Electronic copy available at: http://ssrn.com/abstract=2522812. Disruptive Innovation: A Catalyst for Change in Business and Market Modeling. Aeron Zentner.
Disruptive Innovation: A Catalyst for Change in Business and Market Modeling Aeron Zentner As the business market environment continues to shift and long-term stability is not easily attainable with the constant market disruptions and emerging regions. In order to compete on this platform, organizations must maintain flexibility within their business models and strategies to effectively capitalize or respond to market disruptions. Keywords—Business Modeling, Market Modeling, Disruption, Innovation
I. INTRODUCTION In recent years the evolution of the global market has prompted firms to rethink and reconfigure strategies in order to compete on the global platform. Innovation is considered a relevant factor in developing organizational strategies to increase competitive advantage. Literature shows with the rapid advancement in technology, increase international trade and investment growth, wealth throughout the globe, and convergence of consumer demands and needs are influencing firms to expand globalization strategies and tactics (Akkrawimut & Ussahawanitchakit, 2011). Additionally, a recent article supports disruptive innovations as not just technological advancements, but are business model changers (Saravanan, 2012). The following report with review the theory of disruptive innovation and present strategies to address integrating disruptive strategies to gain competitive advantage through business model innovation and market model innovation. II. DISRUPTIVE INNOVATION The disruptive innovation theory was coined by Christensen (n.d.) as “A process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market’, eventually displacing established competitors”. An approach used by new entrants to undermine incumbents is the release of a service or product into new or unattractive market. By catering to an undefined market can provide the entrant the ability to grasp competitive control and dominate the market). In other cases entrants provide new products or services, which captivate a new audience though the offering in substantial quality, but increased improvement overtime either by the entrant or fast second firms can hinder the ability of incumbents to compete (Raynor, 2011). Christensen and Overdorf (2000) describe the strategy of disruption as “Creating an entirely new market through the introduction of a new kind of product or service,
one that's actually worse, initially, as judged by the performance metrics that mainstream customers value” (p. 72). An example of was the introduction of mobile phones in the early 1990s. The new technology boasted a mediocre product and provided limited access to consumers. Over time, the commodities were better developed through disruptive technology, which produced a new market demand through innovations in the product and service. Christensen and Overdorf (2000) define this approach as sustaining technology, which is “Innovations that make a product or service perform better in ways that customers in the mainstream market already value” (p 72). To reference the previous example of disruptive innovation, disruptive technology took the product (mobile phone) and developed new market competition that erupted into an epidemic of consumer demand through the provision of many product and service options. The identification of potential demands and the creation of new products and services to obtain a new market is the foundation that disruptive technology is based upon. The advantages of harnessing new ideas and innovations can create a new market of consumers and be a breakthrough point for companies looking to expand into the market. A prime example was the response of Apple's release of their product, the iPod. Apple identified a need for services to accompany the growing technology of digital music. The disruptive innovation occurred when Apple released the iTunes store. The digital marketplace provides consumers direct and instant access to an infinite library of music and audio books formatted to play on all MP3 devices. The new service provided the opportunity for Apple and non-Apple product users to access content and media, which catapulted Apple to the forefront of the digital music industry. Over time, the disruptive technology of online music marketplaces revolutionized how consumers attainted music, video and literature, which displaced many media distribution storefronts into conforming to the new standard to meet consumer needs. The advantage of utilizing disruptive technology can create new revenue streams through the enhancement of other’s disruptive innovations. Consumers’ adaptation to a modified product or service may yield a higher return and market reaction based on brand recognition of the incumbent product or service. The established product or service may have gone under scrutiny, which may position outside firms or
Electronic copy available at: http://ssrn.com/abstract=2522812
even incumbent firms the opportunity to capitalize on the identification of product or service problems. The reaction to the situation may result in the release of new competitive products or services to meet the demands of the current consumers and attract new markets. The downside to companies attempting to establish themselves through disruptive technology can go through several non-product or service related attributes. Unknown smaller company spin-off products and services may provide a better product at a lower price, but lack the reputation of the incumbent organizations that attracts potential consumers. Though the specifications meet the same standards as the incumbent’s product at lower price, the product remained stagnant on the market radar. Larger organizations carry the advantage of larger resource allocations compared to smaller companies and can provide additional service such as customer support or troubleshooting services to support their products and services. The opportunity for resource allocation to meet consumer needs may be difficult for smaller companies based on the market demand. Along with the incumbent’s reputation, the services can initiate a feeling of security for potential consumers looking to invest in a products and service (Droege, & Johnson, 2010). The lack of effective planning and competitive assessment may attribute to the overhaul of entrant firms seeking to build market strength through disruption. . III. DISRUPTIVE INNOVATION MODELING The rapid shift in consumer demand and in technological progression through disruptive innovation has organizations seeking new strategies to maintain market stature and gain advantage by venturing into new opportunities to meet consumer demand. Skarzynski and Rufat-Latre (2011) presents three tactics to instigate disruptive innovation as the abilities to identify unmet customer needs, link incremental innovation efforts, and align innovation and strategy. By addressing these guiding principles organizations can progress towards effectively disrupting the market. A. Unmet Need The rapid shift to globalization in addition to the constant advancement in technology has evolved into a continuous cycle of consumer demand. This situation provides various forms the opportunity for organizations to increase competitive advantage through intervening with innovative strategies. Skarzynski and Rufat-Latre (2011) suggest two practices to meet shifting trends and consumer need. First, use observation to address consumer need in opposition to relying on data. This approach suggests foresight through observation on current actions and trends would be more beneficial as data reports review previous actions and outcomes of older trends. This strategy takes on a qualitative avenue of consumer observations and interactions to build a better understanding consumer need. Second, leaders must broaden perspectives when analyzing trends. In many cases trends are not stemmed from a single idea but is a matrix of integrated factors, which culminate into a disruptive change. Addressing multiple facets
of opportunities leaders can better determine approaches to gain advantage with the shifting markets and consumer needs. B. Linking Innovation Approaches In many instances organizational strategies isolate innovative efforts in two innovative categories, game-changing (i.e. new or different knowledge; competence destroying) and incremental (i.e., building upon current knowledge; competence enhancing) innovations. Skarzynski and RufatLatre (2011) suggest the isolation of the new approaches can hinder the innovative process as the strategies can be interdependent upon each other and utilize firm competencies in the development process. Though the alignment of the innovative strategies can provide a share aspiration and bring clarity to defining a set approach to achieving a successful future. In order to warrant the two innovative strategies are utilized, Skarzynski and Rufat-Latre (2011) suggest two practices ensure each will be effectively served. First, firms should avoid making a decision to fully employ an innovative strategy during the idea stage. The idea stage should be utilized as an approach to formulate and broaden ideas with focus on the potential opportunities and risks involved. Second, firms should develop a progression platform that systematically follows the incremental innovation strategy and culminates into a game-changing strategy. The mingling of these strategies can pose a positive outcome in the innovation process and should be treated and in complementary setting as opposed to isolation. C. Aligning Innovation to Strategies An issue plaguing organizations is the lack of clarity linking innovation to strategy. In order to have a strong strategic approach, organizations must effectively develop, plan and execute disruptive innovation. Skarzynski and RufatLatre (2011) present two question which can drive the executive decision making process in regards innovating program. The questions are “What is the role of innovation in the overall strategy of your company? Is your innovation capability aligned with your strategy?” (p.8). To effectively respond to these question firms must develop, implement, and execute strategy-to-innovation relationships. This integration will provide flexibility to the strategy to successfully maneuver where barriers arise. Additionally, firms should implement an industry related best-practice methodologies, which can yield new opportunities for innovative advancement (disruptions) and competitive edge. Shaping these responses to best suit firm is a key aspect to aligning strategy and innovation. IV. BUSINESS MODEL INNOVATION Casadesus-Masanell and Ricart (2011) projects the future of business sustainability may be built upon business modeling. Additional literature supports that disruptive innovation (e.g., new products and services) requires new business models (Johnson, Christensen, & Kagermann, 2008). Recently, business model innovation has been a topic of concern with the rapid shift in globalization forcing firms to rethink strategies to incorporate developing industries and countries. Ghezzi, Balocco, and Rangone (2010) suggest that business models closely related to organizational strategy. In response to these
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demands the following will look at business model innovation through the lenses of strategy shaping and failures as catalyst to re-defining firms’ approaches to driving innovation strategies through effective business modeling. A. Shaping Srategy The concept of strategy shaping is the assembling of global ecosystems to change markets and industries. Hagel, Brown, and Davison (2008) describe shaping strategy as, “Shaping strategy is no less than an effort to broadly redefine the terms of competition for a market sector through a positive, galvanizing message that promises benefits to all who adopt the new terms” (p.81). The process of shaping strategy is reliant upon three interrelated components of Shaping View, which focuses on changing participant perspectives on market opportunity; Shaping Platform, which provides support to facilitate participants to do more with less usually through technological advancements or diverse interaction; and Shaping Acts and Assets, which provide credibility to convince participants of the shaper’s long term commitment. The impact of this combination can assist shapers in developing a strong network of participants in support of strategies. To effectively integrate shaping strategies a firm must determine whether opportunities exist within the firm, industries or market and the status of the firm within the shaping process. Hagel, Brown, and Davison (2008) propose a straightforward approach to assess firm direction and ability to integrate shaping strategies known as FAST. The concept of FAST incorporates the four elements of Focus (Postulating future scenarios on mid and long ranges); Accelerate (Determine near term operation initiatives that would increase movement of the future); Strengthen (Identify organizational objective that are hindering the firm from meeting operational goals); and Tie it all Together (Integration of the previous steps and improve them based on what has been learned). Hagel, Brown, and Davison (2008) signify that FAST strategy, “favors incrementalism, but above all it values alignment between near-term performance and long-term direction” (p.87). By understanding firm eligibility and status within the approach of strategy shaping, leaders can better develop business models to reflect a long-term plan for driving sustainability though innovation. B. Failure The factor of failure is a common result of innovation across enterprises, industries, and markets, but in many instances is not recognized as a potential opportunity for advancement. Ghezzi, Balocco and Rangone (2010) imply, “Failures can teach many lessons, and shed light on issues seldom addressed or even spotted when the case under scrutiny is blessed with success” (p.213). The approach of failure analysis is considered as an essential factor, which lessons can be learned and can attribute to future business model innovation. The approach of failure analysis focuses on factors of unsuccessful events by researching the source(s) of the mistakes and the implemented strategies used. The approach goes beyond looking at the strategies driving the decisions but in a broader sense of strategy focusing on an array of
dimensions that can lead to the development a new standardization of procedures in order to prevent similar issues from reoccurring. It is suggested that focus should shift inward and outward to study how and when failure occur, the findings could become leverage for change to avoid mistake and increase organizational performance and competitiveness. Through perspective modification from rejecting and ignoring failure to building a community that embraces failure can enhance the innovative process by supporting idea and knowledge sharing, risk taking, internal and external assessment and investigation, resulting in increased opportunities for innovation. V. MARKET MODEL INNOVATION The emergence of global markets currently and will continue to have a large impact on the business market and require organizations to shift marketing practices in order to remain competitive (Sheth, 2011). Literature suggests that global marketing strategies play a critical part in firm performance within the global environment (Akkrawimut & Ussahawanitchakit, 2011). In response to the global shift and increase in demand, firms must address marketing operations on a global spectrum to reach new markets and gain advantage. Additionally, firms must focus on innovative strategies to utilized technological advancement and methodologies to connect and build relations within new and existing consumers. A. Rethinking Perspective and Practices The emergence of new markets on the global platform has prompted firms to reevaluate marketing operations to capture a new wave of future consumer markets. Sheth (2011) present five characteristics to place under consideration when seeking to venture marketing strategies in the global arena. First, heterogeneity, which is the difference between product and service types based upon location, economic status, and access capabilities. In the case of emerging markets, firm focus is not be on consumer need and want, but based upon resource limitations. By addressing the constraints or a region, firms can better understand how to engage and attain new consumers. Second, sociopolitical governance such as religion, business groups, government, organizations and communities can have heavy influence on consumers in emerging markets. Addressing this factor is key in determining what influences are potential barriers or opportunities to leverage new products and services into the market. Third, unbranded competition considers service and products that can be produced or completed by the individuals in the household of emerging markets. In many cases the availability of products is minimal and the lack of financial resources force families to be reliant upon skills and capabilities to be resourceful or barter with the local community members. Fourth, chronic shortage of resource in exchange, production and consumption is a common trend in emerging markets, which can be attributed to the lack of physical space, and access to utilize it effectively. In response firms can develop low-cost products and services that are versatile and easily exchangeable. Fifth, inadequate infrastructure focus on a regions lack of logistical functions (e.g., roads, storage, etc.) market transaction functions (e.g., point-of-sale terminals, basic banking, credit cards, etc.);
Electronic copy available at: http://ssrn.com/abstract=2522812
communication functions (e.g., telephone, Internet, information, etc.)); and utilities (e.g., water, electricity, etc.). This poses a huge barrier in reaching consumer in emerging non-metropolitan areas, as the scarcity of resources does not allow the opportunity for commerce to take place. By addressing these characteristics firm can have a better understanding in developing products, services and marketing approaches to reach emerging markets on the global stage. .
innovation modeling, business model innovation and market model innovation. Therefore, the integration of these approaches can potentially increase opportunity to advance and retain market strength while projecting long-time opportunity through instigating disruptions.
B. Consumer Engagement In the past, traditional consumer decision-making processes followed a funnel shaped model, which begins with a plethora of options and brands that was narrowed down to a final choice of purchase. Post purchase is where the relationship or perception was built based upon the use of the product or service. These decisions were driven by traditional marketing strategies, which focused on media streams (e.g., radio, television, billboards, etc.) In today’s market, the decision making process follow the concept of consumer decision journey, which focuses on consumers evaluating options prior to making a purchase decision. The evaluation process undergoes the utilization of different resource means (e.g., online reviews, blogs, social networks, etc.) with a concentration on other consumer advocacies (Edelman, 2011). Social media has been a key venue that enables firms to interact with an active community with the opportunity to remain in constant connection with consumers (Furlow, 2012). In this mode of factors driving consumer decision to purchase is made base upon advocates and experience reviews and is followed by impact of the product or service on the consumer satisfaction. In a positive outcome, this leads to the consumer becoming an advocate, which creates a bond and stems a loyalty loop that spawns to other consumers. Therefore, the focus on the future in marketing is built on developing a positive social rapport through online advocate venues in social media to leverage for consumer decision processes.
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VI. DISCUSSION As the global market continually evolves and shifts based on disruptions driven by advancement and consumer need, firms must be wary of changes and prepared to effectively respond in order to remain competitive and stable in the volatile market. The approaches of this report address responses to better shape strategy through disruptive
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