A look at Uber and Netflix: disruptive innovation explained

So much attention has been paid to the term “disruptive innovation” in recent years that its true meaning appears to have been lost. The term is frequently used to describe any situation whereby an industry is shaken up and existing businesses are challenged, when rarely are these disruptions at all. In last week’s blog post, we explained how disruptive innovation differs from the three other types of innovation – routine, radical and architectural. In this post, we explore the disruptive kind in more depth.

Defining disruption

According to a December 2015 Harvard Business Review article, to which the ‘father’ of disruptive innovation, Clayton Christensen, contributed, “despite broad dissemination, the [disruptive innovation] theory’s core concepts have been widely misunderstood and its basic principles frequently misapplied”. An example is Uber and Netflix – both companies are almost always referred to as being ‘disruptive’, yet only one actually fits the model.

While Uber is certainly transforming the taxi industry, it’s not disrupting it for two reasons. First, a disruptive business either gains a position in a low-end market that had been ignored by the incumbent in favour of more profitable customers, or it creates an entirely new market, turning non-customers into customers. Second, a disruptive business begins with low quality offerings, and eventually captures the mainstream market by improving quality. Uber doesn’t meet either of these criteria: it targets people who already use taxi services (and simply created a more convenient app-based system) and it doesn’t provide a particularly lower-end experience.

In fact, Uber has completely opposed the disruption model; it established itself in the mainstream market before focusing on overlooked segments of the population, rather than the other way around. Uber’s strategy is more aligned with the routine type of innovation, as rather than disrupting the taxi industry, it is actually helping to sustain it by improving the quality of service. Because it has been so well received by consumers from its conception, competitors are threatened and have responded by deploying rival technologies and contesting the legality of Uber’s services – a typically defensive response from incumbents when facing threats from sustaining innovations. Uber enjoyed success almost immediately; had it been a disruptive innovation, it would have gone unnoticed or been ignored by existing players for quite some time due to its perceived inferiority.

This is exactly what happened in the case of Netflix – a textbook example of disruptive innovation. Launched in 1997, its initial service – whereby customers ordered DVDs online that were then delivered through the post – didn’t appeal to Blockbuster’s mainstream customers, who wanted instant gratification and access to new releases. But Netflix took advantage of new technologies that enabled it to stream video over the internet, and its business model and quality of service improved as a result. This in turn increased its appeal to Blockbuster’s customers, who now saw Netflix as a better alternative, eventually forcing the incumbent into bankruptcy in 2010. Blockbuster chose to ignore Netflix and it was this decision that eventually led to its collapse, as it was ultimately unable to respond effectively to the trajectory Netflix was on.

In an interview with Forbes.com, Christensen explains the difference in competitive response, “If I introduce a sustaining [routine] innovation, incumbents will generally try to mount a defence and try to eliminate me. If it’s a disruptive innovation, they are likely to ignore me or flee rather than flight”.

A lot to learn

“Disruptive innovation” is now part of the popular business lexicon, but despite the term’s frequent use, genuine disruptive innovation is rare. Uber is an example of where many commentators go wrong, applying the term too broadly.

For a more in-depth explanation of disruptive innovation by Clayton Christensen himself, watch the below video:

If you’re a business or technology leader looking to drive innovation in your organisation, download our complimentary “how-to” guide, ‘The age of innovation: When change is no longer an option', by clicking here.

Tags Innovation, disruption, disruptive innovation, technology, business executives


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