Disruptive Innovation

Economic Crisis and Disruptive Innovation

As companies that provide goods or services mature, they steadily improve their offerings to better meet the needs of their customers. Products are incrementally refined during this process and become more capable and sophisticated, generating better margins for the producing company. This process is termed sustaining innovation and it results in gradual product improvements which slowly shift the market for the product. Early cell phones are an example of sustaining innovation; the major manufacturers incrementally improved the phones each year, making them smaller or adding cameras or other features. From year to year, however, no major changes occurred and current phones looked and operated much like their predecessors. As incumbent companies focus on the premium end of their offerings, this cycle of improvement creates space at the bottom of the market for new companies that can fill the lowest niche with innovative services or products at a lower cost.

Disruptive innovation occurs when incumbent firms, concentrating on maintaining market share, are caught off guard by the adoption of technologies, products, or services by consumers in new and nontraditional ways. Often smaller or new companies are able to capitalize on these paradigm shifts since they are not particularly invested in the old model. The entrant companies develop products or services that supplant those of the incumbent firms, not because the offerings are better but because they are being used in new ways. This creates new markets and value networks and, over time, displaces earlier technologies.

Disruptive innovation and economic crisis may be intertwined, but not necessarily. Times of economic crisis are generally not periods where companies innovate strongly; market uncertainties limit the long-term investments that innovation requires. The 2007-2008 global economic crisis had an adverse impact on the innovation investment of large,...