Disruptive Business Models: The Magic Formula Revealed

Most companies that consider themselves innovative and think they are developing disruptive business models are actually only working with sustainable innovations.

When a company simply includes incremental improvements in its products to meet the demands of customers that already exist in an established market, it’s not being disruptive.

On the contrary, disruptive business models create new markets with totally different business models from previous ones. This results in completely new process models.

And it’s precisely for this reason that Clayton M. Christensen, Mark W. Johnson, and Darrell K. Rigby have published an article in the MIT Sloan Management Review pointing to two effective strategies for creating disruptive business models.

Follow the main points of this text in our post today.

See also: Disruptive innovation: Is it the new fashionable business expression?

Creating Disruptive Business Models

One of the most interesting conclusions from this article is that companies established in the market are less efficient at creating disruptive business models.

And the reason is simple:

Disruptive innovations are usually intended for customers who aren’t catered for by companies already firmly placed in the market.

Imagine that you’re a product manager for a large multinational corporation and you’ve developed two plans for new product launches.

One simply adds a few incremental features to an existing product. Tests show that one of the markets in which this company already operates (and knows very well) will show good growth when launching this product, and at little extra cost.

The other plan for launching a new product is totally disruptive. Therefore, it involves the uncertainties of a market that the company has not yet explored, has more risks and will come out a little more expensive.

Amid the internal struggle for funding, and the fear that your colleagues brand the new disruptive business model idea as too radical or even crazy. Which of the two projects do you think this product manager will present to the board?

It’s clear that the incremental idea will overcome the disruptive idea in order ‘to preserve my neck and my reputation in the company’.

That’s why a disruptive business model is often more successful with new entrants.

Here are the two strategies the authors suggest to create disruptive innovations.

Check it out: What is disruptive innovation? The great decision that changes an era!

2 strategies for creating disruptive business models

According to research, the possibility of creating a new business with success and constant growth is 10 times greater with disruptive innovations than with sustainable innovations.

Excited? Here are two strategies on how to do this:

1- Create a new market as the basis of the disruptive business model

Look for ways to take advantage of the repressed demands of a market.

Usually this happens because people are unable to benefit from existing products that are too expensive or too complicated.

It’s much easier to reach potential consumers who are not buying anything (so it’s therefore a non-existent market) than stealing customers from established companies.

But, there are 3 questions you need to answer about that potential market before embarking on your disruptive adventure:

Question 1: Do the new consumers that you want, not use the existing product because it’s expensive or because they don’t know how to use it?

An example of a disruptive business model that fits perfectly in this category are PCs.

Before the 70’s it was absurdly expensive to have a computer. Only large corporations could get one, and moreover, they needed skilled technicians to deal with those huge machines.

PCs have gained access to this market by lowering prices and product complexity. They therefore pass the first question!

Question 2: Are new consumers willing to use a simpler product?

If the new product or service is complicated to use, it’s more likely that consumers will reject it.

Therefore, you need an audience that is happy with something simple and uncomplicated.

Here are two examples of disruptive business models:

When Apple released the Apple II, it positioned it as a toy for children. Xerox had already positioned their personal computers as the most appropriate technology to automate offices.

We all know the result.

Years later, when Apple had already become an established company, it was them who made a mistake in positioning their product.

The Palm Pilot was a monumental success by positioning itself as ‘a simple organizer’. While Apple marketed its Newton as ‘a computer in the palm of your hand’, which did not take off.

Do you remember this or anything else like this in your life?

disruptive business models
Newton vs. Palm Pilot – Source: PopJoust

Question 3: Will disruptive innovation help people do something easier that they already do?

When film camera makers launched digital cameras (yes, film camera companies) they boasted that it would be much easier for the public to organize photo albums on their PCs.

In fact, only 5% of people stored their paper photos in albums, when using the previous film technology. Exactly what happens today, with the hundreds of photos you take every month.

Therefore, the digital machines were not disruptive.

They were expensive and didn’t lend themselves to something that the average consumer already had the habit of doing with the previous analog machines.

Only when companies incorporated them into cell phones did they become disruptive. This facilitated the sharing of moments (the primary function of a paper photograph). And, thus permanently sealed the fate of photographic film companies.

2- Disruptive Business Models for new entrants

When a market is served beyond expectations for customers positioned in the more expensive segments, creating a new entry product can be very interesting.

Let’s consider these test questions:

Question 1: Do leading products go beyond expectations?

If you can offer similar products to the more expensive ones for market segments that don’t yet use them because they’re expensive, you’ll be able to develop a market that was previously non-existent.

For example:
The rich and famous use personal brokers and expensive investment banks to manage their applications on the stock exchange.

Online brokers have been able to develop applications for people to create their own investment portfolios by themselves. This has attracted a hungry audience with a simpler product that fully meets their needs.

Question 2: Can you create a business model with lower costs?

Of course this will only work if the new disruptive business model has scale or a chain of processes that allows for lower costs and better prices for consumers who were previously left out of the market.

Proper process modeling can help a lot.

Create a disruptive business model when you don’t need disruption

Sony, despite being a stable company in the market, has always looked for risk by introducing disruptive business models, thus protecting itself from new entrants.

One of the most famous was the Walkman, a portable cassette player that people could carry on their belts while walking and exercising.

The advantage is that a stable company has more capital and experience to be disruptive, they generally just lack courage.

Two other famous examples of products based on disruptive business models are CDs, which replaced cassettes and vinyl, and music stream sites, which replaced the previous two.

Learn more: Disruptive Leadership: Respect for Leaders and Vision in the Future

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