Home / Opinion / Views /  Opinion | Disruption - The business model innovation

Innovation is creating new value and/or capturing value in a new way. Disruption is a disturbance or problem that interrupts an event, activity or process.

The term “disruption" was coined with the business context in Clayton Christensen’s 1997 book The Innovator’s Dilemma. Christensen, in the book, introduced the idea of “disruptive innovation", as a way to think about successful companies, not just meeting customers’ current needs, but anticipating their unstated or future needs.

The book explained how small companies with minimal resources were able to enter a market and shake up the established brands; and theorised that a disruptive business is likely to start by either attracting the lesser-served customers or creating a market where none existed before! A classic eye-opener with this theory is that Uber doesn’t actually fit the true disruption definition. Because the service provides a direct challenge to taxis which is actually a pre-existing market. Uber did shift the transportation industry, but it didn’t truly disrupt it.

Iconic companies such as Kodak, Sears, Borders, Radio Shack, and Toys R Us sank while global-disruptors such as Google, Amazon, Airbnb, Netflix and Apple rose. Organisations faced with potential disruption from competitors, commit resources to generating new ideas for exploration but struggle to convert these ideas into meaningful businesses. In almost every case of disruption (such as Blockbuster, Sears, Nokia, and Kodak), the firm fell victim to a new business model. They lost the relevance to and contextual value with their consumers.

Innovating the business models

Across many industries, companies are using innovative business models as a basis for competitive advantage; be it leveraging their resources associated with value creation, capture, and delivery. As a consequence, companies have started to focus not just on product or process innovation. The concept of Business Model is the business logic to create and capture value for both consumers and businesses and new solutions to problems and needs.

Dell’s production-to-order system, Zara’s supply chain for fast-fashion, and the famous Toyota production system; in each of these examples, the firms disrupted the traditional way of doing business not through introduction of new technology, creation of new products, or finding new market niches, but by identifying novel ways of delivering existing products based on existing technology to existing markets.

There are other business model innovations that are enabled by technological advances, such as Amazon’s efficient retailing model, which was enabled by advances in information technology. In 1994, Amazon started selling books online. Over the years, Amazon has acquired technological prowess and invaluable expertise in the development of web and data infrastructures; based on this expertise, it offers web services and infrastructure to thousands of companies and has become one of the leading cloud-computing service providers. Amazon Web Services, for example, helps subsidise the Amazon Prime business model. Prime memberships, in turn, provide Amazon with more customer data, which enhances customer service and the online retail experience. This, in turn, feeds buyer demand, which attracts more sellers, which ensures low-cost products, and so on.

Netflix, which launched in 1997 as a traditional pay-per-rental DVD rental service that offered delivery by mail. In 1999, Netflix shifted to streaming video over the internet, the company did eventually become appealing to Blockbuster’s core customers, offering a wider selection of content with an all-you-can-watch, on demand, low-price, high-quality, highly convenient approach. And it got there via a classically disruptive path displacing the leading video rental chains like Blockbuster..

Apple leveraged its superior design and product development capabilities to serve product markets — going over and above PCs — but also capitalized on its exceptional management and marketing capabilities to develop a unique value proposition and customer engagement mechanism: This enabled Apple to first disrupt the digital music industry (with iTunes and the iPod) and then reap the benefits of that disruption via the iPhone.

Reliance Jio disrupted the Indian telecom market by launching its mobile telephony and data services. Jio implemented ‘Bait and Hook’ Strategy where in the basic product (hook) was offered cheaply or free; the complementary product or refill (bait) was sold at comparative higher prices. Buying complementary product was necessary to use core product. Selling free 4G SIM with free phone calls, data and OTT services enabled non 4G users to switch to 4G (VoLTE) handsets and to the Jio ecosystem. Reliance Jio, a mirror image of ‘OIL’, started its commercial operations in late 2016; and quickly built consumer traction within a short period of time. Jio has further diversified its product-mix portfolio in telecommunication, OTT, healthcare, retail, e-commerce, IoT, VR/AR etc.; and one expects it would add many more products & services to add to its portfolio.

Sharing economy / platform economy

The emergence of peer-to-peer platforms, collectively known as the “sharing economy", has enabled people to collaboratively make use of under-utilised inventory through fee-based sharing. Consumers have so far enthusiastically adopted the services offered by firms such as OYO rooms, Ola, Make My Trip.

The rapid growth of peer-to-peer platforms has arguably been enabled by two key factors: technology innovations and supply-side flexibility. Technology innovations have streamlined the process of market entry for (newer & wider range of) suppliers , facilitated convenience for consumers, and kept transaction costs low.

Oyo, founded in 2013, describes itself as a trusted community marketplace for people to list, discover, and book unique accommodations around the world. Its a peer-to-peer marketplace in the sharing economy. Prospective hosts list their properties on the platform,; establish their price, and offer accommodation to guests. Oyo derives revenue from hosts for this service.

Friedman suggested that the winners in a global economy will be those players whose collaborative relationships effectively augment their own operational excellence, consequently enabling them to deliver value farther, faster, deeper, and cheaper to customers wherever they may be. Platform enterprises bring together a community or cluster of firms that possess complementary assets and capabilities.

The success of platform based business model is particularly noteworthy in the context of a global economy. Technology is fast unlocking these opportunities. In particular, mobile applications are enabling start-ups to aggregate sufficient demand to support this new business model, often by capturing unrealized value from assets these start-ups do not own. Technology is closing the gap between decisions made by consumers and the satisfaction of those choices. Relationship between consumers and producers or retailers changes from "go to" to "come to". In the technology-driven era, producers or retailers will come to consumers instead. As on-demand mobile services become the dominant business model, a number of innovations will emerge.

Business model 2.0

One problem with identifying disruptors is that often they need lot of time to make a real impact in their respective fields. Sometimes it can take years for the true effects of disruption to present itself in the market. Additionally, a disruptor’s business model can look completely different than what’s already there, so it can be hard to identify disruptive innovation in its early stages. Business model innovations are key to a firms’ long-term survival. Disruption is a good change that organisations can leverage for their long term survival and staying true to their consumer needs.

In India, the challenges of serving India vs Bharat consumer differentiation but without product-feature or pricing discrimination is high. The additional complexity of serving a stratified demographics and a large population base in each of these segments will test any business plan.

Not every start-up will beat the incumbent. Not every big company is going to be disrupted. If a business wants to disrupt instead of it being disrupted, it should have pulse on its consumers first and then its entire competition set who may not be seen as a threat yet. And these businesses should not be afraid to disrupt their own current business model. Self-disruption could be the only way to survive and be relevant even in the future.

(Srinath Sridharan is an independent markets commentator and Srinivasan R. Iyengar is a faculty in the area of strategy at JBIMS, Mumbai. All views expressed in this article are personal and do not reflect Mint's.)

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