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The Weak Spot of Incumbents: Disruptive Innovation

On Sunday, November 6, 2016, a newspaper headline featured a red hand produced by Robotel volunteers for Yağmur’s non-congenital fingers. 3D printers produced Yağmur’s hand using organic plastic at a cost of 50 dollars. According to the report, a similar prosthesis would cost $3,000.

On the other hand, the dominant prosthetic companies are in a fierce technology development competition. For example, myoelectric prostheses read the electrical signals created in the muscles by the movement order sent by the brain and became able to act according to the order. While existing companies try to design and manufacture prostheses as closely as possible to human limbs, prostheses cost tens of thousands of dollars. People in need of prostheses are under increasing financial burden, those without insurance are deprived of prosthesis.

Yağmur’s red hand may not be reading electrical signals for now, but 3D-printed prosthetic hands are a disruptive innovation on the horizon for the dominant prosthetic companies pushing the boundaries of technology. It’s only a matter of time before prosthetic manufacturing with 3D technology knocks existing prosthetic companies out of the market.

The danger of disruptive innovation is for incumbents

According to the disruptive innovation theory, dominant companies are very successful in improving their existing products by constantly improving their technologies. The biggest danger for them is the products that are brought to the market with an alternative technology called disruptive innovation, whose performance is below the current customer demands, but at the same time, the prices are relatively low. It is almost impossible for dominant companies to compete with these products; because their current cost structures and distribution channels do not allow them to compete with these products. In addition, existing customers do not want to buy these products because they do not meet their expectations. Dominant companies whose cost structures include high development costs and are focused on constantly improving their products and selling to more profitable customer segments have no choice but to ignore disruptive innovation products.

Entrepreneurial companies that produce cheap products with disruptive innovation are protected from the competition of long-established companies. Since the performance of their products is low in the beginning, they target the lowest segment customers. Dominant companies that initially ‘get rid’ of these customers are happy to compete in high-profit segments. What is critical for dominant companies is that disruptive innovation products evolve over time and reach the point where they can appeal to higher segment customers each time. Thus, incumbent companies gradually lose their customers and are squeezed into higher and higher segments of the market. Their complete disappearance from the market is only due to time.

The excavating machinery industry, for example, has undergone disruptive innovation. In the past, the bucket was moving with industrial cable systems in excavation machines. The cable system could move larger buckets and move more soil at once. Later, new companies entered the sector with excavation machines using hydraulic systems. Hydraulic technology was initially able to carry a small load with small shovels. But excavation machines made with hydraulic systems were much cheaper. These products did not satisfy mining companies in the largest existing customer segment. New companies, in turn, sought new customers for their products. The first customers were companies that installed plumbing in home gardens. Low-cost small excavation machines adequately met the requirements of these companies. Over time, hydraulic technology developed and reached the size and capacity of cable excavation machines. At this point, the danger of breaking the cables caused even mining companies to prefer hydraulics and the dominant companies were deleted from the market one by one.

Christensen, C. (2013). The innovator’s dilemma: when new technologies cause firms to fail. Harvard Business Review Press.

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The Weak Spot of Incumbents: Disruptive Innovation – Birgul Arslan