Disruptive innovation and progress

In 1942, the Austrian economist Joseph Schumpeter had a simple but eye-opening illumination: human civilisation evolves through creative destruction. By creative destruction, Schumpeter means “a process of industrial mutation that continuously revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. This concept can be seen by looking at our history: prehistoric man who abandoned stone for metal or more recent examples such as typewriters which were ousted by text processing software. Schumpeter’s theory, known as Schumpeter’s gale, rested on the mechanism intrinsic to society which is what drives it. His economic thinking laid the basis for one of the most revolutionary concepts ever: disruptive innovation.

The creative destruction theory leads on to the very current concept of disruptive innovation. This term first appeared in an article written by Clayton Christensen and Joseph Bower published in the Harvard Business Review in 1995. They defined disruptive innovation as innovation that is able to disrupt or even destroy consolidated business in favour of emerging enterprises. Specifically, it is a process where an innovative service or product takes root initially in the low-end target market due to its accessible price but moves to the high end as it gradually gains recognition, displacing the sector’s giants. 

Disruptive innovations are products or services that are initially modest but reveal extraordinary potential over time, such to revolutionise an entire industry. Innovative technology often emerges in an early form, attracting the attention of a small group of customers that remain a minority, and is only adopted by the majority at a later date. A classic example is the digital camera. It has disrupted film cameras but it did not oust them immediately. In the 1980s, digital cameras were not very advanced and were viewed with distrust by photography enthusiasts and, hence, only used by very few people. At the end of the 1990s, this situation had changed dramatically. Technological development had made the digital camera a better quality and cheaper option to those that used film. The about-turn took place between the end of the 1990s and early 2000s when digital cameras took over and revolutionised the photographic industry.

Contrary to common belief, disruptive innovations do not boast particularly complex technologies, rather they offer unique and novel characteristics compared to the rest of the market. A new way of interpreting products and services is the winning factor of companies that have made democratisation, accessibility and simplification key to their innovation. The film and TV series streaming giant, Netflix, is an excellent example of a company that has revolutionised the entire home video entertainment sector.

When Netflix was set up in 1997, there was a huge number of Blockbuster stores (the famous US-based home video rental company) and people all over the world rented films from them. Twenty years later the situation is completely different: video rental is just a memory and film streaming from home is normal. Technological anticipation was fundamental in this disruption. Netflix started out as a postal DVD rental service when DVD technology was less common than the use of videos and Blockbuster was at the height of its success. Initially this format penalised the business, as people preferred to go directly to a Blockbuster store to pick their videos immediately rather than having to wait days until it arrived by post. However, in the long term, with the dissemination of internet, Netflix’s intuition paid off: it built a streaming platform with ever lower costs and thus increasingly accessible, with the result that physical DVDs have been replaced by the dematerialised internet. In 2010, Blockbuster declared bankruptcy while streaming took off to become a normal part of our daily life.

When we talk about disruptive innovation, we usually think of start-ups. Their small size, flexibility and risk appetite make them excellent disrupters, conceived to propose alternative business models. It is not surprising that many of today’s large multinationals were once more similar to a start-up than a complex organisation: Amazon was an online bookshop, Facebook the project of a Harvard university student and Netflix a postal DVD, VHS and videogame rental service. Alongside these success stories are countless cases that did not do as well. While it is true that start-ups are inclined to be innovative, it is also true that their casualty rate is high. To avoid this risk, they need to keep innovating: companies like Kodak and Myspace lost out because they underestimated customers’ new needs and market changes. 

Whether we talk about small or large organisations, the status quo needs to be challenged for innovation to occur. In this sense, the pandemic has acted as an accelerator, encouraging research into alternative solutions to compensate for social limitations and the generalised economic recession. For example, the public health emergency has been a catalyst for a more sustainable economy with greater focus on environmental and social issues. Therefore, we may well find that we are living though a time of creative disruption that transforms a deep economic recession into a more responsible economy.