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Disruptive Innovation

"Sun Tzu The Art of War Wisdom"

What Sun Tzu has to do with a modern Harvard University competitive theory such as the theory of Disruptive Innovation?

Sun Tzu Said:

"Those who strategise use the Tao of Paradox. They attack when the opponent is unprepared and appear where they least expected"

Unfortunately, most interpretations of this famous statement from Sun Tzu, focuses on the direct meaning related to war.

By delving a bit deeper into its meaning we find that it meant something more profound especially when it comes to application in business today.

The key to this understanding lies in two words; "unprepared" and "least expected".

Sun Tzu's statement encapsulate in one line a very important modern competitive theory developed by Harvard University in the last ten years.

The theory of "Disruptive Innovation" . What you will read in hundreds of modern books is exactly what sun Tzu described in this one short sentence 2500 years ago.

What is disruptive innovation?

There are two distinct categories in innovations: sustaining and disruptive.

Sustaining innovation, is when the competitive race forces the dominant company to make better products that can be sold for more money to more attractive customers. In such a competition the incumbent supplier always wins.

Disruptive innovation on the other hand, is when a company new to a market; leaner and more cost efficient, commercialise a simpler, more convenient product that sells for less money and appeals to a new or "unattractive" customer. The new comer to this market is likely in this case to beat the incumbents.

This is the phenomenon that so frequently defeats successful and large companies. It implies, of course, that the best way for upstart to attack established company is to disrupt them by attacking them when they are "unprepared" and where they least expected to be attacked.

What are they "unprepared" for?

They are unprepared from a cost structure and business model point of view, to take a smaller margin or to develop a lower quality and cheaper version of their lucrative product.

On the other hand the new entrant is certainly more prepared to do just that.

For examples:

The personal computer and Sony's first battery-powered transistor pocket radio were new-market disruptions. Their initial customers were new consumers that had not owned or used the prior generation of this products and services.

Canon's desktop photocopiers were also a new-market disruption, in that they enabled people to begin conveniently making their own photocopies around the corner from their offices, rather than taking their originals to the corporate high-speed photocopy centre where a technician had to run the job for them.

When Canon made photocopying so convenient, people ended up making a lot more copies and letting go of the large centralised copier concept.

In the above examples, the established supplier focused mainly on improving the product at hand to increasing their margin by moving up the scale to more lucrative customers. They were "unprepared" to venture into lower margin, lower quality business and didn't "expect" that a "smart" entrant will eventually topple them.

There is also the classic case of the Mini Computer manufacturers; Not one of them ventured into the PC market, because their cost structure and resources allocation system didn't allow them to compete.

They geared their business model toward sustainable innovation by improving the speed and the power of the minicomputer while completely ignoring the emerging "lower quality, less efficient" but cheaper and more convenient Personal Computers.

The rest of course is history, as none of these suppliers exist today i.e. Digital, Pyramid, Sequent and many more..

Disruptive innovation like this, start at lower quality but with time and increase sales, quality improves and market share increase till eventually they topple the incumbents all together.

Another type of disruptive innovation is the Low-End. This is what we call a disruption that takes root at the low end of the original product.

Disruptions such as discount retailing (i.e. Wall Mart), and the Korean automakers entry into the American market have been pure low-end disruptions in that they did not create new markets or product, they were simply low-cost business models that grew by picking off the least attractive of the established firms' customers.

Those customers really had enough improved quality and now needed simpler and cheaper products to do the job.

Although they are different, new-market and low-end disruptive innovation both:

"Attack when the incumbents are unprepared and appear where the incumbents least expects them..."

Sun Tzu would say in such circumstances;

"This must be studied"

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