company is struggling to use risk management for building a strategic advantage in your industry, I invite you to visit my consulting firm website Strategic Decision Solutions to learn more about how we help companies take smart and informed risks to maximize business performance.