Disruptive Innovation and Conventional Strategic Management Theory

In November 2009, Hari Nair, partner at Innosight Ventures wrote an article in the social enterprise magazine Beyond Profit on his company’s philosophy of supporting “disruptive innovation.” This form of innovation typically involves those that are smaller, cheaper and simpler than those of the traditional market leaders. Such innovation often reshapes a market. An example of such innovation would be Razor Rave — a booth-operated micro franchise that offers premium grooming services for men at costs far lower than than conventional service providers.

Mayank Jaiswal, Villgro Fellow 2010, takes a look the the concept of disruptive innovation through the lens of conventional strategic management theory.

Read Hari Nair’s full article here.

Hari Nair, in his piece, “Shaping For-Profit Enterprises Through Disruptive Innovation,” presents the concept of “disruptive innovation.” In this analysis I have attempted to understand it through the lens of conventional strategic management theory.

In the diagram alongside, the curve ODT represents an efficient Price Quality Frontier (which essentially means that it represents the best quality for a certain price and vice versa available in the market).

Disruptive innovation moves the frontier to point C so assume a curve passing through OCT rather than the solid curve shown passing through ODT. What this means is a business has found a new way of doing something which either provides a better quality at the same price as the efficient frontier or same quality at a lower price than the corresponding efficient frontier.

Let us further assume that A and B were established players who were providing a certain quality for a certain price. For example A is a Ramada Inn, which is a budget hotel with best quality in class similarly B is a Taj Palace, high quality for high price. We also see that both A and B have ‘influence circles’ – it is the area from which A and B derive their consumers. Thus if a company comes along and ‘breaks’ the frontier at D and raises it to C, we can have two types of migration – the ‘quality migrators’ people willing to pay slightly higher prices for a much higher quality or ‘price migrators’ people willing to settle for slightly lower quality with a considerable decrease in price. Thus we see flight of two types of consumers.

Additionally, it might so happen that region D was a consumer ‘wasteland’ say 20 years ago – i.e. no consumers existed in that region. However, with the change in the economic conditions may be region D has now become a ‘hot spot’, the entrenched players A and B usually miss out on these if they are not conducting timely surveys of the consumer landscape, and keeping themselves abreast of the latest changes in consumption patterns.

Razor Rave is a case in point. A can be thought of as the street hair dresser and B as the high end salon. With the entry of Razor Rave kiosks and the fact that there is more disposable income with Indians especially in the middle class, Razor Rave is C. It has come in where no players existed and has created disruptive innovation by serving the consumer professionally (quality axis growth) at not very high price points.

The theory has implications for new social enterprises as well. I If new enterprises can develop innovative approaches which provide better services orquality at similar prices or similar quality at lower prices and can identify “consumer wastelands” which will be no more, there is scope for a successful enterprise to be set up. The need and chances of developing such enterprises in the social space are very high given the current rate of growth in countries like India.