Friday, July 22, 2011
At a networking event this week, I attended a lecture about disruptive technology which, while its message may or may not have been old news to someone with a business background, I found it very helpful in explaining how "good enough" technologies sometimes displace high-quality market leaders. The speaker used a graph much like the one below (from Wikipedia).
However, the speaker's graph also included a bell curve along the vertical axis and to the right, and centered around the end of the "medium quality use" line. This bell curve represented how much of the market wanted any given level of performance, and showed that, over time, a disruptive technology that started out serving only the relatively small, lower end of a market could gradually improve enough to satisfy other, larger and more lucrative market segments. This not only can make the formerly inferior product eventually able to out-compete a market leader, it's the kind of thing that can and often does catch even good companies off-guard.
The reasoning in the lecture was very much like that in the Wikipedia entry on Disruptive Technology, specifically about "low end disruption:"
"Low-end disruption" occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the performance of the product overshoots the needs of certain customer segments. At this point, a disruptive technology may enter the market and provide a product which has lower performance than the incumbent but which exceeds the requirements of certain segments, thereby gaining a foothold in the market.Does this mean that capitalism is bad for innovation? Of course not. The initial innovation here lies in seeing that there is a cheaper, more efficient way to deliver something that many people in a market might want, but can't afford. Dazzling advances in technology are more fun to hear about, but they aren't the whole picture when it comes to innovation.
In low-end disruption, the disruptor is focused initially on serving the least profitable customer, who is happy with a good enough product. This type of customer is not willing to pay premium for enhancements in product functionality. Once the disruptor has gained foot hold in this customer segment, it seeks to improve its profit margin. To get higher profit margins, the disruptor needs to enter the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disruptor needs to innovate. The incumbent will not do much to retain its share in a not so profitable segment, and will move up-market and focus on its more attractive customers. After a number of such encounters, the incumbent is squeezed into smaller markets than it was previously serving. And then finally the disruptive technology meets the demands of the most profitable segment and drives the established company out of the market.