Disruptive innovation is used as a byline to market a lot of startups these days. But the fact is that not all innovative products are disruptive and being disruptive is a lot more than just creating a new exciting product. Just because an industry is affected by a new player or product, that does not mean there is disruption at hand.
Breakthroughs happen all the time, but they do not all equate to disruptive innovation.
Before moving on, let’s have a look at the semantics. There are two terms here.
Innovation is relatively easy to comprehend and define: a product, service or experience with a solid business model that is new and brings certain benefits to users. There’s a plethora of definitions, but as a concept it’s quite familiar and easier to point out.
Disruption on the other hand has been used in all sorts of situations, often undeserved.
Clay Christensen has defined disruption in his book, The Innovator’s Dilemma, as a product that serves a market that previously couldn’t be addressed (new market disruption) or a product that offers a low level option, cheaper or more convenient (low level disruption) suitable for overserved markets.
As such, disruptive innovation happens when new markets are created or when products get a foothold in the low end of an existing market. This occurs when a company provides customers with comprehensive products that constantly improve and pays little attention to customers that have fewer demands (and have less potential for profit). A new contender arrives that offers a cheaper product with just enough features for those consumers and enters the low end of the market.
In both cases, the newcomer challenges the incumbents, who may or may not respond. Disruption creates consumers, either by creating a market or by offering a product that works for consumers that have been overlooked, the product being cheaper or more convenient. Most users will adopt the disruptive product once it reaches a certain level of stability and quality.
Here’s an example.
Netflix launched in 1997 and offered a mail order/rental DVD service. Blockbuster took little notice of it at first, but they still did try to buy Netflix 3 years after it was founded. Nevertheless, they didn’t see it as a real competitor. As new technologies came into place and buyer behaviours changed, Netflix grew substantially, got into streaming and became a major player. Blockbuster didn’t, they went out of business in 2013.
Well, Netflix started out small and slow, they didn’t make big waves and weren’t particularly appealing to most Blockbuster customers, so the incumbent in the market didn’t feel threatened. They got a foothold in the market and targeted people that found Blockbuster inconvenient. If they had started out aggressively pursuing a large share of Blockbuster’s customers, Blockbuster would have responded aggressively and the result might have been different.
The DVD rental market was also overserved and Netflix offered a practical and cheaper alternative. It originally had a similar pay-per-rent model like Blockbuster, which later changed into a monthly subscription model and then a flat fee with unlimited rentals (without any extra fees) that proved highly successful.
This is a classic example of disruptive innovation, a low end market type of disruption.
Note that there’s a difference between disruptive innovation and sustaining innovation. The former creates products that are not viewed highly (originally) by most consumers, while the latter builds better products for consumers.
There’s one thing to remember: Disruptive innovation is a process, it’s not a result. It’s a journey, not a destination.
We can conclude that disruptive innovation has happened with a product or a company when it has already disrupted a market. That can take years. Or decades.
Blockchain in itself is not a product, but a technology that is poised to revolutionize the world. However, as previously mentioned, products can be revolutionary without being disruptive.
Right now blockchain development offers amazing opportunities that companies and startups all around the world are tapping into. Overall, it’s definitely changing things, but it’s not putting anybody out of business.
If we take a look at the two types of disruptive innovation (new market and low end market), we can see that Blockchain products have the characteristics of products entering at the bottom of the market, especially in emerging economies, but they can also build new markets by addressing nonconsumers.
It all started in 2008 when Satoshi Nakamoto released the Bitcoin: A Peer to Peer Electronic Cash System white paper. Bitcoin was the first blockchain product. Back when blockchain was a really confusing term, Bitcoin and blockchain were considered the same thing, because there was nothing else built using blockchain.
A small caveat to make it clear – blockchain is the system, the network, the framework on top of which that first cryptocurrency was built.
In 2015, when the Ethereum platform was released, people started to realize how important and revolutionary blockchain really was. It went beyond it’s cryptocurrency use, through smart contracts and Dapps (decentralized applications). This changed how we view, build and use software, offering a decentralized world.
And that changes everything.
We now have hundreds of blockchain applications, Dapps, ICO, startups and all sorts of new ideas and visions that may come to fruition as something disruptive or remain as innovative products that may die down under market pressure.
Banking, online payments, cyber security, supply chain management, IoT, insurance, ride sharing, cloud storage, charity, voting process, government management, healthcare, energy, music, retail, real estate, messaging apps, cloud computing, insurance and gun tracking are some of the markets and/or industries in which blockchain-based startups are building products that have the potential to be disruptive innovations.
But there’s one big difference here, one between perception and attitude.
Remember the Netflix story from a few paragraphs ago? Jim Keyes, Blockbuster CEO said in 2008:
“Neither RedBox nor Netflix are even on the radar screen in terms of competition,” he said. “It’s more Wal-Mart and Apple.”
They went bankrupt 5 years later.
Blockchain may be hyped up and oversold at times, but it’s certainly not overlooked as a technology, as a framework for products that can challenge incumbent companies in their respective markets. Banks are not dismissive of blockchain, they’re investing in blockchain solutions.
It’s not a situation where a contender enters the financial market to disrupt it, it’s a race to develop blockchain solutions by all interested parties.
Disruptive innovation is a process and we’re right in the middle of it.
Christensen notes that disruption often happens in markets where incumbents don’t take notice of early contenders, or in markets that just don’t seem appealing. That’s not the case here.
New startups and products are popping up with new visions for products that will cause incumbent companies to have tough conversations. They’re all innovative, no doubt about that, but they’re not disruptive, not yet anyway.
Take Bitcoin, the most advanced blockchain product. It’s revolutionary and innovative, it creates no fees electronic transactions that are authenticated cryptographically and cannot be reversed. It’s a new market type of disruption, but even though it’s been integrated in plenty of online stores as a payment option, it has not been adopted by most consumers. Its nature is disruptive, but it’s not disrupting, yet.
Companies integrate cryptocurrencies as payment options, but they’re not throwing away classical payment options. There’s a lot of hype and flamboyant statements that we’ll only be using crypto in 5 or 10 years, but that’s only a bit more than wishful thinking. The potential is there, indeed, but it’s not there yet from a practical point of view.
Disruption takes time. Blockchain has the potential to disrupt several markets and industries, but it’s not there yet. When mainstream customers buy/use your product in bulk, be it new market customers or low level market customers with fewer needs, that’s when disruption happens.
Here are a few words that describe blockchain in the world of disruptive innovation: potential, will, could. They all refer to a future situation that might occur based on current prospects.
Blockchain is shaping new markets that didn’t exist until 2008, for crypto and, in the last few years, for decentralized platforms based on blockchain, but it’s a technology that is being used by incumbents in several markets. Startups and new products might have the vision and the flexibility, but they’re not alone in the game.
Between innovation and disruption, there is innovative and potentially disruptive. That’s where we are right now. Its applications are barely being explored, their impact is something to be looked at in the coming years. Its innovative status is indeed unchallenged, but whether or not it will act as a foundation for products that will disrupt markets, that remains to be seen.