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Disruptive innovation is the process by which new technologies emerge, often very quickly, and can change a market place so that companies that were in a strong position in that market, maybe they were the market leader, find their position is eroded.
Companies that have been victims of disruptive innovation in recent years have included Blockbuster, Kodak, Nokia and Blackberry.
But a more telling example may relate to the story of Encyclopaedia Britannica, Encarta and Wikipedia. The story is interesting because disruptive innovation occurred twice, and its initial victim, Encyclopaedia Britannica eventually enjoyed a better fate than the product that disrupted it.
Encyclopaedia Britannica went bust in 1996, Competition from Encarta, a CDROM product from Microsoft was too formidable. Encyclopaedia Britannica’s problem was that it had developed a business model that was resistant to change. There were two key pillars to the business; editorial and sales. Editorial was superb, with entries usually written by qualified academics. But the company was largely ruled by sales. Its senior management typically started off by selling the Encyclopaedia door to door. When Encarta emerged, it was not taken seriously. For one thing, editorial was not considered to have been so thorough, there was less prestige in writing for Encarta, and maybe Encyclopaedia Britannica’s top management ever so slightly looked down their noses at Encarta. For another thing, Encarta was distributed via CDROM, such a marketing strategy meant cannibalising Encyclopaedia Britannica’s key revenue model.
In fact, in 1985, Encyclopaedia Britannica received an approach from Microsoft to work together. A year later, Larry Grinnell, Director of Public Relations at Britannica, said: “Encyclopaedia Britannica has no plans to be on a home computer. And since the market is so small, only four or five per cent of households have computers, we would not want to hurt our traditional way of selling.”
But the company misread the market, and was out-competed by disruptive innovation.
A few years later, Encarta was a victim of disruptive innovation – it invested heavily in content, but could not compete against Wikipedia. If Bill Gates had invested his entire fortune in producing content for Encarta, it would still have had less articles than Wikipedia’s 5,270,396 entries as at October 31 2016.
But for a new look Encyclopaedia Britannica, an opportunity emerged. Wikipedia is a useful tool, but students at schools and universities are not supposed to reference it in their work. They can however reference Encyclopaedia Britannica, which, in any case, many academics see as a more reliable reference source.
The old fashioned heavy books have gone, but Encyclopaedia Britannica still exists. The lesson: what matters is not the media, it is the content.
The above story not only illustrates what disruptive innovation is, it is an example of innovators dilemma, the theory developed by the Harvard Professor Clayton Christensen.
Professor Christensen’s theory looked at why large companies, in a dominant market position that for years seemed invulnerable, fail. In developing his theory of disruptive innovation, Professor Clayton focused on the disc drive industry. He said: “Nowhere in the history of business has there been an industry like disc drives where changes in technology, market structure, global scope, and vertical integration have been so pervasive, rapid and unrelenting.”
Over the time-period that his classic study, looking at disrupted innovation, considered the disc drive industry went through four major shifts – from 12 inch, to eight inch to 5¼ inch to 3½ inch drives.
He found that for as long one of the standards stayed in place, the order of leading companies in the industry pretty much stayed at it was. But then when there was a shift from one drive to the next, the industry saw a massive shakeout.
This industry shift occurred as the dominant computer changed from mainframe –using 12 inch drives, to mini computers using eight inch, to desktops typically using 5¼ inch to lap tops using 3½ inch drives.
In this way, the new technology was largely neglected by the key players and left to companies trying to exploit a niche. But the niche got bigger, and bigger, such that these smaller players became bigger, and they specialised to such an extent in the new disc drive, that by the time they went mainstream they had too much of a lead over the companies that had previously been dominating the industry.
And that is what disruptive innovation is.