What does disruptive innovation disrupt?

Defining disruptive means explaining what disruptive innovation is disrupting. In addition to disruptive pricing in the case of low-end disruptive innovation and market segmentation in the case of new market disruptive innovation, disruptive innovation also disrupts our definition of performance as well as established value networks.

I/ Disruptive innovation disrupts our understanding of product performance

I’ll start out by showing why disruptive innovation disrupts the definition of performance. And to make things more concrete I’ll refer to an example which is Nintendo’s Wii, the videogame system. When Nintendo came out with its Wii, it was facing competition in the form of Microsoft Xbox and Sony’s PlayStation. Both of these videogame systems were much more powerful than Nintendo’s Wii: they had superior graphic capabilities and superior microprocessors that allowed for better 3-D rendering. But Nintendo really changed the way we see video games with its Wii mote, the joystick that is used to play and interact with the Wii. Nintendo added an element of physical exercise to the video gaming experience. In other words where Microsoft Xbox and Sony’s PlayStation would provide a very static videogame experience, Nintendo offered players to move around and use their body as perhaps the primary way of interacting with the game. So in other words Nintendo’s Wii really changed how videogames were used.

“Nintendo changed our definition of performance: performance in videogames is no longer limited to graphic capability and micro-processing power, but also includes the ability to use your body as a way to evolve in the game.”

So what this means is that the Nintendo’s Wii altered the definition of performance. While Nintendo’s Wii was a lower performing product in terms of graphical capability and micro-processing power, it offered something that the other competing videogame systems did not offer. As a result Microsoft and Sony came out with add-ons to their videogame systems to match Nintendo’s innovation. So this example really shows that new market disruptive innovation disrupts our definition of performance or at least it disrupts incumbents’ definition of performance.

II/ Disruptive innovation disrupts established value networks

In addition to disrupting incumbents’ definition of performance, disruptive innovation also disrupts established value networks.

“Value networks are basically the companies that are involved in creating, distributing and supplying a given product.”

For example, in the case of computers, the computers value network would involve the hard disk manufacturers such as Scan Disk, the micro-processing company such as Intel, the operating system software such as Microsoft, the motherboard company, the keyboard company, the screen company and all other companies that are involved in creating components that are used in assembling a computer. Each of these of value network players have built their business around a specific cost structure which yield profits if a given profit margin is reached. If that given profit margin is not reached then those value network players cannot be profitable. And this is critically important. In some cases incumbent companies have developed disruptive innovations, but when those disruptive innovations were presented to their value network partners such as distributors, they were rejected if they did not guarantee adequate profit margins.

III/ The example of Honda

For example, Honda is widely attributed to have created a new market in the United States with off the roads motorcycles (“motocross”).

“Honda penetrated the US market wanting to compete against Harley Davidson, but given that Harley Davidson was a firmly established company in mature market, Honda did not find a way to compete effectively. Fortunately for Honda, Honda executives pretty much discovered a new market which was off-road motorcycle market.”

In this market, people use motorcycles off-roads: in the woods and on dirt roads, for example. When Honda met with Harley Davidson’s distributors and tried to convince Harley Davidson’s distributors to distribute their off-road motorcycle, Harley-Davidson distributors refused on the basis that profits were too low on this kind of product category. So, unable to use established distributors, Honda turned to a whole new set of distributors in order to distribute its products across United States and in doing so they created a new value network, a value network that was dedicated to off-road motorcycles; basically, a value network that disrupted Harley Davidson’s value network.

So, to summarize, disruptive innovation disrupts the incumbent’s definition of performance and adds a new criteria for performance. Also, disruptive innovation disrupts incumbents’ value networks and introduces a new value network that is instrumental in distributing and manufacturing the disruptive innovation product.