The Answer to Disruptive Innovation: Adaptive Transformation

JAN-FEB 2017|BY ELIAS VYZAS, PARTNER, ADVISORY SERVICES, EY GREECE, CENTRAL AND SOUTHEAST EUROPE DATA AND ANALYTICS LEADER

Disruptive Innovation: Its Evolving Meaning & Importance

The theoretical framework of disruptive innovation (DI) was first put forward by Harvard Business School Professors Joseph Bower and Clayton Christensen in 19951 to describe the transformation of business models and value networks by radical technological or business oriented innovation.

Since then, the term has entered our everyday business vocabulary as we have come to realize that DI in business models, products or services is multifaceted2, ubiquitous, and most importantly accelerating. In parallel, the definition of the term has expanded as it became clear that its root causes included not only technological breakthroughs, but also macroeconomic trends, demographic changes, globalization effects and their interaction. Moreover, nowadays it is clear that the consequences of DI reach far beyond the business world and cover society as a whole, affecting everyday life, income distribution, regulatory frameworks and relationships between governments and citizens.

Megatrends Impacted

Considering the evolving definition and importance of DI, its current state is setting in motion eight megatrends, which could be better understood by asking ourselves some difficult but nevertheless critical questions3. After all, now more than ever, asking better questions can lead to that type of thinking which expands our insight and generates successful corporate strategies:

  1. Is every industry now your industry? As customer empowerment drives demand for novel solutions, industries are redefined, long held characteristics change and barriers to entry are lowered. The automotive industry is a clear example of how technology can disrupt a traditional sector and drive convergence.
  2. What intelligence will we need to create a smart future? Smart technologies, such as the Internet of Things (IoT), Artificial Intelligence (AI) and Robotics Process Automation (RPA), ensure that an asset, infrastructure, or even transaction is connected, it analyzes its data and becomes more autonomous and effective.
  3. When machines become workers, what is the human role? Technology has been reshaping the type and nature of work since the first Industrial Revolution. Moving forward, the next waves of disruptive technology (e.g. Chatbots, Virtual-Augmented Reality) are poised to take labor displacement to a higher level affecting both blue and white collar jobs, generating huge benefits for consumers, and at the same time shifting from a “gig economy” (Uber, Airbnb platforms) to a “machine economy” (AI and RPA).
  4. How will individual behavior impact our collective future? Governments and the private sector increasingly turn to behavioral economics for answers and ways to motivate human behavior without restricting individual freedoms. This discipline examines the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and resource allocation. Digital technology, smartphones, sensors and analytics are driving this megatrend.
  5. How will you change buyers into stakeholders? Today’s individual customers understand their commercial value and expect to be understood and appealed to in their full complexity. In this culture of the niche, all products and services need to be personalized. Moreover, customers also trust each other more than they trust brands or businesses. This customer empowerment is a chance for consumers and providers to realize greater value through a more intimate and trusted relationship, based on digital transformation.
  6. In a fast-changing world, can cities be built with a long-term perspective? The growth of cities creates a need for sustainable and resilient infrastructures. Innovation is cutting infrastructure costs and making cities more habitable, from smart grids and better network load balancing to less expensive natural gas extraction and improved flow rates across roads.
  7. With growing health needs, is digital the best medicine? As healthcare systems are striving to expand access, improve quality and manage costs, digital health (mobile apps, wearables, social media, analytics) is providing a key part of the answer by enabling approaches that are dramatically more cost-effective.
  8. Can innovation make the planet resource-rich instead of resource-scarce? Demographic trends and climate change are challenging the established models of consumption and pushing the rise of renewables, the shift to gas and the global utility market reform.

CEOs Response to DI: Adaptive Transformation

For a CEO to seize any upside potential, he has to ensure that his company is transforming by enhancing its ability to adopt, at the highest pace, highest net benefit, and lowest calculated risk, those elements of DI that will improve operational and/or financial performance. More specifically, companies need to:

  • Adopt a venture capitalist mindset, collaborate and incubate: Be present in the Startup community and in technology centers. Consider inorganic investments to augment digital capabilities.
  • Develop an in-house innovation group: Promote an entrepreneurial and creative culture. Focus on organic initiatives to digitize. Develop co-creation initiatives.
  • Invest in new customer segments that will drive future value: Focus on young, high-income, highly digitally active, urban customers where various technological breakthroughs are gaining more traction. Protect and serve those customers.
  • Master the design principles: Construct and deliver your proposition entirely around the client/consumer. Ensure simple and entirely intuitive client/consumer visuals and journey with easy onboarding, whether you are a B2B or B2C company.
  • Adopt agile innovation: Give innovation teams “freedom to fail.” Help teams to learn fast and implement quick exit strategies. Involve customers in validation.

Main Conclusions

When responding to DI and the affected megatrends, companies cannot afford to fall back on old solutions. Instead, they need to transform through a more sophisticated method of adaptation. Our experience from various types of advisory projects in the domestic and Central-Southeastern Europe region indicates that those megatrends affecting the most in the short to medium term are the ones of: (1) industries’ redefinition, (2) smart technologies, (4) future of work, and (4) customer empowerment. Their impact results to strategic targets or needs that are mostly addressed through Digital Transformation and Analytics solutions delivered by our advisory team. Embracing adaptive transformation, through creativity, entrepreneurial spirit, diversity and inclusivity, companies can challenge the prevailing paradigms and successfully transform their business models.

Figure 1: DI translated in technologies (non-exhaustive)

Figure 2: Megatrends moving forward

1 Bower, Joseph L., Clayton M. Christensen. 1995. Disruptive technologies: Catching the wave. Harvard Business Review 73(1) 43–53.

2 Markides, C., 2006. Disruptive innovation: In need of a better theory. Journal of Product Innovation Management 23, 19-25.

3 EY. 2016. The upside of disruption. Megatrends shaping 2016 and beyond.

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