Quantifying the Impacts of Disruptive Innovations

The article looks at disruptive innovation and how, by using Global Insight’s services, companies can be more effective in seeing and acting on market disruptions. Disruptive innovation requires disruptive thinking. Econometric and statistical forecasting models can be used to better understand the likely outcomes from truly new product innovations.

Innovations are widely acknowledged as a key factor in the growth of companies. This is especially true for disruptive innovations, which radically change product and industry boundaries. Whereas incumbent companies are adept at incremental innovation, i.e., extending attributes of already existing products, they tend to perform poorly when it comes to disruptive innovation and end up ceding their leadership to aggressive new entrants. Sony has been the leader in consumer electronics for years, rightly celebrated as the ultimate innovator, marrying content and electronics long before it became fashionable; yet it is Apple that dominates the market for MP3 players with its blockbuster iPod®.

Incumbent failure can be, to a large extent, ascribed to a failure of traditional marketing processes, which fail to deliver critical insights and help the firm respond to the disruption. One of the reasons is that a significant percentage of new product introductions, particularly in the consumer products area, are not disruptive. They are me-toos and line extensions, i.e., incremental in nature. Traditionally, businesses have focused their efforts addressing the challenges of incremental innovation, developing a product-centered mentality. They tell us what exists, and how it could be “improved”; not what could be invented. Conventional research relies upon knowledge of how many new people are likely to try the new product, how many will continue to buy it, how often will they buy it, and in what quantities will the product be purchased. Thinking about products and markets in conventional ways blinds the company to disruptions, and confines marketing to the realm of incremental innovation.

Disruptions break products and market boundaries. That’s not all. Most disruptions are the result of breakthrough technology. Particularly in the early stages of the disruption, it takes technical knowledge to appreciate the potential impact of the new technology, and a special talent to judge its commercial viability. Think of the Laser: a fundamental science in the seventies, in every home ten years later. Businesses, however, often lack this knowledge as their education and experience has distanced them from the technology, if they ever were close to it.

A successful process for identifying and understanding markets for disruptive innovation must 1) identify and develop understanding of markets needed for taking action; 2) detect possible relevant disruptions (not all disruptions are worth pursuing); and 3) understand the consequences of a go-to-market response.

Identifying and Understanding Markets for Disruptive Innovation

Quantification of the market impact of disruptive innovation must begin with understanding the market and the identification of user needs. This stage of the process involves recognizing both the supply-push side of the market (frequently the dominant driver in the case of technology-based innovation) and the demand-pull side of the equation. A useful approach in this case is provided by Christensen, Anthony, Bell and Nitterhouse (MIT Sloan Management Review, Spring 2007) who consider not only the conventional positioning space in terms of products and customer characteristics, but carefully consider the “job” that the customer seeks to accomplish. Global Insight’s capabilities focused on macroeconomic (including consumer) behavior in conjunction with market research tools can help determine the extent to which a given market is likely to be a bright prospect for innovation.

The second phase of the process involves leveraging all of the information gathered in the first phase to simulate thinking about what different kinds of products and services could be developed in order to meet the end-user requirements. Such research involves a network or community of persons such as potential end-users, marketers, and subject matter experts who can lend insight into identifying the relevant technology that can be leveraged to develop products that do “jobs.” For example, a group might consider applications of high-speed connection or even applications for nano-technology.

Finally, with possibilities in mind, during the third stage, it is possible to apply forecasting and simulation models to assess (within reasonable boundaries) the possible impact a disruptive innovation is likely to have on the market. Simulation studies involve the application of econometric and statistical methodologies to understand the current market structure, and as a consequence of introducing outside or exogenous shocks, better understand the economic possibilities going into the future.

It is possible to execute state-of-the art techniques for forecasting disruptions—disruptive situations call for application of disruptive models and simulation tools. Such complex, meaningful models are capable of capturing abrupt changes in the product market trajectory. It may be the case that the impact on the market is pronounced, but gradual, requiring a model that exhibits gradual upward sloping or even “stair-step” outcomes. Hybrid models yielding different scenarios or outcomes can be used to capture a significant disruption followed by a more gradual upward-sloping behavior. The generally accepted procedure for using these models is to repeat the simulations many times over introducing a range of possible circumstances. Such outputs can be recorded and create knowledge of a reasonable band within which possible outcomes might fall.

In the context of the three-phase process described above, it is paramount to understand that research directed toward disruptions is not about predicting the unpredictable. It is about managing uncertainty and understanding the sources and consequences of disruptive change through market understanding and quantification in the “what-if” mode of analysis. The goal of implementing such a processes as that described here is to emphasize the potential associated with going beyond the incremental and proactively seeking the disruptive.