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Why Your Company Needs A Disruptive Business Model

Meredith Wood

Meredith Wood

Vice President and Founding Editor at Fundera
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
Meredith Wood
Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

In the face of increased competition across most industries, it can seem difficult for companies to stay afloat. We’re probably all familiar with the story of startups emerging seemingly out of nowhere and either taking a slew of customers away from large, established companies or at the most extreme, putting incumbents out of business (what’s a BlockBuster?).

The reality of the economic landscape demands that a business must either figure out how to create new markets for its products and services or reshape existing ones to stay relevant. In essence, a business must either disrupt or are at risk of being disrupted within its industry. Though creating a disruptive business model may seem more realistic for a startup business, established companies can make changes to their current business models to stay ahead of the curve. Read on to learn more about what a disruptive strategy looks like or jump straight to the infographic to learn how to create and enact a successful disruptive business model.

What is a Disruptive Business Model?

A disruptive business model employs a strategy for creating new business markets by improving upon or making a change to an existing business model. In the course of the growth of these new markets, it eventually uproots established businesses, also called incumbents. Disruptive companies often combine elements of various existing business models or build upon proven business strategies by introducing some type of disruptive innovation in their models.

Serving Unmet Customer Needs

Companies that use disruptive business models make a tangible impact because they shake up their respective industries by addressing an unmet need — often by taking a nontraditional approach to solve a customer problem. Businesses that use these strategies tend to appeal to the dissatisfied customers of market incumbents or instead create niche markets to serve. By focusing on small markets rather than trying to steal away the mature customer base of established companies, disruptors are able to be flexible in trialing their products or services in markets that are more receptive because they’ve had a need neglected by mainstream market offerings. In this flexibility, disruptive companies eventually find the right combination of market and business model and as they innovate, they eventually disrupt the business of larger companies.

Startups vs Established Businesses

Typically, it’s easier for new market entrants to be successful with a disruptive business model, but that doesn’t mean that it’s impossible for established businesses to become disruptive. It would seem that industry leaders with resources and large budgets already at their fingertips should be more easily able to figure out how to disrupt, but startup businesses actually have the advantage because of their willingness to pursue unproven opportunities. According to the idea of the Innovator’s Dilemma, it can be a catch-22 for marketing incumbents that are looking to disrupt their industries.

What is the Innovator’s Dilemma?

The “Innovator’s Dilemma” is a concept introduced by Harvard Business School professor Clayton Christensen that explains why established companies have a hard time getting innovation right. Stable businesses can fail because they focus on making improvements to existing products and services based on the demands of their current customer base. Keeping current customers happy in established markets by meeting their demands for product performance improvement is called sustaining innovation, and works out in the short term to satisfy customer needs. At first glance this seems like the right course of action for growth, but by following this path, the incumbent isn’t setting itself up to be disruptive. It’s merely following convention.

Disruptive innovations, on the other hand, create entirely new value rather than just making improvements on what already exists. These innovations usually address the needs of customers that don’t just want a better version or a product or service, but instead want a completely different one or new way of doing things. Disruptive innovations hold appeal because they are often more convenient, accessible, personalized, or able to be customized. Uncertainty and risk are central to companies with disruptive business models, because the success of these new innovations hasn’t previously been proven.

Why Established Companies Struggle With Disruption

Established companies typically do poorly at executing disruptive innovations because they don’t see good cause to deviate from the business models that have allowed them success in the past. Putting time and effort into sustaining innovation makes sense because it satisfies customers’ current needs. Market leaders also hesitate to invest in niche, unproven offerings because it seems that the risk of failure is too great.

With a limited budget to spend on either something that’s worked well in the past with an established customer base or on something that’s never been tried in a new market, the perceived safe choice for established company is to stay the course and spend limited resources on sustaining innovations. This fear of change hurts them in the long run, because disruptive innovations are necessary to tap into customers’ future needs. There will come a time when slight improvements on existing services will no longer satisfy even their most loyal customers.

New companies often do better at disruptive innovation because they have less to lose. Without an established reputation on the line, they can be flexible and scrap the entire thing if it doesn’t work right. By starting right off the bat with a disruptive business model and relying on trial and error to get the right results, they’re set up for success. Industry leaders don’t fear new entrants because they operate initially low-performing products in small markets that aren’t affecting their customer bases. But as new companies improve their innovations, they begin to take on larger markets. The next thing an incumbent knows, their customers are being taken by small companies they once didn’t take seriously.

A Real World Disruption Example

A classic example of a successful disruption is the failure of Blockbuster in the wake of Netflix. Netflix, created less than ten years after Blockbuster, worked through trial and error for years, even changing their business model to a subscription model. Netflix addressed pain points of neglected consumers: it had no late fees, offered personalized viewing suggestions, and featured an accessible mail-delivery structure. Blockbuster was committed to its retail strategy, unwilling to change its business model (which had been successful in the past) to meet changing customer desires. As Netflix started becoming successful, Blockbuster tried to copy its model, but it was too late. Blockbuster had stayed its “tried-and-true” course for too long, and that was ultimately its downfall.

Whether you have an established business and want to remain competitive or are just starting out for the first time, there are steps you can take to make your company disruptive. Set your business up for success with help from this infographic.

Sources:

HuffPost | Investopedia | Forbes | Accenture | PwC | MIT Sloan Management Review | U.S. News | The Atlantic | Startup Grind | Medium | Harvard Business School

Meredith Wood

Meredith Wood

Vice President and Founding Editor at Fundera
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
Meredith Wood

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