In a competitive global marketplace, a sustainable strategy is based on the organisation's capability to generate innovative business models, value propositions, products and services. Such organisations encourage the process of ideation. Processes of ideation propounded by experts include the five-step discovery process, blue ocean strategy and disruptive innovation. Clayton Christensen's disruptive innovation (DI) process says that disruption is good if it enables a larger population of less skilled or less wealthy people to do something that could historically have been done only by experts or the rich.
For instance, transistors are a DI. They enabled the development of products that made life easier or more enjoyable as compared to products possible with vacuum tube-based technology. They were also much cheaper.
DIs could be either low-end or new-market disruptive innovations. Low-end disruptions target customers who are not looking for full performance, which is valued by the high-end customer.
New-market disruptions target customers who could not be served profitably by the existing product. Thus, DI competes with non-consumption and/or leads to the creation of a new market.
In every case of DI, the distinguishing characteristics remain the same: finding products for under-served or non-consuming customers, then delivering a series of improvements that eventually displace market dominant products. Innovative products that will serve the needs of the bottom of the pyramid really mean low-end disruptions.
Low-end disruption occurs when product improvements take place faster than the pace at which customers adopt new features.
At some point, product performance exceeds the needs of a customer segment. That is when disruptive technology enters the market by providing a product with lower performance than the incumbent but exceeds the requirements of certain segments, thereby gaining an advantage over the existing product.
Once a disruptive product is established, the disrupter works towards enhancing profit margin. The disrupter enters the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disrupter further innovates. The incumbent will not do much to retain its share in a less profitable segment, and will move up the market to focus on more attractive customers.
Now the leader is squeezed into smaller markets than it was previously serving. The disruptive technology meets the demands of the most profitable segment and drives the established company out of the market.
To get the first-mover advantage, disrupters create products with open and modular architectures. Companies are then no longer vertically integrated and can outsource to maintain the first mover advantage. This enables them to expand markets, offer products and or services at a lower cost and capture a larger share of the pie.
Bharti, for instance, has done this successfully and has been able to assume a leadership position by meeting the unserved needs of a large section of India's population.
However, this strategy could prove harmful for an incumbent company, as it happened in Compaq's case. Starting with the circuit boards, to motherboards to the computer assembly to the manufacturing of the computers, Compaq outsourced everything. Each time it outsourced, Compaq's bottomline improved by 20 per cent, without impacting the revenues.
Flextronics on the other hand, continued to get into value-added services and improving its revenues. This process trivialised Compaq's value and enhanced the value at Flextronics. What outsourcing did for Compaq was to defer its impending death by a couple of years.
Most large companies find it difficult to come up with DIs because their most demanding and paying customers are not interested in disruptive products.
Moreover, the profit margins on such products are squeezed and may not fit in the company's business models. Their interests, consequently, lie in enhancing their current products having an established market through sustaining innovations.
The mantra for success lies in companies giving a level of freedom to groups pursuing creative ideas. They need to set up autonomous organisations charged with building a new and independent business around the disruptive technology.
Such autonomous organisations are termed by Quality guru Shoji Shiba as ambidextrous organisations. Needless to say, once this ambidextrous organisation develops a disruptive product, marketing it to the correct customer is equally critical.
Dr Surinder Kapur is chairman, CII Mission for Manufacturing Innovation, and chairman and managing director, Sona Koyo Steering Systems
