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Home arrow Computer Science arrow Technological Entrepreneurship: Technology-Driven vs Market-Driven Innovation

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Economics

A potentially disruptive technological innovation can only succeed when the new proposition generates a profit. For this to occur, the cost of production has to be lower than the price at which customers are willing to purchase the new product or service. In his original formulation of disruptive innovation, Christensen’s (1997) perspective was that market success was achieved by developing a product or service which, while exhibiting a poorer performance than existing established goods, was capable of being offered at a lower price. Although examples such as the minicomputer, the mini-mill and first-generation PCs provide validation of his theory, the number of successful market entries is somewhat limited. This is because low-end innovation does not usually involve a major investment in new technology, but in most cases is the outcome of a clever recombination of existing technologies.

Subsequently it has been accepted that developing a high-end proposition of superior performance, typically a very expensive process, may also create disruption. The initial launch will need to be a high-end introduc?tion in order to generate a profit. The high price means the new product or service is likely to only be of interest to a limited number of customers who regard the benefit on offer as an affordable proposition. In cases where there is no potential to significantly reduce production costs over time, the innovation will remain a niche product. An example of this outcome is the supercomputer. These machines are extremely expensive and hence only appeal to a small number of customers who need a much higher level of computational capacity than is offered by a standard computer. The first and subsequent generations of supercomputer have therefore been used for highly complex tasks such as high-speed code breaking, long-range weather forecasting and molecular modelling.

Although these high-end niche propositions are of minimal interest to companies involved in supplying products or services using existing conventional technology, the potential threat is that cost reduction achieved through further innovation could reduce price to the point where the benefit offered by the new technology is affordable for the majority of customers in a market sector. As this juncture high-end market disruption is likely to occur. The outcome for long-established suppliers may be declining revenue, in some cases leading eventually to bankruptcy, unless these organisations develop the capability to begin exploiting the new technology themselves.

High-end disruptors’ strategy is to produce innovations that are leapfrog in nature, making it difficult to rapidly imitate them (Lacourbe 2013). They outperform existing products on one or more critical high- appeal criteria at launch, sell for a premium price and target incumbents’ most profitable customers, going after the most discriminating and least price-sensitive buyers before spreading to the mainstream. Examples include Apple’s iPod displacing the Sony Walkman and Dyson’s bagless vacuum cleaner’s impact on conventional vacuum cleaner manufacturers. The incumbents did not react fast enough and these two high-end disruptors took over their markets.

Another example of a high-end innovation which moved from a niche to a mass-market product is the mobile telephone. The first-generation products were bulky and expensive. Market appeal was limited to business users who were willing to pay a very high price to receive the desired benefit of enhanced communication mobility. Only after further technologi?cal advances which reduced both the size and cost of these new devices did the product become perceived as sufficiently affordable for the mobile telephone to evolve into a mass-market proposition (Sandstrom et al. 2009).

 
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