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Running head: DISRUPTIVE INNOVATION 1

Disruptive Innovation: A Multi-Sector Analysis

Richard J. Basch

Walden University

DISRUPTIVE INNOVATION

Disruptive Innovation: A Multi-Sector Analysis

Introduction

Disruptive innovations have been described as technologies that create new markets by

affecting existing industries and infrastructures. The concept of disruptive innovation theory

was proposed and popularized by Clayton Christensen in several seminal works published in

1995, 1997, and 2003 (Guttentag, 2015). The term disruptive technologies was coined by

Christensen in his 1995 article “Disruptive Technologies: Catching the Wage” as a means of

describing new technologies that may undermine and potentially displace established firms,

products, or even entire sectors (Cortez, 2014). In his book, The Innovator’s Dilemma,

Christensen explores the concept of disruption further, based on an in-depth analysis of the disk

drive industry from the late 1950s through present-day (Christensen, 2011).

While Christensen’s original concept of disruptive technology was rooted in

technological innovation, within a relatively short period, the concept was adopted by the

business community as a descriptor for business modeling, wherein the terminology evolved into

the term disruptive innovation. In 2008, Christensen and Mark W. Johnson, the co-founders of

management consulting firm Innosight, along with Henning Kagermann, CEO of SAP AG in

Walldorf, Germany, published an article in the Harvard Business Review titled “Reinventing

Your Business Model,” which was the catalyst for the disruptive innovation movement

(Johnson, Christensen, & Kagermann, 2008). Today, there are myriad examples of disruptive

innovation across a broad swath of industries. Several of the most noteworthy and iconic

examples of disruptive innovation are represented by companies such as Airbnb in the informal

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tourism accommodation sector, Tesla in the electric vehicle sector, General Electric (GE) in the

healthcare sector, and numerous other organizations across multiple industries.

To understand the concept of disruptive innovation within the construct of the current

business environment, it is critical first to examine the state of the field of innovation

management. In this paper, I begin with a detailed analysis of the innovation management field.

I then explore the topic of disruptive innovation based on current theories and areas of debate,

paying particular attention to specific industries and technologies impacted by disruptive

technology. Finally, I delve into specific areas for future research and examine the potential

impact of disruptive innovation in relation to the field of innovation management research

within the next 3-5 years.

Analysis of the Field

The concept of innovation management, in its broadest sense, is the management of

innovation processes from both an organizational and product perspective. According to Kam

Sing Wong (2013), success in business today is largely dependent on the intangible assets of an

organization. In the broadest sense, Kam Sing Wong refers to this as the knowledge economy.

Of all the intangible assets an organization can possess, one of the most critical is its ability to

innovate (Kam Sing Wong, 2013). While innovation is playing an increasingly important role in

helping companies to differentiate themselves from a crowded and extremely competitive global

marketplace, innovation alone is simply not enough. To maximize the potential of innovation as

a growth engine, a company must harness this innovation through careful planning and effective

management (Kam Sing Wong, 2013).

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To understand the state of the field of innovation management today, we must first create

an analytic framework for measuring innovation management. Adams, Bessant, and Phelps

(2006), in their analysis of innovation management measurement, describe the framework for

measuring innovation as the output of an internal organizational analysis characterized by

several factors. First, Adams et al. found that an organization must identify and document its

innovative processes and procedures. Second the organization must ensure that their ideas can

be converted into marketable products. Third, the company must be able to measure the return

on investment (ROI) for each product relative to the innovation-related research and

development (R&D) costs (Adams et al., 2006). The application of this framework will provide

a foundation for conducting a formal evaluation and analysis or innovation management activity,

which will, in turn, help to identify deficiencies, weaknesses, and gaps which could ultimately

undermine profitability and performance (Adams et al., 2006).

While the development of a framework for analyzing innovation management

effectiveness can play a significant role in an organization’s ability to measure its efficiency and

ROI, this is not enough to ensure success. To be successful, organizations must understand the

knowledge economy from a broader perspective, which must include a comprehensive review of

such elements as major competitors, industry trends, the impact of regulatory agencies such as

the federal government, and broader industry trends (Hidalgo & Albors, 2008). More precisely,

an organization must understand the primary innovation management techniques (IMTs) that

impact growth and competitiveness as viewed through the lens of knowledge management

(Hidalgo & Albors, 2008).

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According to Hidalgo and Albors (2008), a knowledge-based economy is defined as an

economy that relies on the production, dissemination, and use of knowledge. As economies

continue to evolve from capital-based systems that are dependent on the creation and delivery of

tangible products to information-based systems, the realization that knowledge is playing an

increasingly important role in fostering innovation is quickly taking root (Hidalgo & Albors,

2008). This is not to say that innovation is limited to intangible products, but rather that the

increasing proliferation of digital technology has served to underscore the fact that while the

products and services are themselves important; the underlying knowledge necessary to create

the products and services represents the real value of an organization Put another way,

companies have come to the realization that IMTs and the ability to quantify and harness

innovation is one of the most critical determinants of success (Oke, 2007).

Research Topic

While the topic of innovation management has become increasingly popular in recent

years, it has yet to become a household word. In contrast, the term “disruptive innovation” has

become ubiquitous to the point where some have said that we have become a culture obsessed

with the idea of innovation (Gobble, 2015). In fact, Gobble (2015) chronicled that in some

circles people believe that “disruption” has become a buzzword that has taken on so many

different meanings that “when everything is disruptive, nothing is” (p. 59). Although this is an

area of some debate, many would argue that the term disruptive technology, as coined by

Christensen in 1995, is one of the single most important concepts of our day (Christensen,

Raynor, & McDonald, 2015).

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For the past 20 years, the idea of disruptive innovation has served as a powerful tool for

predicting the success of organizations and has been tremendously influential in business circles

(Christensen, et al., 2015). With that said, however, as evidenced by articles such as the one

penned by Jill Lepore and described by Gobble (2015), the concept has also been somewhat

controversial. As stated previously, the term disruptive innovation refers to innovations that

create new markets by creating new categories of customers. While initially, the idea of

disruptive innovation was primarily associated with technological innovation, the concept has

since been broadened to include business models that may not necessarily include a

technological component.

Areas of Debate

Although significant evidence exists to suggest that the concept of disruptive innovation

is, on the whole, generally perceived positively, there are those that argue, sometimes quite

vehemently, that the concept is inherently flawed. Of those who are particularly critical of the

concept, one individual, in particular, Jill Lepore, has gained some notoriety. According to

Lepore, disruptive innovation is “a theory of history founded on a profound anxiety about

financial collapse, an apocalyptic fear of global devastation, and shaky evidence” (Gobble, 2015,

p. 59). From Lepore’s perspective, the fundamental flaw in Christensen’s concept is that the

vision of progress proffered by disruptive innovation is devoid of any concept of good, based on

the precept that creative destruction is inevitable (Gobble, 2015). For Lepore, disruptive

innovation is only representative of part of the story, and cannot be viewed as a simple formula

that startup businesses can use to ensure success (Gobble, 2015).

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Impacted Industries

Regardless of individuals’ perceptions regarding the concept of disruptive innovation,

there is little, if any, debate that the concept has directly impacted a broad cross-section of

industries. For those industries affected by disruptive innovation, a direct correlation can be

drawn between the growth of various sectors within each industry and disruptive innovation. In

the following analysis, I will explore four specific industries in detail: (a) informal tourism

accommodation, (b) cloud computing, (c) health care, and (d) electric vehicles.

Informal tourism. Within the informal tourism accommodation sector, one of the

biggest names to emerge within the past decade is Airbnb. From its humble beginnings in 2007

when two university graduates placed three air matresses on the floor of a San Francisco

apartment, which they advertised as an inexpensive “AirBed & Breakfast” alternative for

conference delegates, to its multi-billion dollar valuation today, Airbnb has come a long way

(Guttentag, 2015). Although the seeds of innovation were sown based on the concept of peer-to-

peer accommodation, the truly innovative aspect of the Airbnb concept was its web site and

innovative business model (Guttentag, 2015). This was also the element that allowed the

organization to achieve almost unheard of growth and scale in a relatively short period of time.

To understand Airbnb in relation to disruptive innovation, it is first important to comprehend

what Airbnb is.

Airbnb is a platform through which people advertise their personal accommodations for

rent. The accommodations themselves can range from a couch in a living room to an entire

home, and the person renting the space may either be present at the time of the rental, absent, or

operating the rental as a bed and breakfast (B&B) type business (Guttentag, 2015). Airbnb

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generates its revenue by charging the people renting out their spaces a 3% fee, and their guests a

6-12% fee (Guttentag, 2015). While the sharing of one’s physical accommodations as a rental

unit can be viewed as innovative, the aspect of this model that makes it disruptive is its impact

on the traditional rental market. While the housing rental market has relied on more traditional

accommodations in the form of hotel rooms or even condominium rentals, the Airbnb model has

disrupted this model by providing an online platform that permits large-scale rental of spaces on

a peer-to-peer basis (Guttentag, 2015). For those who were inclined to dismiss the Airbnb

model as a fad, the concept is currently on track to sell as many room nights as top brands such

as Holiday Inn, and may even approach the volume of industry stalwarts such as Marriott

International (Guttentag, 2015).

Cloud computing. Over the course of the last decade, the concept of cloud computing

has gained significant recognition and traction. The cloud computing model evolved as a result

of the proliferation of the Internet and a universal improvement in Internet connection speeds

and reliability (Cătinean & Cândea, 2013). Whereas in the not too distant past companies were

largely tethered to on-site database systems which operated based n software that had to be

purchased and installed locally, cloud computing technology offers companies the ability to

conduct their computing needs via the Internet. This technology not only provides greater

flexibility and increased agility, it significantly decreases the expenses inherent in purchasing

and maintaining on-site systems, while providing a support structure that is potentially more

efficient and which requires no management on the part of the company (Cătinean & Cândea,

2013).

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While this innovative new web-based technology platform has had an adverse impact on

some traditional computer hardware and software companies, the technology is not without its

challenges. Research has shown that many managers and executives are still reluctant to

embrace could-based computing because of the trust it requires (Cătinean & Cândea, 2013). In

their article, Cătinean and Cândea cite a study in which 66% of respondents stated an

unwillingness to consider a cloud-based solution because of concerns regarding security and

stability. Additionally, many cited concerns about sharing internal financial data and the

potential exposure risks associated with sharing critical intellectual property over the web. One

recent development that has quelled some of the negative feedback from cloud-based computing

naysayers has been the success of Amazon as the leading Infrastructure as a Service (IaaS)

provider. From an innovation standpoint, many cloud-based computing companies have

concluded that trust plays a key role in converting companies to Software as a Solution (SaaS)

systems, and as such, they have invested heavily in promoting themselves as stable, trustworthy

institutions.

Healthcare. While industries such as service and manufacturing have long been

considered hotbeds of disruptive innovation activity, healthcare in the U.S. has been slow to

adopt innovative disruption (Zimlichman & Levin-Scherz, 2013). Historically, most healthcare

in the U.S. has been funded by either the federal government or by health insurance companies

(Zimlichman & Levin-Scherz, 2013). According to Zimlichman and Levin-Scherz, with the

advent of the Affordable Care Act (ACA) and the creation of Accountable Care Organizations

(ACOs), health care providers are increasingly being required to accept financial responsibility

for patient care, and as such, they are becoming much more cost-conscious. Additionally, as

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healthcare providers are increasingly being required to move to a patient-centric, outcome-based

model with the inherent reporting transparency requirements, many providers are looking for

ways to increase profits and efficiency. Enter the concept of disruptive innovation.

Although disruptive innovation is beginning to impact every aspect of healthcare from

electronic medical records (EMRs) to telemedicine, perhaps nowhere is this new perspective

more visible than in cardiac medicine. On September 16, 1977, Dr. Andreas Gruentzig

performed the first balloon angioplasty for a blocked coronary artery, based on a catheter which

he built on his kitchen table using commonly available materials (Chitwood Jr., 2015). This

single event served as a catalyst which triggered one of the most sustained and prolific trends in

disruptive innovation in any industry. Whereas coronary artery surgery was previously

considered the gold standard of care in the late 1970s and throughout the 1980s, by 2003, the

number of angioplasties in the U.S. had surpassed coronary artery surgery by 22% (Chitwood

Jr., 2015).

Perhaps the aspect of disruptive innovation in the cardiac surgery community that is the

most interesting is the fact that cardiac surgeons did not perceive disruptive innovations and

technology as a threat, but rather as exciting new advances in the treatment of heart disease

(Chitwood Jr., 2015). While some of this attitude may be attributed to the fact that heart

surgeons are very likely motivated by their desire to save lives, they also may not feel directly

threatened by the technology based on the specialized nature of their field. Moreover,

improvements in technology have resulted in significant gains both in efficiency and positive

patient outcomes, which are both key elements of the ACA. As such, cardiac physicians may

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potentially see an uptick in demand for their services, and perhaps even their compensation, as

they are able to conduct more procedures with better outcomes (Chitwood Jr., 2015).

Electric vehicles. The automotive industry has relied on the internal combustion engine

(ICE) for decades to power their vehicles (Dijk, Wells, & Kemp, 2016). The automotive sector

has long been one of the most entrenched industries in the U.S., and has largely been impervious

to the advent of new technologies and manufactures. Innovation in the automotive market is

both costly and risky, and as a whole, automakers have been reluctant to unilaterally introduce

innovations (Dijk et al., 2016). Much of the innovation in the automotive industry has been

prompted by either government regulation in the form of emissions and fuel efficiency

requirements, or public outcry as a result of increasing fossil fuel costs (Dijk et al., 2016). It is

only in recent years, with the advent of hybrid and all-electric vehicles such as those

manufactured by Tesla, that automotive manufacturers have embraced these new technologies en

masse.

According to Dijk et al. (2016), studies have shown that radical innovation in the

automotive marketplace has historically come as a result of new entrants and not the incumbents.

This is true for three primary reasons. First, incumbents frequently fail to understand the

demand for new technologies outside of their customer base (Dijk et al., 2016). Manufacturers

tend to position their brand names to cater to specific demographics, which, from their

perspective, may not be interested in new technologies. In particular, this was often the case

concerning manufacturers catering to more niche segments, such as seniors and sports car

enthusiasts. Second, from a profitability standpoint, new technologies are often very expensive

to adopt and require significant investments in research and development (Dijk et al., 2016).

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Additionally, profit margins may be minuscule. Third, according to Dijk et al., incumbent

automotive producers are often constrained by existing manufacturing processes, which require

significant retooling to be able to accommodate new technologies. These constraints may

prevent manufacturers from being able to react quickly to market conditions, and may cause

them to lose market share if significant investments of time, money, and resources are not made

(Dijk, et al., 2016).

Impact. Based on the preceding analysis of four sectors currently experiencing the

effects of disruptive innovation, (a) informal tourism accommodation, (b) cloud computing, (c)

health care, and (d) electric vehicles, from my perspective the impact has been largely positive.

In every instance, improvements in technology have resulted in rapid growth and increased

efficiency, which has significant implications for society as a whole. In each case, the

introduction of disruptive innovation could potentially reduce costs for the end consumer. For

example, the impact of Airbnb could create a price war in the traditional hotel industry, thereby

decreasing hotel room costs across the sector. Cloud computing could minimize the need for

companies to have to invest vast sums in technology infrastructure, and these savings could

potentially be passed along to the consumer. Innovations in healthcare could potentially

improve patient outcomes, and reduce costs by improving the efficiency and efficacy of care.

And the introduction of electric vehicles could reduce our dependence on fossil fuels, while

significantly reducing emissions, which harm the environment.

Future Directions

Since its first introduction by Clayton Christensen in 1995, the term innovative

disruption has become synonymous with growth, creativity, and competition. Disruptive

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innovation requires organizations to push themselves beyond their traditional comfort zones and

to consider options beyond key metrics such as profit margins and the maximization of

shareholder value (Petrick & Martinelli, 2012). As the power of technology continues to

improve and the world becomes increasingly interconnected, companies will be forced to

consider issues such as global warming, ecological sustainability, and social consciousness.

Additionally, many disruptive innovators will find themselves in a position where they must

contend with increasing oversight and regulation (Cortez, 2014). As an example, Airbnb is

facing increasing scrutiny from multiple municipalities that have laws regulating short-term

rentals (Guttentag, 2015).

To better understand the concept of disruptive innovation, additional research must be

conducted in several key areas including an analysis of the global economy, the aging of many

societies throughout the world, and environmental sustainability. While the U.S. has long been

considered one of the primary drivers of the global economy, many disruptive innovations have

the potential to impact people across the globe. For example, the nature of cloud-based

computing is such that the technology is not constrained by geographics. As such, technologies

developed in the U.S. could be translated into multiple languages and utilized to improve

everything from tax payment and collection to banking. Even heart surgery can now be

performed via the use of technology, and procedures that were once only available in the U.S.

could be performed by trained physicians via digital links.

Potential impact. The potential impact of disruptive innovation is virtually limitless.

As disruptive innovation is universally regarded a growth engine, and a means of achieving

business success, this is a concept that continues to stand the test of time (Kam Sing Wong,

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2013). Perhaps what is even more important than the idea of embracing disruptive innovation, is

an understanding of the consequences of failing to do so. Eastman Kodak is a prime example.

On August 25, 1981, the Sony Corporation demonstrated the first ever digital camera,

which it dubbed the Mavica (MAgnetic VIdeo CAmera) (Vitton, Schultz, & Butz, 2014). At the

time, Kodak’s president, Colby Chandler, dismissed Sony’s innovation as a flash in the pan that

could never impact Kodak’s vast empire, which, in 1981, had a net income over $1.1 billion and

more than $1.585 billion in cash reserves (Vitton et al., 2014). Looking back on this today, this

type of arrogance is laughable. However, many industries continue to resist the need to

implement management innovation programs. Within the next three to five years, I anticipate

that the pace of disruption and innovation will continue to increase; particularly overseas.

Companies would be wise to heed the warning signs, lest they are relegated to the ranks of

Eastman Kodak.

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