Are you ready to disrupt or will you be disrupted?
Imagine you are the captain of a ship sailing smoothly in calm waters. Your destination is clear, the crew is efficient, and the vessel is at the top. What if a peril wave appears out of the dark, threatening to wreck your ship unless you change route immediately? This is the only essence of the Innovator’s dilemma - a situation or a possibility where everything smooth can still lead to failure because the tables have turned. This paradoxical challenge, modulated by Professor Clayton Christensen, is the cruel trick of choosing between sticking with what made you successful or embracing the next big thing that could render your success story outdated. It's a paradox where doing everything right that a business should - fulfilling the customer’s needs, continuous innovations, and having a growth-oriented vision can lead to failure when innovations disruptive in nature take place.
Disruptive Innovation: The double-edged sword of success
Disruptive innovations are the underdog of the business world. They are typically less lucrative, less profitable, have low margins, and serve a niche market that doesn’t seem to matter much initially. They often start their journey in niche markets that the giant players ignore, but eventually, they start ruling the entire industry. The companies are so driven by their existing customer needs that they tend to overlook the forest for the trees.
Let us consider Kodak for example. In the late 20’s Kodak was synonymous with photography. The company enjoyed a monopoly for years and was the darling of Wall Street. But Kodak didn't jump on the new technology fast enough when the digital cameras came along. Digital cameras were initially seen as a niche investment, and Kodak didn’t want to cannibalize its lucrative film business. By the time Kodak fully adapted to digital technology, it was too late, ultimately leaving no option for Kodak except to file for bankruptcy in 2013 while the digital cameras thrived.
The difference between disruptive and sustaining innovations lies in their impact on existing markets. Sustaining innovation strategies are used by companies already successful in their industries, by innovating existing products for its best customers, for higher profit margins. Disruptive innovations occur when companies capture new markets or form new networks, ultimately replacing the old ones, ultimately emerging as the winners of the success race.
The Dilemma: To disrupt or not to disrupt?
The financial implications are daunting for companies struggling with an innovator’s dilemma. Should a company pour resources into sustaining innovations improving the existing products or leap of faith into an uncharted segment with the disruptive innovations that could one day cannibalize its cash cow revolutionizing the entire industry? The risk of clinging to sustainable innovations is that they offer only short-term profits. Yes, the product gets better but it's like playing within the same sandbox. On the other side, disruptive innovators are setting the stage for the next big wave. When the incumbents realized what was happening, it was already too late. the upstarts have already captured major market share, leaving the old guard with- “Remember when we were great?” nostalgia lane
Winning the Dilemma
But not all doom and gloom. Some companies have understood the Innovator’s Dilemma successfully, proving the possibility of innovation and growth without self-slaughtering.
The key to innovation lies in a delicate balancing act that requires vision, courage, creativity, and a good dose of pragmatism.
Let's consider Walmart as an example. Walmart, the multinational retail corporation, has gained good recognition for its disruptive innovation in the retail industry. Starting as a small discount store in Arkansas, Walmart revolutionized the shopping experience and affordability of products. One of Walmart’s key disruptive innovations was its commitment to low prices. By streamlining supply chain management and locking favourable deals with suppliers, Walmart was able to pass on the benefit of cost savings to customers, making products more affordable and accessible to the market.
But how did Walmart manage to transform the industry without breaking a sweat? One word: vision. Walmart’s leadership realized that clinging to past glories was a recipe for stagnation and self-destruction. Instead, they set out to redefine success, not by playing it safe but by embracing the new and the next.
Turning Pennies into Potential
One of the core problems with the Innovator’s Dilemma is how they crunch the numbers on new opportunities. Traditional financial metrics like- Return on Investment, and Net Present Value, aren’t exactly the cheerleaders for disruptive innovations we think them to be. These metrics vouch for projects with risk-free returns and lucrative profit margins, which disruptive innovations fail to offer at the start. These metrics are all about pushing companies to invest in projects that deliver fast profits without the risk component rather than being the leader in the clan.
To step into the world of long-term profits, some companies are already experimenting with new financial strategies. For example, real options valuation, which considers investment in new technology as a strategic option rather than an all-or-nothing gamble, allows more flexibility in decision-making. It additionally reduces the cost of capital for high-risk projects by as much as 10-25%, making it easier to justify investments in disruptive innovations calling it a win-win situation for the business. Additionally, Corporate Venture Capitalists enable the company to try their luck in startups and cutting-edge technologies, allowing them to engage with disruptive innovators without putting their entire business on the verge of extinction In 2022, CVC funding exceeded $110 billion globally, with renowned names like Google and Intel Capital leading the charge. It's like enjoying a backstage ticket to disruptive innovation, all while keeping the core business safe and healthy.
The Innovation Tightrope
This is where the innovator’s dilemma gets interesting. It’s not the poor management practices that cause the company to fall into a place of disruption- it’s the good management. The strategies that make companies successful in stable markets are the same strategies that can lead them toward failure when disruption strikes.
So what can a forward-thinking person with a long-term vision do? How can they avoid the trap of the innovator’s dilemma? The key is to experiment with the dual strategy to excel in the core business while being open to experimentation with disruptive innovations.
This isn't about chasing after every new trend. It's about forming teams with creative minds in the organization to explore new markets and technologies without the need to worry about existing business practices.
The Rulebook Revolution
Business success can deteriorate when businesses focus too much on their existing strengths without considering the emerging opportunities. Flexibility is crucial.-sometimes you have to disrupt your part before someone else does. Encouraging a culture of innovation across the organization encourages risks and a response to change. Where innovation becomes a part of a company’s DNA, businesses flourish. In the corporate behemoth, becoming fixated on shiny numbers, revenue, and market share is easier. But Innovator’s Dilemma reminds us that those metrics are just the tip of the iceberg. A company can achieve its financial targets but still be on a one-way train to disaster if it's not embracing disruptive innovators. The Innovator’s Dilemma isn’t a one-time thing, but a wake-up call for change.
In this fast-paced world, clinging to the old rules is the same as trying to win today’s game with yesterday’s rulebook. Sometimes, the smartest move is not playing along but flipping the board, and rewriting the rulebook.
So if you dream of being a CEO, leading the next big thing, ask yourself:
Are you ready to disrupt - Or Will you be disrupted?
Author: Neha Agarwal
Illustration: Pavni Choubey
Sources
Medium
The NewYorker
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