• Learning Objectives for Project Managers and Innovation Personnel
• To understand what is meant by disruptive innovation
• To recognize the types of disruptive innovation
• To recognize the skills needed to work on disruptive innovation projects

INTRODUCTION

In today's business environment, we are faced with challenges and crises due to competition, unstable economies, and sustainability. “Business as usual” is no longer an option for survival, nor is the idea that “we will build it and they will come.” Innovations will occur, and many newcomers will disrupt how incumbents conduct their business.

There are many forms of disruptive innovation. Not all disruptive innovations are destructive. Each form may require a different strategic approach and the use of different tools. Failing to understand these differences reduces the chances of success.

There are several categories of innovation, as discussed in Chapter 2. Christensen (1997) classified innovation in two categories:

• Sustaining innovation. An innovation that does not significantly affect existing markets. It may be either:
  • Evolutionary: An innovation that improves a product in an existing market in ways that customers are expecting
  • Revolutionary (discontinuous, radical): An innovation that is unexpected, but nevertheless does not affect existing markets
• Disruptive innovation. An innovation that creates a new market by providing a different set of (business) values, which ultimately (and unexpectedly) overtakes an existing market

While most people seem to understand what is meant by sustaining innovation and agree to its definition, there are several interpretations of disruptive innovation. Authors who publish papers on disruptive innovation usually provide their definition in the beginning of their work.

The term disruption seems to be treated as a buzzword to mean just about anything that leads to a change. As such, the term appears to be meaningless because of the many ways it is being used. There must be a company agreed-on definition of disruptive innovation if the project managers are expected to make business decisions that are aligned with corporate business objectives and in the best interest of the company.

EARLY UNDERSTANDING OF DISRUPTION

“Disruptors don't have to discover something new; they just have to discover a practical use for new discoveries.”

– Jay Samit, Disrupt You!: Master Personal Transformation, Seize Opportunity, and Thrive in the Era of Endless Innovation

The term disruptive technologies was first used by Joseph Bower and Clayton Christensen (Bower and Christensen 1995) and introduced in their 1995 article titled Disruptive Technologies: Catching the Wave. The article targeted management executives who made the funding or purchasing decisions in companies, rather than the research community. Christensen then described the term further in his book The Innovator's Dilemma (Christensen 1997). The Innovator's Dilemma explored the disk drive industry. In his sequel with Michael E. Raynor, The Innovator's Solution, (Christensen and Raynor 2003), Christensen replaced the term disruptive technology with disruptive innovation because he recognized that few technologies are intrinsically disruptive or sustaining in character; rather, it is the business model that the technology enables that creates the disruptive impact. Simply stated, technology by itself is not disruptive. It is how you use the technology that determines its disruptive nature and whether you should follow a disruptive or sustaining path. With both paths there can be an impact on a firm's business model and how and when a firm should interact in the market or industry.

In today's environment, disruptive innovation is used to define a situation that shakes up an industry. This occurs when new entrants challenge incumbent firms that may have superior resources. The new entrants may focus on market segments overlooked by the incumbents or create a market whereby nonconsumers become consumers.

Quality and cost are not the only characteristics of a disruptive innovation. There are usually other performance characteristics or functionality that may be deemed important by mainstream customers. The innovation can take place in products, services, and processes. We must remember that many process innovations may alter how we conduct our business but have no impact on sales. In this case, the disruption can occur in how we manage our business.

Nagy et al. (2016) identify three questions that people must address to understand disruptive innovation: “First, what is a disruptive innovation? Second, how can a disruptive innovation be disruptive to some and yet sustaining to others? Third, how can disruptive innovations be identified before a disruption has occurred in an organization?” Even though there are a multitude of articles published on disruptive innovation, there does not exist a universally agreed on answers to these questions. Managers who seem to understand the answers to these questions are more likely to respond favorably to disruptive innovations that affect their firm and turn a potential disaster or business disruption into an opportunity.

Much of the literature on innovation uses the terms disruptive innovation and radical innovation interchangeably. Hopp et al. (2018) differentiate between them:

Radical innovations … stem from the creation of new knowledge and the commercialization of completely novel ideas or products. Research on radical innovation therefore focuses on the types of organizational behavior and structures that explain and predict the commercialization of breakthrough ideas.

INNOVATION AND THE BUSINESS MODEL DISRUPTION

“When rate of problems is greater than rate of solutions, only radical changes can make the difference.”

— Sukant Ratnakar

There are numerous business models in industry, and each model is based on types of targeted customers. We identify five types of customers in a business model that may be impacted by innovation:

1. Satisfied customers
2. Unsatisfied customers (not happy with offerings)
3. Wannabe customers (appeals but out of reach)
4. Refusers (aware but cannot see relevance)
5. Unexplored customers (unconsidered audience)

At the high end of the business model are satisfied customers that provide repeat business to incumbent, well-established businesses. The incumbent businesses are generally quite happy with the profit margins and focus mainly on incremental innovation rather than disruptive innovation. Disruptive innovations can occur at this end of the spectrum, especially if there is a major change in technology, but it is more likely that disruptions will occur at the low end.

Incumbents may be fearful of innovations that can cause them to lose the profits from their most demanding customers. As such, there is generally a close working relationship between the incumbents and the existing customers to give them what they want and possibly more. Incremental innovation at the high end often results in a technology overshoot situation, where the incumbents focus on a “featuritis” mentality and provide more features to their products and services than the customers need or want. The customers may not ever use the added value provided, but they still appear loyal to the incumbent companies.

We have all heard expressions such as “Listen to the voice of the customer,” “Give the customers what they want,” “Stay close to the customer,” and “Let's do better with updates.” These expressions drive sustaining or incremental innovation rather than disruptive innovation. While it is true that technology can change and eventually lead to disruptive innovation, incremental changes are more likely. Customers at the high end that are happy with their products and services may want to see just incremental changes rather than radical changes based on a recent technology. These customers may reject certain technological changes in favor of the status quo when, in fact, the rejections could very well replace existing technology some time later.

Incremental innovation feeds short-term cash flow and revenue generation, often at the expense of forgoing long-term consideration. Incremental innovation may use the company's R&D guidelines or a project management methodology that the project manager must use. The methodology is part of the company's business model and may not encourage project teams to think outside of the box. The larger the company, the greater the difficulty to innovate outside of the existing business model. As such, project managers then staff the projects with resources that have expertise in incremental innovation rather than technological or disruptive innovation.

Disruptive innovation usually begins at the low end of the business model where products and services are created for a new set of customers. Christensen and Raynor (2003) distinguishes between "low-end disruption," which targets customers who do not need the full performance valued by customers at the high end of the market, and "new-market disruption," which targets customers who have needs that were previously unserved by existing incumbents.

According to Christensen et al. (2015), disruption describes a process whereby a smaller company with fewer resources can successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some market segments and ignore the needs of others. New entrants to the market begin the disruptive process by successfully targeting those overlooked segments and gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents' mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants' offerings in volume, disruption has occurred.

To be disruptive, a business must first gain acceptance in the low end of the market, the segment by and large ignored by incumbents in lieu of more profitable high-end customers. A prime example is Netflix, which was founded in 1997. In 2008, Jim Keyes, CEO of Blockbuster, commented, “Neither Redbox or Netflix are even on the radar screen in terms of competition.” In 2011, Blockbuster went bankrupt. As summarized by Hopp et al. (2018):

The initial mail-order movie rental business was not appealing to a large group of Blockbuster customers. It appealed to a niche of film nerds. Only with the rise of technology, including eventually the ability to stream over the Internet, was Netflix able to grow its business and eventually offer on-demand movies and TV to a huge audience, conveniently and cost-effectively. It was the initial encroachment from the low-end of the market that made Netflix disruptive. A focus on a larger market segment initially might have induced a fighting response by Blockbuster. Gaining a low-end foothold allowed Netflix to move upmarket with a completely different business model that was eventually attractive to Blockbuster's core customers. The Netflix case also shows that disruption may take time… . Now, Netflix is targeting other entertainment providers and is set to disrupt yet another part of its industry.

Many of the companies that were hurt by disruptive innovations were well-managed companies that had excellent research and development departments and were responsive to the needs of their customers. The mistake they made was ignoring those parts of the market that were most susceptible to disruptive innovations because they were too small to provide an acceptable growth rate that the larger firm desired, the profits margins were lower than expected, or simply there were no apparent competitive threats forecasted in the industry. As stated by Mark Parker, CEO Nike, “Companies fall apart when their [business] model is so successful that it stifles thinking that challenges it.” This is often referred to as the failure of success.

Disruption can be beneficial if a firm responds rapidly, has the right vision about the future, and can modify its business model in a timely manner. The launch of the internet disrupted the traditional newspaper industry by eliminating advertising revenue from clients that could expose themselves to a greater market over the Internet and at a lower cost. Book stores and travel agencies also suffered, and many never recovered. Retailers also suffered but those that saw the benefits of Internet marketing quickly converted to a catalog retailer environment.

CATEGORIES OF DISRUPTIVE INNOVATIONS

There are categories of disruption the same way there are categories of innovation. The simplest forms of disruptive innovations are viewed as being either “low-end disruptions” or “high-end disruptions.”

Low-end disruption occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the performance of the product no longer underperforms on product attributes important to the customers and overshoots the needs of certain customer segments even though these attributes may not be highly valued by the customers. At this point, a disruptive technology may enter the market and provide a product that has lower performance than the incumbent but that exceeds the requirements of certain segments, thereby gaining a foothold in the market.

In low-end disruption, the disruptor is focused initially on serving the least profitable customer, who is happy with a good enough product. This type of customer is most likely price-sensitive and not willing to pay a premium for enhancements in product functionality. Once the disruptor has gained a foothold in this customer segment, it seeks to improve its profit margin. To get higher profit margins, the disruptor needs to enter the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disruptor needs to innovate. The incumbent will not do much to retain its share in a not-so-profitable segment and will move up-market and focus on its more attractive customers. After several of such encounters, the incumbent is squeezed into smaller markets than it was previously serving. And then, finally, the disruptive technology meets the demands of the most profitable segment and drives the established company out of the market.

High-end disruptive innovations, on the other hand, are generally more technologically radical in nature. Their appeal is based on technological advancements or added functionality and not limited to the price-sensitive customer.

The term disruptive innovation tends to be misleading because people use it to refer to a product or service at one fixed point, such as low-end or high-end, rather than to the evolution of that product or service over time. Innovation may not have anything to do with technology. Innovation may simply be the impact that a new product or service has on changing a firm's business model to capture untapped markets.

Dru (2015) focuses on the path to destructive innovation rather than what occurs at a fixed point in time related to technology or product price. Dru discussed 15 paths:

1. Open disruption
2. Structural disruption
3. Asset-based disruption
4. Reverse disruption
5. Sustainability-driven disruption
6. Revival-based disruption
7. Data-driven disruption
8. Usage-based disruption
9. Price-led disruption
10. Added-service disruption
11. Partnership-led disruption
12. Brand-led disruption
13. Insight-driven disruption
14. Business model disruption
15. Anticipation-driven disruption

There are three reasons why Dru's approach is important to innovation project managers. First, project managers are responsible for managing the paths that lead to innovation. Second, because each path chosen is directly related to changes in the company's business model, marketing's involvement is mandatory especially in developing the business case for the selected path. Third, Dru reinforces the understanding that there is a strong bond between innovation and marketing. Peter Drucker (1954) stated in his book The Practice of Management, “Because the purpose of business is to create a customer, the business enterprise has two—and only two—functions: marketing and innovation. Marketing and innovation produce results: all the rest are costs.” Most innovations are marketing-driven innovations.

The marketing-innovation bond is critical for success. There are four steps in disruptive innovation that are common to most of the paths:

1. Identify the market segments overlooked, add more functionality and features to your products and services, and then be prepared to sell the products and services at a lower price than the competitors.
2. Improve quality such that you can differentiate your products from your competitors. This is the step where you begin attracting customers and disrupt the market.
3. Sales volume increases and disruption is in full force.
4. Customers see the value in your products and services and are willing to switch over.

THE DARK SIDE OF DISRUPTIVE INNOVATION

Disruptive innovation generally addresses how a new product or service can disrupt new and existing customers in the marketplace. Unfortunately, in the process of developing new products and services, a company mght find that the disruption to its own business model has occurred.

As an example, a company decided that it could speed up the delivery of its products to its customers by creating several software programs that could be used as part of their logistics and supply chain management activities, which were currently labor-intensive. This would speed up order entry, order preparation, and billing. Everyone understood that this innovation would generate more customers and increase profitability.

As the company began implementation and testing of the newly created software, workers recognized that the new system would eliminate several of their jobs. Workers began sabotaging the system to remain employed. It took the company almost six months to correct the damage that was created.

Internal disruption can occur while companies are attempting to disrupt the marketplace. Companies must proceed cautiously and understand the impact that their actions will have on their own business and business model.

USING INTEGRATED PRODUCT/PROJECT TEAMS

“High Performance Teams create cultures of caring, connection, commitment, collaboration and clear consistent communication.”

– Tony Dovale

A team must be assembled to either cause market disruption or to respond to a disruption that has occurred. Making the decision to launch a new product or service and disrupt the marketplace is a lot easier than being able to do it. If the change is incremental, then the members of the team may be part-time. If the change is disruptive or radical, then the team members would probably be assigned on a full-time basis. Most companies seem to prefer full-time assignments for staffing innovation teams because one of the questions that has challenged scholars for decades involves how innovative workers can be on a part-time basis.

The team may be responsible just for the launch of the new product or service rather than also having to develop the technology. The technology may already exist or is being developed by an R&D group.

In recent years, there has been an effort to substantially improve the formation and makeup of teams required to develop a new product or implement a new practice. These teams have membership from across the entire organization and are called integrated product/project teams (IPTs), venture teams, or entrepreneurial teams.

The IPT consists of a sponsor, a program/project manager, and the core team. If the technology already exists, and the team's mission is disruptive innovation, the sponsor most likely would come from marketing because of their knowledge of the target market and how companies may respond. As stated by Reinhardt and Gurtner (2015):

Customer value, customer satisfaction, customization and many other central management concepts have one joint premise—acquiring knowledge about customers. The process of understanding why consumers become customers of a firm becomes particularly important when firms develop new products and services.

For the most part, members of the core team are assigned full-time to the team but may not be on the team for the duration of the entire project. The membership of the team can change as we go from low-end to high-end market disruption. Team members should possess at least a cursory understanding about disruptive innovation.

The skills needed to be a member of the core team to focus on disruptive innovation include:

• Self-starter ability
• Work without supervision
• Good communications skills
• Cooperative
• Technical understanding
• Willing to learn backup skills if necessary
• Able to perform feasibility studies and cost/benefit analyses
• Able to perform or assist in market research studies
• Able to evaluate asset utilization
• Willingness to make decisions in a timely manner
• Knowledgeable in risk management
• Understand the need for continuous validation

IPTs must be staffed with creative thinkers and be able to think out of the box. They must have the freedom to explore, within limits, and test their ideas. Therefore, traditional R&D guidelines may be inappropriate, too conventional, and restrictive.

Each IPT is given a project charter that identifies the project's mission and the assigned project/ program manager or innovation leader. However, unlike traditional charters, the IPT charter can also identify the key members of the IPT by name or job responsibility.

All IPT members must understand the business model and how value is created and distributed through the model. Even though the team has a specific customer targeted for the innovation, there could be tangential customers that may be directly or indirectly affected by the disruptive innovation. As stated by Kumar (2013, 197):

An innovator in the U.S. healthcare, for example, needs to think not only in terms of the valuable offerings for patients or doctors, but also the opportunities to create value for other stakeholders in the system such as hospitals, pharmacies, insurance companies, and drug-makers—all players with a huge financial stake in the system. Even a good mental model to imagine how value flows between all the stakeholders in the system can be a good diagnostic tool for finding out where the most valuable opportunities for innovation might be.

IPTs that are involved with new product development activities may need legal representation on the team because of patents, copyrights, trademarks, and potential risks such as from product tampering. Corporate legal may provide this support as needed rather than having full-time legal representatives assigned.

Unlike traditional project teams, the IPT thrives on sharing information across the team and collective decision making in a timely manner. IPTs eventually develop their own culture and, as such, can function in either a formal or informal capacity. However, companies seem to prefer the creation of a separate functional group for these ventures.

Since the concept of an IPT is well suited to large, long-term projects, it is no wonder that the Department of Defense has been researching best practices for an IPT.¹ The government looked at four projects, in both the public and private sectors, which were highly successful using the IPT approach and four government projects that had less than acceptable results. The successful IPT projects are shown in Table 9-1. The unsuccessful IPT projects are shown in Table 9-2. The government research indicated that the greater the number times decisions must be made by executives or stakeholders outside of the team, the more likely it is that the time, cost, and performance constraints will not be achieved. The research confirmed that if the IPT has the knowledge necessary to make decisions and the authority to make the decisions, then the desired performance would be achieved, and schedule slippages would be less likely to occur.

The success of the IPT or venture team is heavily dependent on the corporation's attitude toward the ventures that allows the product/program managers to take the necessary steps to be competitive (Crockett et al. 2013). The corporation must give the team some degree of autonomy to make high-level decisions, resolve conflicts, and take risks. The corporation must give the team access to superior human and financial resources. All the support, which includes insulating the team from political battles, must be visible and real rather than lip service.

DISRUPTIVE INNOVATION IN ACTION

One of the key success factors in disruptive innovation is that ideas and solutions tends to come from those not weighed down by what went before. IPTs must be willing to challenge everything using what-if scenarios.

Project managers are now recognizing that the assumptions made at the beginning of a project may change throughout the life of the project and that all the assumptions must be tracked and challenged frequently. If the assumptions change, you could be making the wrong decisions or working on the wrong project. Kumar (2013) provides examples shown in Table 9-3 of what happens when assumptions are challenged. Kumar states:

It is normal for organizations to follow the norms that their industry has established for years. But is it possible to recognize those norms as assumptions and find out if they are still relevant in these rapidly changing times? Are there other ways, new ways, to provide something new, even if they mean disrupting the industry behaviors? And is it possible to do this without losing sight of the core fundamental objectives of meeting peoples' needs and fitting well with their context? (p. 197)

Organizations that create disruptive innovations and become successful are often leaders in exercising this mindset – abandoning conventional models and adopting new ways of thinking. Table 9-3 shows a few examples of organizations that challenged assumptions in a timely manner and reframed their solution space, opening up dramatically new opportunities for products and services.

When disruptive innovation is effective, significant rewards and future opportunities occur. For the incumbents that were unable to see the forest for the trees, their next step may be the need for crisis-driven innovations just to survive. As stated by Gibson (2015, 100):

This is why disruptive innovation newcomers have a big advantage. The come into an existing industry without having any of the preconceptions that blind incumbents to revolutionary opportunities. They have no attachment to the established industry molds that have been long producing the same products and services. Instead, they feel free to break those molds and set up their own unique approach to things. They typically leverage an innovative technology, a fresh product idea, a truly novel service concept, or a game-changing business model to reinvent a stagnant industry and often seize the dominant position away from some sleepy incumbent.

…Suddenly an organization [i.e., an incumbent] is forced fundamentally to rethink what it is doing and where it is going when there is probably no longer enough time to make the changes necessary for survival. When you're going full speed ahead in what turns out to be the wrong direction, it can be almost impossible to quickly and radically turn a company around without having a fatal or near-fatal crash.

When companies cannot react rapidly to an attack on their business, disaster can occur, as shown in Table 9-4.

IMPLICATIONS AND ISSUES FOR PROJECT MANAGERS AND INNOVATION PERSONNEL

Project managers are often placed in charge of innovation projects that are designed to either create disruption in the marketplace or respond to disruption caused by competitors. These types of projects occur less frequently than others, and some project managers may feel uncomfortable being involved in these projects. Most PMs therefore may possess a poor understanding about disruption activities. Some of the critical issues and challenges that may be new for some project managers include an understanding of the following:

• Know what disruptive innovation really means.
• Understand why disruption occurs.
• Identify the relationship between disruptive innovation and business models.
• Identify the categories of disruptive innovation.
• The skills needed to work with disruptive innovation may be different than the skills needed for other forms of innovation.
• Integrated project teams will be needed for some forms of disruptive innovation.

REFERENCES

1. Bower, J. L., and Christensen, C. M. (1995). Disruptive technologies: Catching the wave. Harvard Business Review 73 (1), 43–53.
2. Christensen, C. (1997). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston: Harvard Business School Press.
3. Christensen, C., and Raynor, M. (2003). The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston: Harvard Business School Press.
4. Christensen, C. Raynor, M., and McDonald, R. (2015). “What is disruptive innovation? Harvard Business Review, December, 44–53.
5. Crockett, D. R., McGee, J. E., and Payne, G. T. (2013). Employing new business divisions to exploit disruptive innovations: The interplay between characteristics of the corporation and those of the venture management team. Journal of Product Innovation Management 30 (5), 856–879.
6. Dru, J. (2015). The Ways to New: 15 Paths to Disruptive Innovation. Hoboken, NJ: John Wiley and Sons.
7. Drucker, Peter (1954). The Practice of Management. New York: Harper & Brothers.
8. Gibson, R. (2015). The 4 Lenses of Innovation: A Power Tool for Creative Thinking. Hoboken, NJ: John Wiley & Sons.
9. Hopp, C., Antons, D., Kaminski, J., and Salge, T. O. (2018). What 40 years of research reveals about the difference between disruptive and radical innovation. Harvard Business Review (April 9). Available at https://hbr.org/2018/04/what-40-years-of-research-reveals-about-the-difference-between-disruptive-and-radical-innovation.
10. Kumar, V. (2013). 101 Design Methods: A Structured Approach for Driving Innovation in Your Organization. Hoboken, NJ: John Wiley and Sons.
11. Nagy, D., Schuessler, J., and Dubinsky, A. (2016). Defining and identifying disruptive innovations. Industrial Marketing Management 57, 119–126.
12. Reinhardt, R., and Gurtner, S. (2015). Differences between early adopters of disruptive and sustaining innovations. Journal of Business Research 68, 137–145.