The Victims of Disruptive Innovation

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So far, many successful companies have been the victims of disruptive innovation. Disruptive Innovation isn’t about being wily or cunning, it is about passion and privation. Clayton Christensen of Harward Business School coined the term “Disruptive Innovation” in his book The Innovator’s Dilemma and since then it is widely used to describe an innovation challenge companies face internally and externally. A disruptive innovation is cheaper than the existing version and initially not as good but for established players, this poses a challenge, sometimes huge. A disruptive innovation is an innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology. Let’s take a look, why do successful companies fail?

The companies who are market leaders, have a huge customer base, have great management team and spend heavily in R&D, fail to realize the power of disruptive innovation of start-ups and small companies. Acclaimed Prof. Tim Silk of Sauder School of Business, University of British Columbia, gives the analogy of Titanic while explaining the concept. He says that the craft which was designed to be virtually unsinkable and had one of the best talent of the industry on board failed to spot the iceberg on time, underestimated the size of the iceberg and took too much time to maneuver. Disruptive innovation is like the tip of the iceberg, established and successful companies fail to see, estimate and maneuver on time.

The two classical victims of disruptive innovation are:

The Kodak Case

For nearly a century, Kodak’s business model was based on silver halide film and paper. Sell cameras and filming equipment and keep on earning though films for the lifetime of the equipment. Professional photographers and movie makers could not imagine the work without Kodak. It accounted for 90% of film and 85% of camera sales in 1976 and employed 145,000 in 1988. Despite having invented the core technology used in current digital cameras, Kodak always thought that Film would co-exist with digital. Although Kodak developed world’s first digital camera in 1975, the product was dropped for the fear that it would threaten its highly profitable photographic film business.

Kodak-film-roll

Consumers gradually switched to digital offerings from companies like Sony and total sales of digital cameras surpassed those of analog cameras for the first time in 2002, where there were only five major players and Kodak’s market share in digital cameras was less than 25%.  Its business model was heavily dependent on films and less on the equipment. Even after sensing the digital wave, it avoided risky decisions and maintained status quo. The change came in too late in 2003 and by that time it had already lost the market leader position. For Kodak, it was hard to believe in something that was not as profitable as films. As a senior vice president and director at Kodak said,

“We’re moving into an information based company, but it’s very hard to find anything with profit margins like color photography that is legal”.

Sony was leading the market of digital cameras though it started with its first digital camera only in 1981. Digital age necessitated a revolutionary change but Kodak did it too slowly and too late. In January 2012, Kodak filed for chapter 11 and the success story of great technology company and market leader met a tragic end.

The Blockbuster Case

In 2000, Reed Hastings, the founder of Netflix, proposed a partnership to John Antioco, the CEO of Blockbuster. Hastings proposed to take Blockbuster online and Blockbuster could promote Netflix in its stores. Antioco turned down a chance to purchase the still fledging Netflix for $50 million. As of October 2015, Netflix reported 69.17 million subscribers worldwide, including more than 43 million in the U.S. Netflix is now $30 billion Company.

blockbuster-closing

When Antioco turned down Hastings’ proposal, Blockbuster was ruling the video rental industry and charging late fees to customer was their profitable business model. Penalizing its loyal customer was acceptable to people because there was no competition. Since Netflix didn’t have to operate expensive retail stores at up scale locations and didn’t have to hire as many employees to front end consumers, it could afford to lower down the cost, offer a wider variety and customers could watch a video as long as they wanted or return it and get a new one.  On top of that, through streaming they could watch online without even waiting for the video to arrive in their mailbox. They were leading the innovation in video rental industry.

Although Blockbuster also started rentals-by-mail and streaming services in order to compete with Netflix, their value proposition was not strong enough and they couldn’t start the service soon enough. The disruptive innovation of Netflix killed Blockbuster and forced the later to file chapter 11 in 2010.

There are lot of victims of disruptive innovation. Please contribute to the list and share stories!

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