“Innovation is widely regarded as the single most important ingredient in today’s economy,” according to entrepreneur Faisal Hoque at Fast Company.
Innovation not only impacts global economies and business models, but the quality of life of people. Innovation has changed the way people live, work and do business.
Businesses can focus on two types of innovation: sustaining innovation and disruptive innovation.
Sustaining Innovation Defined.
A sustaining innovation improves existing products. It does not create new markets or value markets, but develops existing ones with better value, allowing companies to compete against each other’s sustaining improvements. Scholar and innovation expert Clayton Christensen explains it this way.
A sustaining innovation targets demanding, high-end customers with better performance than what was previously available. Some sustaining innovations are the incremental year-by-year improvements that all good companies grind out. Other sustaining innovations are breakthrough, leapfrog-beyond-the-competition products. It doesn’t matter how technologically difficult the innovation is, however: The established competitors almost always win the battles of sustaining technology. Because this strategy entails making a better product that they can sell for higher profit margins to their best customers, the established competitors have powerful motivations to fight sustaining battles. And they have the resources to win.
An example of sustaining innovation is Pfizer, the world’s biggest pharmaceutical company by revenues. Hoque notes the company’s ongoing success with blockbuster medicines and vaccines with household names, such as Zithromax, Lipitor and Viagra. The company was founded in 1849 as a manufacturer of fine chemicals, and a year later, it discovered Terramycin (oxytetracylcine), launching the company’s successful and ongoing expansion into a research-based pharmaceutical company. It augmented its research by building its brands, pipeline and profile through major acquisitions.
Disruptive Innovation Defined.
A disruptive innovation helps create a new market and value network. The innovation eventually disrupts an existing market and value network. An important note is that while the concept of disruptive technology is widely used, “disruptive innovation” is a more useful concept because few technologies are intrinsically disruptive. It is the business model and not the technology that enables and creates the disruptive effect.
A key to disruptive innovation is that, opposed to sustaining innovation, it does not take place with established competitors, as Christensen explains in Harvard Business Review.
“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.
An example of disruptive innovation is how when Apple introduced the iPod, the company brought together a strong technology with a groundbreaking business model. Customers flocked to Apple, and the company had record-breaking profits with its hardware, software and service. But the real innovation was making downloading digital music easy. The business model paired integrated hardware, software and service with low-profit iTunes music and the high-profit iPod.
There are different types of disruptive innovations, according to Christensen:
Low-end disruptions involve a new operating and/or financial approach with some combination of lower gross profit margins and higher asset utilization. Attractive returns are possible at the discounted prices needed to win business at the low end of the market. Instead of creating new markets, companies use low-cost business models that pick off the least attractive customers of established companies. Examples include how Korean automakers entered the European and North American markets or how Amazon disrupted traditional bookstores early on.
New-market disruptions involve products that are much more affordable to own and simpler to use — they allow a new population to own and use the product. New markets were created with the smartwatch, which instead of focusing on the Swiss watch industry, targeted the 60 percent of 18- to 34-year-olds who get the time from their phones. The personal computer also tapped into a non-existent market before receiving sales from higher-end professional computers.
Hybrid disruptions involve both new-market and low-end approaches. Southwest Airlines and Virgin America reflected this by targeting people who weren’t flying as well as customers who were at the low end of major airlines’ value network.
Sustaining Innovation vs. Disruptive Innovation.
Choosing between sustaining innovation and disruptive innovation is not simple. There are practical problems with neglecting either form of innovation.
Incumbent businesses often neglect disrupters because the process can take time. Netflix launched in 1997 and its service wasn’t appealing to most of Blockbuster’s customers, who rented movies on impulse. But when Netflix went from movie deliveries through the mail to streaming services over the internet, it was then targeting Blockbuster’s core market. Blockbuster failed to respond appropriately because the initial threat didn’t appear too disruptive; the two companies were serving different audiences.
A disruptive business model can generate attractive profits, but organizations shouldn’t neglect sustaining innovation in favor of disruption. Sustaining innovation can help a new business grow through better technologies and products; it can help an established business “build a better mousetrap.” But once the viability of the superior product is established, businesses will need to turn to disruption for “new” growth (in other areas of business).
What wins in sustaining innovation vs. disruptive innovation? According to Deloitte, businesses should pursue both forms of innovation.
The “innovator’s dilemma” is the tough choice any company faces when it has to choose between holding onto an existing market by doing the same, yet slightly better (sustaining innovation), or capturing new markets by embracing new technologies and adopting new business models (disruptive innovation). In order to achieve cutting-edge innovation within a company while creating a long-lasting business advantage, the latter should aspire to achieve both revolution and evolution. In other words, disruptive innovation and sustaining innovation do not necessarily need to be alternative to one another, but rather complementary measures.
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