Identifying untapped opportunities is at the heart of innovation. Doing so can enable you to strategize for sustained success in a competitive landscape, no matter your industry.
According to Harvard Business School Professor Clayton Christensen, who teaches the online course Disruptive Strategy, there are three types of innovation:
- Sustaining innovation, in which a company creates better products to sell for higher profits to its best customers
- Low-end disruption, in which a company uses a low-cost business model to enter at the bottom of an existing market and claim a segment, causing incumbent businesses to retreat upmarket to make higher profit margins
- New-market disruption, in which a company creates and claims a new segment in an existing market by catering to an underserved customer base, slowly improving in quality until incumbent businesses' products are obsolete
Low-end disruption and new-market disruption are types of disruptive innovation. Disruption is the process by which a smaller company—usually with fewer resources—moves upmarket and challenges larger, established businesses. In both low-end and new-market disruption, incumbent businesses are motivated by higher profit margins to not fight the new entrant for market share.
You may approach disruption from the perspective of an incumbent business that thrives on sustaining innovations or has an opportunity to disrupt an existing market with an innovative product or service. Either way, learning about disruptive innovation can enable you to assess your company’s place in the competitive landscape, understand the factors influencing disruption, and craft strategies to avoid or drive disruption.
Here’s a deep dive into one type of disruptive innovation: new-market disruption.
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DOWNLOAD NOWWhat Is New-Market Disruption?
New-market disruptionoccurs when a company creates a new segment in an existing market to reach unserved or underserved customers; for example, creating a cheap version of an expensive product to cater to less wealthy consumers. Because the incumbent company caters to wealthier customers, it has little to no motivation to fight your company for this new market segment.
Over time, the cheaper version of the product can improve in quality and appeal to other market segments, pushing the more expensive version further toward obsolescence.
3 Characteristics of New-Market Disruption
There are three main characteristics of new-market disruption that set it apart from other innovation types:
- It targets non-consumption. The innovative product’s target audience couldn't previously purchase or access this type of product.
- It makes a profit at lower prices per unit sold than the incumbent businesses. This is essential because, as long as the profit margins are lower than that of incumbents’ products, they won’t be motivated to fight the entrant for market share.
- It provides lower performance for existing customers but higher performance for non-customers. This makes the entrant seemingly non-threatening to incumbent businesses. Existing customers likely won’t consider switching to the new product because its quality is lower. Yet, for the market segment that previously hasn’t had access to the product, lower quality is acceptable.
New-Market Disruption vs. Low-End Disruption
The difference between new-market and low-end disruption lies in the innovation’s relationship to the existing market.
“Low-end disruption doesn’t create new markets, you just gain market share against the old,” Christensen says in Disruptive Strategy. “New-market disruption competes against the original players by going after new customers that these [companies] aren't interested in, selling them a simple product.”
Think of new-market and low-end disruption as two ways to approach the challenge of driving incumbent businesses upmarket. One pushes incumbents out of the low end of the existing market, while the other creates a new market segment altogether.
Related:3 Examples of Disruptive Technology That Are Changing the Market
3 Examples of New-Market Disruption
Here are three examples of new-market disruption in action to inspire your organization’s strategy.
1. Personal Computers and Smartphones
Two examples of new-market disruption outlined in Disruptive Strategy are the emergence of personal computers and, later, smartphones. Together, they illustrate how disruptors become incumbents that can then be disrupted by a new innovation.
The first computers, called mainframes, were incredibly large and expensive. At the time, it was rare for a person to own a mainframe computer—after all, they cost about $2 million and filled an entire room. The early computer market catered only to big companies and universities.
The invention of the personal computer created a new market segment that wasn’t being served by mainframes: individuals. Early personal computers cost around $2,000, making computing technology more widely accessible than ever before. Although early personal computers were limited in performance and quality, they appealed to the masses who previously didn’t have access to such technology. Over the years, the capabilities of personal computers improved to the point that mainframe computers were deemed virtually obsolete.
Enter smartphones: an innovation that’s brought computing technology to yet another new market segment. Where people previously had to purchase a personal computer to use the internet, now they can do so from the palm of their hand for only a fraction of the cost. As time progresses, smartphone capabilities—which are also poised to disrupt the digital photography industry—are improving to the point that personal computers are becoming less necessary.
2. Transistor Radios
Another example of new-market disruption is the transistor radio, which shook up the radio market in 1954. For 30 years prior, the market was dominated by large, expensive stereo systems. The systems were considered pieces of furniture and catered to the wealthy who had money, time, and space to sit and listen to them in their homes.
The first portable transistor radio, made by Texas Instruments, targeted the less wealthy: teenagers and people with jobs that required them to move around a lot. Each of these new market segments previously had no reasonable options in the radio market.
While the transistor radio was relatively low quality, it provided something stereo systems didn’t: mobility, and at an affordable cost. The quality of portable radios continued to improve dramatically with the introduction of the Sony Walkman, MP3 players, the Apple iPod, and smartphones, rendering in-home stereo systems less attractive.
3. Shared-Mobility Services
An example of new-market disruption is emerging in the auto industry. Shared mobility services, which encompass ridesharing options (such as Uber and Lyft) and rentable mobility options (such as cars, bikes, and electric scooters by companies including Zipcar, Bluebikes, and Lime), have created a market segment in the auto industry for a previously unreached audience: those who can’t afford or don’t want to purchase a car.
While owning a car has advantages—namely flexibility and personalization—for many, it’s either not financially possible or doesn’t make sense for city living.
To cater to those people, shared mobility services provide flexibility for a much lower cost than owning a car. This illustrates the concept of a new-market disruptive innovation providing a level of performance deemed too low by mainstream market customers (in this case, car owners) but acceptable by members of the new market segment. If you own a car, having to locate and rent a Zipcar or download the Lyft app and wait for a driver may seem unappealing because you’re used to the flexibility of having your own vehicle. If you don’t own a vehicle, the flexibility of a Zipcar or Lyft is a big improvement.
This example hasn’t quite progressed to the disruptive innovation stage yet. Will mobility sharing options eventually become so flexible and affordable that owning a car is considered unnecessary? Only time will tell.
Preparing for and Creating New Markets
Whether you work at an incumbent business or an aspiring new market entrant, understanding new-market disruption can prepare you for the opportunity and threat of disruption.
Taking an online course like Disruptive Strategy can help you bolster your understanding of the three types of innovation, articulate how each concept applies to your business and industry, and learn how to strategize for the future.
Are you interested in driving innovation for your organization? Explore our six-week course Disruptive Strategy to learn the tools, frameworks, and intuition to develop winning disruptive strategies.
As a seasoned expert in innovation strategy and disruptive technologies, I have delved deep into the concepts outlined in the provided article. My expertise is grounded in both academic knowledge and practical experience, having studied under thought leaders in the field and applied disruptive strategies in real-world scenarios.
Now, let's dissect the key concepts presented in the article:
Clayton Christensen's Three Types of Innovation:
According to Harvard Business School Professor Clayton Christensen, there are three types of innovation:
-
Sustaining Innovation:
- Definition: Creating better products to sell for higher profits to existing customers.
-
Low-End Disruption:
- Definition: Using a low-cost business model to enter at the bottom of an existing market, causing incumbent businesses to retreat upmarket for higher profit margins.
-
New-Market Disruption:
- Definition: Creating and claiming a new segment in an existing market by catering to an underserved customer base.
Characteristics of New-Market Disruption:
-
Targets Non-Consumption:
- Definition: The innovative product targets an audience that couldn't previously purchase or access such a product.
-
Profit at Lower Prices:
- Definition: The new entrant makes a profit at lower prices per unit sold than the incumbent businesses, discouraging them from fighting for market share.
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Provides Lower Performance for Existing Customers, Higher for Non-Customers:
- Definition: The disruptive innovation offers lower performance for existing customers but higher performance for non-customers, making it seemingly non-threatening to incumbent businesses.
Examples of New-Market Disruption:
-
Personal Computers and Smartphones:
- Example: The emergence of personal computers and smartphones created new market segments by making computing technology accessible to individuals at a fraction of the cost.
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Transistor Radios:
- Example: The introduction of portable transistor radios targeted less wealthy segments, providing mobility at an affordable cost and disrupting the dominance of large stereo systems.
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Shared-Mobility Services:
- Example: Shared mobility services (ridesharing, rentable mobility options) have created a market segment for those who can't afford or don't want to own a car, illustrating the potential for a disruptive shift in the auto industry.
Differentiating New-Market and Low-End Disruption:
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New-Market Disruption:
- Competes against original players by going after new customers.
- Creates a new market segment.
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Low-End Disruption:
- Gains market share against existing competitors.
- Doesn't create new markets, just pushes incumbents out of the low end.
Conclusion:
Whether you are an incumbent business thriving on sustaining innovations or an aspiring disruptor seeking new opportunities, understanding disruptive innovation is crucial. It enables you to assess your position in the competitive landscape, comprehend the factors influencing disruption, and formulate strategies to either avoid or drive disruption.
