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3 types of innovations that I learn from Professor Clayton Christensen

Er HC February 03, 2018
  • Disruptive Innovation/Market-creating Innovation/Empowering Innovation: The type of new product/service where the new entrants normally start operating from the low end of market (and being ignored by the incumbents due to its insignificant market share and profit margin) and slowly move up the value chain and finally replace the incumbents.

    The typical examples of disruptive innovations are:-

    i) Toyota entered into the US market in 1960s and 1970s by manufacturing small but affordable cars that enable college students and housewives to possess their own vehicles. After gaining the foothold in the US automaker market, Toyota started moving up the value chain by making more variety of vehicle models to address the needs of different market segments as well as introducing luxury car brand Lexus to compete with General Motor and Ford.

    ii) Online video streaming business has almost phased out the tape/VCD/DVD rental business.

    The prerequisite of Disruptive Innovation is enabling technology - this explains why luxury hotels were not disrupted by budget hotels until the advent of Airbnb.

    The exception of the notion that Disruptive Innovation could only come from the low end of Market is Uber.

    Professor Clayton Christensen explains this exception as follows:-
    •  Uber came in not at the low end of the market, where disruption usually comes from, but with a price that was competitive or even higher than taxis. But it had a business model that was almost impossible for taxis to respond to. Taxis have fixed costs and it’s an asset intensive business. They own the taxis and the medallions. They have to have taxis on the road 24/7 in order to get the return they need to be profitable. Uber comes in with a very different business model. They actually don’t have assets because they don’t own the cars and they don’t need medallions. Taxis can’t adopt the Uber model. Uber helped me realize that it isn’t that being at the bottom of the market is the causal mechanism, but that it’s correlated with a business model that is unattractive to its competitor. So yes, it is disruptive. That doesn’t necessarily guarantee Uber’s success but it helps us see why taxis can’t go up against them.

     Source: https://www.forbes.com/sites/forbestreptalks/2016/10/03/clayton-christensen-on-what-he-got-wrong-about-disruptive-innovation/2/#6dd9ddb15cdf

    As the alternative name of  Disruptive Innovation suggests - Market-creating Innovation, this type of innovation creates new jobs via the creation of new market.

    The valuable lesson from different Disruptive Innovation case studies is that many big corporations eventually failed not because they have not done enough in protecting their core business models (by improving their operations, customer services and the quality of the flagship products/services) but rather because they were too obsessed with the attractive profit generated by the existing businesses until they have neglected the potential threats posed by the players from the low end of the market. In the end, these big companies were replaced by new opponents who have successfully commercialized disruptive technologies or adopted completely different business models.

    Source: Harvard Business Review

  • Sustaining Innovation/Performance-Improving Innovation: The innovation with the aim to improve the quality and feature of the current product offering. The typical example is the renewal/replacement of the existing product model with the upgraded version. The limitation of this type of innovation is that at certain point of time, the product features probably overshoot the actual needs of the target consumers where the customers opt to withhold spending and continue using the old product model.

    The example given is a consumer who has bought Toyota Prius will unlikely buy another Toyota Camry.

    This type of innovation grows job opportunities modestly or at least maintain the existing jobs via the continuous renewal of product life cycles.
  • Efficiency Innovation: The innovation that tries to do more with less in "manufacturing" the product offering. It improves the throughput of production line and therefore achieves greater cost efficiency by continuously refining the product delivery process. It potentially releases more capital into the market via cost saving.

    This is non-market creating innovation where the investors should be wary of keep on recycling the capital into the improvement of operational efficiency without creating new market opportunity from non-consumption.

    The ideal situation is that the capital released by Efficiency Innovation would be invested into Disruptive Innovations to create new market and new jobs.

Er HC

Posted by Er HC

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