Disruptive innovation refers to innovations that create new markets by either targeting customers at the bottom of the market who are not served by existing products, or targeting customers in new emerging markets. There are three main types of disruptive innovation: low-end disruption, new market disruption, and business model innovation. Examples include Toyota entering the US market with affordable cars, and Grameen Bank providing microloans to the poor without collateral. For companies to foster disruptive innovation, they need to create separate organizational structures, spin out new organizations, or acquire startups already pursuing disruptive strategies. Developing countries and non-consumers are ideal target markets. Grameen Bank and Grameen Phone are examples of disruptive

1. Disruptive Innovation
Partha P.Kundu
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2. Introduction
 We have all heard of innovation
 But when is it called disruptive?
 And why so?
 How relevant is it to us today?
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3. Types of Innovation
 Sustaining Innovation – these do not affect existing
markets
 Revolutionary, Transformational or Discontinuous – creates a
new market by allowing customers to solve a problem in a
radical new way e.g., automobile vs. horse-drawn carts
 Evolutionary – improves a product in an existing market in a
way that the customer expects e.g. Carburetor to MPFI; CRDI
 Disruptive Innovation (DI) – these radically affect
existing markets
 Creates a new (and unexpected!) market by applying a different
set of rules, typically by lowering price or designing for a
different set of customers! e.g. Assembly line mfg (Ford’s Model
T), micro credit (Grameen Bank)
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4. A bit of history….
 The term “disruptive technologies” was introduced by
Clayton M. Christensen in a Feb ‘95 article for HBR
which he co-wrote with Joseph Bower
 He subsequently realized that few technologies are
intrinsically disruptive or sustaining in nature
 Thus he changed it to “disruptive innovation”
 More importantly, it is the strategy or the business
model that the technology enables that created the
disruptive impact
 How relevant is it to us today?
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5. First Type of Disruption
 Low End Disruption
 Targets customers who do not need the full
performance needed by the customers at the high end
of the market e.g., Toyota’s entrance into the US market
with the Corona in the 1960-s.
 Within a few years, it became the favorite 2nd car
 Immediately other Japanese companies such as Honda
and Datsun (renamed Nissan) followed suit.
 Guess what Toyota did next!!
 Toyota entered the upper end of the market with
Corolla, Tercel, Camry, 4Runner, Lexus and Avalon
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6. Second Type of Disruption
 New Market Disruption
 Targets those customers who haven’t been served by the
existing incumbents e.g., Sony’s transistor radio in the
1950-s in the US. Targeted teenagers who did not mind
the low volume as they could listen to their favorite music
without their parents knowing about it!!
 Within a few years, Sony drove everyone else out of the
market
 When Linux was introduced, it was inferior to Unix and
Windows NT. It is now installed in 88% of the world’s 500
fastest supercomputers
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7. Examples of Disruptive Innovation
Disruptive Innovation Displaced Technology
Refrigerators Icehouses
Mini Steel Mills Large Integrated Steel mills
Digital Photography Traditional photography
Telephone Telegraphy
Paper Parchment
Steamships Sailing Ships
Digital Synthesizer Organ, Piano
Solid State Drive Hard Disk Drives
Digital Media CD, DVD
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8. How to foster Disruptive Innovation?
New resources, processes and values are required. Fine, but how?
 Method 1: Create a new organizational structure
 A classic example is the Macintosh team in Apple
 New people were brought together, and kept away from the
rest of the group by a boundary
 Steve Jobs created a post teen office atmosphere
 Stereo system and 6’ high speakers
 Masseur on call all day
 24 hr supply of fruit juice and mineral water
 Bossendorfer grand piano in the lobby
 BMW-s and Mercs at the disposal of the team
Result: MACINTOSH
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9. How to foster Disruptive Innovation?
New processes, resources and values are required. Here’s one more way
 Method 2: Spin out a new organization
 Necessary when values of mainstream organization
are antithetical
 A good example is HP printer division at Boise,
Idaho
 This unit was unable to devote time or talent to the
ink jet printer business
 Managers needed to be able to adjust to lower gross
margins, small market and lower performance
 Ink jet printer project flourished only when this was
transferred to Vancouver in British Columbia
Result: Ink Jet project was a huge success!
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10. How to foster Disruptive Innovation?
New processes, resources and values are required. A third method
 Method 3: Acquire an organization that already
has the desired resources, processes and
values
 Cisco is a past master at this game – successfully
acquired several co-s between 1993 and 1997
 Prime motivation was the engineers in these small
co-s and the products they made
 Cisco took their resources, and bolstered logistics,
manufacturing and marketing processes
 A very good example was StrataCom
Result: Tremendous synergy in CISCO
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11. Target Markets for DI
 Developing countries are ideal locations
 GM set up a Buick plant in China in 2002
 It targeted the middle class, and not those who could afford a
Mercedes or a BMW
 DI-s compete against non consumption
 The product or service that emerges from DI serves
people who were either not served earlier or were
used to poor service
 Business models designed for low income markets
can be deployed in high income markets, but NOT the
other way round
 Honda manufactured motor cycles for people living in
crowded and impoverished Japanese cities in the 1950-s
 When Honda entered the US market in the 1960-s with the
Supercub, it was an instant hit, as US bike makers were
unwilling to sell their products at such low prices
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12. Case Study – 1: Grameen Bank
 Grameen Bank was set up by Prof. Muhammad Yunus in
Bangladesh in 1983
 It was the result of a project initiated in 1976 to examine the
possibility of designing a credit delivery system for the rural poor.
 Aim was to provide credit to the poorest of the poor sections of
society WITHOUT COLLATERAL!!
 Group based credit – utilizes peer pressure to ensure that the
borrowers follow strict financial discipline, ensure timely repayment
and thereby increase credit standing
 The bank accepts deposits, runs several development oriented
businesses such as fabric, telecom and energy
 Dr. Muhammad Yunus obtained his Ph.D. from, and was a
Fulbright scholar at Vanderbilt University in the US
 He started his career in the Economics dept. at Chittagong
University, Bangladesh
 The Grameen Bank and Prof Yunus were awarded the Nobel
Prize for Peace in 1996
 Their Low-Cost Housing Program won the World Habitat Award in
1998
 Prof Yunus was awarded the Presidential Medal of Freedom by
President Obama in Aug 2009
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13. Grameen Bank, cont’d
 Guess Grameen Bank’s turnover and profits
 In 2009, GB gave out $ 1.15 BB as loans
 The total amount it has given in loans since it was founded is $ 8.74
BB
 The profit for the year 2009 was $ 5.4 MM, compared to 19 M last yr
 Story in 1983: 1250 villages with 58000 members (46% female), net
loss $ 5900
 Story in 2009: 83450 villages, 8 MM members (97% female), net profit
$ 5.4 MM
 Repayment rate is a staggering 98%.
 Grameen methods are being applied in France, Canada, Holland and
the US
 All information from www.grameen-info.org
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14. One more story: Grameen Phone and Telecom
 Grameen Telecom (GTC) was set up by Prof. Muhammad
Yunus in Bangladesh, and has a 38% stake in Grameen Phone
(GP)
 The vision behind GP is that of Dr. Abdul Quadir, who has a BS
from Swarthmore, and an MBA from Wharton
 He worked with the World Bank, and subsequently in some
American private financial institutions
 Quadir was convinced that a mobile phone could be an income
generating device for the rural poor
 When he mooted his idea, people laughed at him saying only the
very rich could afford mobile phones
 Bangladesh has a per capita income of < $ 300, and a decent
mobile phone cost around $ 100 at that time.
 So what did Dr. Quadir do?
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15. More about Grameen Phone and Telecom
 Quadir founded Gonophone in NYC in 1993, and this became a
launch pad for Grameen Phone
 The Norwegian company Telenor made this program a reality
 It lent upto $ 175 to women in rural villages – a majority of them were
small time independent entrepreneurs
 The loan included the costs of the phone, the solar recharge unit, as
well as training to use and service equipment
 After training, the women sold these services to the villagers on a per-
call basis at an affordable price
 Pilot project was spread over 950 villages; the income of the “wireless
women” increased by $ 300 per annum – this was spent in healthcare
and education
 Social status of these women increased greatly
 Users could cut down on travel, and shake off their dependence on
the highly unreliable postal system to place orders, and to secure
crop information
 Users could save 10% of their costs
 Environmental benefits – less travel, less pollution, and no additional
construction for land lines
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16. Still more about Grameen Phone and Telecom
 A single phone in a rural area yielded a revenue of $
100 per month as opposed to $ 30 in the urban areas
 It was felt that if this model could be extended, it could
generate revenues of more than $ 100 MM per year
 Repayment rate is 95%!!
 Nokia plays a stellar role in the supply of handsets
 GP provides mobile access to 100 million people in
60000 villages
 Revenues are around S 1 BB annually
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17. DI in the automotive industry
 A Rolls-Royce chassis alone cost £ 900 (c. $ 4500) in the early
1900-s. See
http://www.bentleyboys.com/Rolls-Royce%20History.htm
 Along came Henry Ford, and in 1908, the Model T hit the roads at
$ 850. Competing cars were in the $ 3000-4000 range
 Prices dropped to $550 in 1913 and $440 in 1915
 The car was targeted primarily at farmers!!
 70000 cars were sold in 1911, and this increased to 501000 in
1915
 By 1914, the world market share of Model T was 48%, and in
1921, it was 56%
 In India, Bullets and Yezdi-s dominated the market (250 and 250
cc), until the Japanese came with their 100 cc vehicles
 Gearless scooters by Honda wiped out the Bajaj Chetak
monopoly
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18. When does Disruptive Innovation fail?
 Inadequate resources
 Managers who are successful in mainstream businesses are
antithetical towards DI
 They adopt and foster strategies useful in mature markets
 Profit, not size, should be a driving force
 Inflexible processes
 Failure can occur if DI is attempted keeping existing processes in
place
 For instance, between 1950 and 1980, Sony brought out 12 DI-s –
these created new markets, and brought down industry leaders
 Between 1980 and 1997, not a single DI, only sustainable innovation
in terms of the Play stations, Vaio Notebooks etc
 Organizational values
 If there are rigid values, then a separate venture should be created to
deal with disruptive innovations
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19. Partha P.Kundu
parthapk@gmail.com