Why disruptive innovation

Because they melt scrap of uncertain and varying chemistry in their electric arc furnaces, the quality of the steel that minimills initially could produce was poor. In fact, the only market that would accept the output of minimills was the concrete reinforcing bar rebar market.

The specifications for rebar are loose, so this was an ideal market for products of low and variable quality. As the minimills attacked the rebar market, the integrated mills were happy to be rid of that dog-eat-dog commodity business. Because of the differences in their cost structures and the opportunities for investment that they each faced, the rebar market looked very different to the disruptee and the disruptor.

It was the least attractive of any tier of the market in which they might invest to grow. So as the minimills established a foothold in the rebar market, the integrated mills reconfigured their rebar lines to make more profitable products. In contrast, with a 20 percent cost advantage, the minimills enjoyed attractive profits in competition against the integrated mills for rebar-until , when the minimills finally succeeded in driving the last integrated mill out of the rebar market.

Historical pricing statistics show that the price of rebar then collapsed by 20 percent. As long as the minimills could compete against higher-cost integrated mills, the game was profitable for them.

But as soon as low-cost minimill was pitted against low-cost minimill in a commodity market, the reward for victory was that none of them could earn attractive profits in rebar footnote 6. Worse, as they all sought profitability by becoming more efficient producers, they discovered that cost reductions meant survival, but not profitability, in a commodity such as rebar footnote 7. Soon, however, the minimills looked up-market, and what they saw there spelled relief.

If they could just figure out how to make bigger and better steel-shapes like angle iron and thicker bars and rods-they could roll tons of money, because in that tier of the market, as suggested in Figure 2 , the integrated mills were earning gross margins of about 12 percent-nearly double the margins that they had been able to earn in rebar. That market was also twiceas big as the rebar segment, accounting for about 8 percent of industry tonnage.

As the minimills figured out how to make bigger and better steel and attacked that tier of the market, the integrated mills were almost relieved to be rid of the bar and rod business as well. It was a dog-eat-dog commodity compared with their higher-margin products, whereas for the minimills, it was an attractive opportunity compared with their lower-margin rebar. So as the minimills expanded their capacity to make angle iron and thicker bars and rods, the integrated mills shut their lines down or reconfigured them to make more profitable products.

With a 20 percent cost advantage, the minimills enjoyed significant profits in competition against the integrated mills until , when they finally succeeded in driving the last integrated mill out of the bar and rod market.

Once again, the minimills reaped their reward: With low-cost minimill pitted against low-cost minimill, the price of bar and rod collapsed by 20 percent, and they could no longer earn attractive profits. What could they do? Continued up-market movement into structural beams appeared to be the next obvious answer.

Gross margins in that sector were a whopping 18 percent, and the market was three times as large as the bar and rod business. Most industry technologists thought minimills would be unable to roll structural beams.

Although you could never have predicted what the technical solution would be, you could predict with perfect certainty that the minimills were powerfully motivated to figure it out. Necessity remains the mother of invention.

At the beginning of their invasion into structural beams, the biggest that the minimills could roll were little six-inch beams of the sort that under-gird mobile homes. They attacked the low end of the structural beam market, and again the integrated mills were almost relieved to be rid of it. It was a dog-eat-dog commodity compared with their other higher-margin products where focused investment might bring more attractive volume. To the minimills, in contrast, it was an attractive product compared with the margins they were earning on rebar and angle iron.

So as the minimills expanded their capacity to roll structural beams, the integrated mills shut their structural beam mills down in order to focus on more profitable sheet steel products. With a 20 percent cost advantage, the minimills enjoyed significant profits as long as they could compete against the integrated mills.

Then in the mids, when they finally succeeded in driving the last integrated mill out of the structural beam market, pricing again collapsed. Once again, the reward for victory was the end of profit. The sequence repeated itself when the leading minimill, Nucor, attacked the sheet steel business. Its market capitalization now dwarfs that of the largest integrated steel company, US Steel.

Bethlehem Steel is bankrupt at the time of this writing. This is not a history of bungled steel company management. Or should we invest to strengthen our position in the most profitable tiers of our business, with customers who reward us with premium prices for better products?

The executives who confront this dilemma come in all varieties: timid, feisty, analytical, and action-driven. In an unstructured world their actions might be unpredictable. But as large industry incumbents, they encounter powerful and predictable forces that motivate them to flee rather than fight when attacked from below. That is why shaping a business idea into a disruption is an effective strategy for beating an established competitor.

Disruption works because it is much easier to beat competitors when they are motivated to flee rather than fight. The forces that propel well-managed companies up-market are always at work, in every company in every industry.

Whether or not entrant firms have disrupted the established leaders yet, the forces are at work, leading predictably in one direction. Indeed, when we use the term technology in this chapter, it means the process that any company uses to convert inputs of labor, materials, capital, energy, and information into outputs of greater value.

Every company has technology, and each is subject to these fundamental forces. We must emphasize that we do not argue against the aggressive pursuit of sustaining innovation. Several other insightful books offer management techniques to help companies excel in sustaining innovations-and their contribution is important footnote 8. Almost always a host of similar companies enters an industry in its early years, and getting ahead of that crowd-moving up the sustaining-innovation trajectory more decisively than the others-is critical to the successful exploitation of the disruptive opportunity.

But this is the source of the dilemma: Sustaining innovations are so important and attractive, relative to disruptive ones, that the very best sustaining companies systematically ignore disruptive threats and opportunities until the game is over.

Sustaining innovation essentially entails making a better mousetrap. The theory of disruption suggests, however, that once they have developed and established the viability of their superior product, entrepreneurs who have entered on a sustaining trajectory should turn around and sell out to one of the industry leaders behind them. If executed successfully, getting ahead of the leaders on the sustaining curve and then selling out quickly can be a straightforward way to make an attractive financial return.

A sustaining-technology strategy is not a viable way to build new -growth businesses, however. This advice holds even when the entrant is a huge corporation with ostensibly deeper pockets than the incumbent. For example, electronic cash registers were a radical but sustaining innovation relative to electromechanical cash registers, whose market was dominated by National Cash Register NCR.

Electronic registers were so superior that there was no reason to buy an electromechanical product except as an antique. Yet NCR survived on service revenues for over a year, and when it finally introduced its own electronic cash register, its extensive sales organization quickly captured the same share of the market as the company had enjoyed in the electromechanical realm footnote The attempts that IBM and Kodak made in the s and s to beat Xerox in the high-speed photocopier business are another example.

These companies were far bigger, and yet they failed to outmuscle Xerox in a sustaining-technology competition. The firm that beat Xerox was Canon-and that victory started with a disruptive tabletop copier strategy.

In the end, it was the disruptive personal computer makers, not the major corporations who picked a direct, sustaining-innovation fight, that bested IBM in computers. Airbus entered the commercial airframe industry head-on against Boeing, but doing so required massive subsidies from European governments. An idea that is disruptive to one business may be sustaining to another. Given the stark odds that favor the incumbents in the sustaining race but entrants in disruptive ones, we recommend a strict rule: If your idea for a product or business appears disruptive to some established companies but might represent a sustaining improvement for others, then you should go back to the drawing board.

You need to define an opportunity that is disruptive relative to all the established players in the targeted market space, or you should not invest in the idea. If it is a sustaining innovation relative to the business model of a significant incumbent, you are picking a fight you are very unlikely to win.

Take the Internet, for example. An important reason why many of them failed was that the Internet was a sustaining innovation relative to the business models of a host of companies. Prior to the advent of the Internet, Dell Computer, for example, sold computers directly to customers by mail and over the telephone. This business was already a low-end disruptor, moving up its trajectory.

For Dell, the Internet was a sustaining technology. The theory of disruption would conclude that if Dell and Gateway had not existed, then start-up Internet-based computer retailers might have succeeded in disrupting competitors such as Compaq. But because the Internet was sustaining to powerful incumbents, entrant Internet computer retailers have not prospered.

A disruptive business model that can generate attractive profits at the discount prices required to win business at the low end is an extraordinarily valuable growth asset. When its executives carry the business model up-market to make higher-performance products that sell at higher price points, much of the increment in pricing falls to the bottom line-and it continues to fall there as long as the disruptor can keep moving up, competing at the margin against the higher-cost disruptee.

When a company tries to take a higher-cost business model down-market to sell products at lower price points, almost none of the incremental revenue will fall to its bottom line. It gets absorbed into overheads.

This is why established firms that hope to capture the growth created by disruption need to do so from within an autonomous business with a cost structure that offers as much headroom as possible for subsequent profitable migration up-market. Moving up the trajectory into successively higher-margin tiers of the market and shedding less-profitable products at the low end is something that all good managers must do in order to keep their margins strong and their stock price healthy.

Standing still is not an option, because firms that stop moving up find themselves in a rebar-esque situation, slugging it out with hard-to-differentiate products against competitors whose costs are comparable footnote This ultimately means that in doing what they must do, every company prepares the way for its own disruption.

Many of the most profitable growth trajectories in history have been initiated by disruptive innovations. In reality, there are two different types of disruptions, which can best be visualized by adding a third axis to the disruption diagram, as shown in Figure 3. The vertical and horizontal axes are as before: the performance of the product on the vertical axis, with time plotted on the horizontal dimension.

The third axis represents new customers and new contexts for consumption. Our original dimensions-time and performance-define a particular market application in which customers purchase and use a product or service.

A value network is the context within which a firm establishes a cost structure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers. These perceptions, in turn, shape the rewards and threats that firms expect to experience through disruptive versus sustaining innovations footnote The third dimension that extends toward us in the diagram represents new contexts of consumption and competition, which are new value networks.

These constitute either new customers who previously lacked the money or skills to buy and use the product, or different situations in which a product can be used-enabled by improvements in simplicity, portability, and product cost. Different value networks can emerge at differing distances from the original one along the third dimension of the disruption diagram.

In the following discussion, we will refer to disruptions that create a new value network on the third axis as new-market disruptions. In contrast, low-end disruptions are those that attack the least-profitable and most overserved customers at the low end of the original value network.

When Canon made photocopying so convenient, people ended up making a lot more copies. Although new-market disruptions initially compete against non-consumption in their unique value network, as their performance improves they ultimately become good enough to pull customers out of the original value network into the new one, starting with the least-demanding tier. Because new-market disruptions compete against non-consumption, the incumbent leaders feel no pain and little threat until the disruption is in its final stages.

In fact, when the disruptors begin pulling customers out of the low end of the original value network, it actually feels good to the leading firms, because as they move up-market in their own world, for a time they are replacing the low-margin revenues that they lose to the disruptors with higher-margin revenues footnote We call disruptions that take root at the low end of the original or mainstream value network low-end disruptions.

Although they are different, new-market and low-end disruptions both create the same vexing dilemma for incumbents. New-market disruptions induce incumbents to ignore the attackers, and low-end disruptions motivate the incumbents to flee the attack. Low-end disruption has occurred several times in retailing footnote For example, full-service department stores had a business model that enabled them to turn inventories three times per year.

They needed to earn 40 percent gross margins to make money within their cost structure. They therefore earned 40 percent three times each year, for a percent annual return on capital invested in inventory ROCII. Customers in this tier of the market were overserved by department stores, in that they did not need well-trained floor salespeople to help them get what they needed. Their stocking policies and operating processes enabled them to turn inventories more than five times annually, so that they also earned about percent annual ROCII.

The discounters did not accept lower levels of profitability-their business model simply earned acceptable profit through a different formula footnote It is very hard for established firms not to flee from a low-end disruptor.

One option for department store executives was to allocate more space to even higher-margin cosmetics and high-fashion apparel, where gross margins often exceeded 50 percent. Because their business model turned inventories three times annually, this option promised percent ROCII. The alternative was to defend the branded hard goods businesses, which the discounters were attacking with prices 20 percent below those of department stores.

Competing against the discounters at those levels would send margins plummeting to 20 percent, which, given the three-times inventory turns that were on average inherent in their business model, entailed a ROCII of 60 percent. It thus made perfect sense for the full-service department stores to flee-to get out of the very tiers of the market that the discounters were motivated to enter footnote Many disruptions are hybrids, combining new-market and low-end approaches, as depicted by the continuum of the third axis in Figure 3.

Southwest Airlines is actually a hybrid disruptor, for example. Charles Schwab is a hybrid disruptor. It stole some customers from full-service brokers with its discounted trading fees, but it also created new markets by enabling people who historically were not equity investors-such as students-to begin owning and trading stocks footnote The appendix to this chapter offers a brief historical explanation of each of the disruptive products or companies listed on the chart.

This is not a complete census of disruptive companies, of course, and their position on the chart is only approximate. However, the array does convey our sense that disruption is a primary wellspring of growth.

The chart also shows that disruption is an ongoing force that is always at work-meaning that disruptors in one generation become disruptees later.

The Ford Model T, for example, created the first massive wave of disruptive growth in automobiles. Toyota, Nissan, and Honda then created the next wave, and Korean automakers Hyundai and Kia have now begun the third. Plastics makers such as Dow, DuPont, and General Electric continue to disrupt steel, even as their low end is being eaten away by suppliers of blended polyolefin plastics such as Himont. Instead, they go through a process of becoming fleshed out and shaped into a strategic plan in order to win funding.

Many-but not all-of the initial ideas that get shaped into sustaining innovations could just as readily be shaped into disruptive business plans with far greater growth potential. The shaping process must be consciously managed, however, and not left in an autopilot mode.

Executives must answer three sets of questions to determine whether an idea has disruptive potential. The first explores whether the idea can become a new-market disruption.

For this to happen, at least one and generally both of two conditions must be satisfied:. If the technology can be developed so that a large population of less skilled or less affluent people can begin owning and using, in a more convenient context, something that historically was available only to more skilled or more affluent people in a centralized, inconvenient location, then there is potential for shaping the idea into a new-market disruption.

The second set of questions explores the potential for a low-end disruption. This is possible if these two conditions exist:. Often, the innovations that enable low-end disruption are improvements in manufacturing, service, or business processes, which enable a company to earn attractive returns on lower gross margins, coupled with processes that turn assets faster. Once an innovation passes the new-market or low-end test , there is still a third critical consideration, or litmus test, to apply:.

If an idea fails the litmus tests, then it cannot be shaped into a disruption. It may have promise as a sustaining technology, but in that case we would expect that it could not constitute the basis of a new-growth business for an entrant company.

For summary, table 1 contrasts the characteristics of the three strategies that firms might pursue in creating new-growth businesses: sustaining innovations, new-market disruptions, and low-end disruptions. It compares the targeted product performance or features, the targeted customers or markets, and the business model implications that each route entails. We hope that managers can use this as a template so that they can categorize and see the implications of different plans that might be presented to them for approval.

Executives can use this categorization and the litmus tests to foresee the competitive consequences of alternative strategies as they shape an idea. These improvements may be incremental or breakthrough in character. Technology yields products that are good enough along the traditional metrics of performance at the low end of the mainstream market. The most attractive i. Targets non- consumption: customers who historically lacked the money or skill to buy and use the product.

Improves or maintains profit margins by exploiting the existing processes and cost structure, and making better use of current competitive advantages. Business model must make money at lower price per unit sold, and at unit production volumes that initially will be small emerging market. Gross margin dollars per unit sold will be significantly lower. Table Low-End and New-Market Disruptions. Xerox reportedly has developed outstanding ink-jet printing technology.

What can it do with it? It could attempt to leapfrog Hewlett-Packard by making the best ink-jet printer on the market.

Even if it could make a better printer, however, Xerox would be fighting a battle of sustaining technology against a company with superior resources and more at stake. HP would win that fight. But could Xerox craft a disruptive strategy for this technology?

At the highest tier of the market, customers seem willing to pay significantly more for a faster printer that produces sharper images. However, consumers in the less-demanding tiers are becoming increasingly indifferent to improvements.

It is likely they would be interested in lower-cost alternatives. So the first question gets an affirmative answer. The next question is whether Xerox could define a business model that could generate attractive returns at the discounted prices required to win business at the low end.

HP and other printer companies already outsource the fabrication and assembly of components to the lowest-cost sources in the world.

HP makes its money selling ink cartridges-whose fabrication also is outsourced to low-cost suppliers. Xerox could enter the market by selling ink cartridges at lower prices, but unless it could define an overhead cost structure and business processes that would allow it to turn assets faster, Xerox could not sustain a strategy of low-end disruption footnote Probably not.

Hewlett-Packard already competed successfully against non-consumption when it launched its easy-to-use, inexpensive ink-jet printers. What about enticing existing printer owners to buy more printers, by enabling consumption in a new, more convenient context? Now, this might be achievable. Documents created on notebook computers are not easy to print. Notebook users have to find a stationary printer and connect to it either over a network or a printer cable, or they must transfer the file via removable media to a computer that is connected to a printer.

But as a strategy, this would pass the litmus tests. If Xerox attempted this, we would expect HP to ignore this new-market disruption at the outset because the market would be much smaller than the stationary printer market.

The window-mounted air conditioner market is widely known to be mature, dominated by giants such as Carrier and Whirlpool. Could a company like General Electric GE wallop them? Is a low-end disruption viable? Our sense is that there are overserved customers at the low end of the existing market.

They signal their overservedness by opting for the least-expensive models they can find, unwilling to pay premium prices for the alternative products that are available to them. GE might expand its already substantial manufacturing operations in China, making air conditioners for export to developed economies. This might bring modest but temporary success, because after the established companies respond by setting up their own manufacturing operations in China, GE would find itself locked in a battle with competitors whose costs are comparable and whose distribution and service infrastructure are strong, and where the targeted customers already have manifested an unwillingness to pay premium prices for better products.

Employing low-cost labor constitutes a low-cost business model only until competitors avail themselves of the same option. How about a new-market disruption, however? Disruption is a theory: a conceptual model of cause and effect that makes it possible to better predict the outcomes of competitive battles in different circumstances.

The asymmetries of motivation chronicled in this chapter are natural economic forces that act on all businesspeople, all the time. Historically, these forces almost always have toppled the industry leaders when an attacker has harnessed them, because disruptive strategies are predicated upon competitors doing what is in their best and most urgent interest: satisfying their most important customers and investing where profits are most attractive.

In a profit-seeking world, this is a pretty good bet. Not all innovative ideas can be shaped into disruptive strategies, however, because the necessary preconditions do not exist; in such situations, the opportunity is best licensed or left to the firms that are already established in the market. On occasion, entrant companies have simply caught the leaders asleep at the switch and have succeeded with a strategy of sustaining innovation.

But this is rare. Disruption does not guarantee success: It just helps with an important element in the total formula. Published in , it is still as relevant today as in , and has had tremendous impact on how we think about - and practice - innovation worldwide. Table 2 briefly summarizes our understanding of the disruptive roots of the success of the companies that are arrayed in Figure 4. Because of space limitations, much important detail has been omitted.

The companies are listed in alphabetical, rather than chronological, order. We do not pretend to be strong business historians, and as a consequence can only present here a partial listing of disruptive companies. Some firms existed for a considerable period, often in other lines of business, before the disruptive strategy that led to their ultimate success was implemented.

In some cases it seems easier to visualize the disruption in terms of a product category, rather than by listing the name of one company. Hence, we ask our readers to regard this information as only suggestive, rather than definitive. This is a protocol for high bandwidth wireless transfer of data. It has begun disrupting local area wireline networks.

Microprocessor-based computers made by firms such as Apple, IBM and Compaq were true new-market disruptions, in that for years they were sold and used in their unique value network before they began to capture sales from higher-end professional computers.

In the s, Swift and Armour began huge, centralized beef slaughtering operations that transported large sides of beef by refrigerated railcar to local meat cutters. This disrupted local slaughtering operations. Prior to , hand-held electric tools were heavy and rugged, designed for professionals - and very expensive. These blends of inexpensive polyolefin plastics like polypropylene, sold by firms like Himont, create composite materials that in many ways share the best properties of their constituent materials.

They are getting better at a stunning rate, disrupting markets that historically had been the province of engineering polycarbonate plastics made by firms like GE Plastics. Bloomberg began by providing basic financial data to investment analysts and brokers.

It gradually has improved its data offerings and analysis, and subsequently moved into the financial news business. It has substantially disrupted Dow Jones and Reuters as a result. More recently it has created its own ECN to disrupt stock exchanges. Issuers of government securities can auction their initial offerings over the Bloomberg system, disrupting investment banks. Instead of shipping large sides of beef to local meat cutters for further cutting, IBP cut the beef into finished or nearly finished cuts, for placement directly in supermarket cases.

Until the early s when we needed photocopiers, we had to take our originals to the corporate photocopy center, where a technician ran the job for us.

He had to be a technician, because the high-speed Xerox machine in there was very complicated, and needed servicing frequently. But they were so inexpensive and simple to use that we could afford to put one right around the corner from our office. At the beginning we still took our high-volume jobs to the copy center.

But little by little Canon improved its machines to the point that today, immediate, convenient access to high-quality, full-featured copying is almost a constitutional right in most workplaces.

Sears, Roebuck and Montgomery Ward took root as catalog retailers - enabling people in rural America to buy things that historically had not been accessible. Sears and Wards later moved up-market, building retail stores. Started in as one of the first discount brokers. In the late s Schwab created a separate organization to build an on-line trading business.

It was so successful that the company shut down its original organization of telephone brokers. Disrupted the consumer electronics departments of full-service and discount department stores, which has sent them up-market into higher-margin clothing. But it was good enough to enable a new market to emerge - data networks.

The technology has improved to the point that today, the latency delay of a packet-switched voice call is almost imperceptibly slower than that of a circuit-switched call - enabling VOIP, or voice-over-Internet-protocol telephony. Some community colleges have begun offering four-year degrees. Their enrollment is booming, often with non-traditional students who otherwise would not have taken these courses.

Founded by Kaplan, a unit of the Washington Post Company, this on-line law school has attracted a host of primarily non-traditional students. They want to understand law to help them succeed in other careers.

A formulaic method of determining creditworthiness, substituting for the subjective judgments of bank loan officers. Developed by a Minneapolis firm, Fair Isaac. As the technology improved, it was used for general credit cards, and then auto, mortgage and now small business loans. Clayton Christensen, the quintessential low-end consumer, wrote his doctoral thesis on a Dell notebook computer purchased in , because it was the cheapest portable computer on the market.

Department stores like Z. Macy in New York, disrupted small shopkeepers. The fixed cost and skill required to make a full-length animated movie historically was so high that almost nobody could do it except Disney.

Digital animation technology now enables far more companies Such as Pixar to compete against Disney. Most of the Internet start-ups of the late s attempted to use the Internet as a sustaining innovation relative to the business models of established companies.

E-Bay was a notable exception, as it pursued a new-market disruptive strategy - enabling owners of collectibles that could never turn the head of auction house executives, now to be able to sell off things that they no longer needed. Electronic clearing networks ECNs allow buyers and sellers of equities to exchange them over a computer, at a fraction of the cost of doing it on a formal stock exchange.

The process begins with a small company entering the low end of a market, or creating a new market segment, claiming the least profitable portion of the market as its own. The entrant then improves its offerings and moves upmarket with increasing profitability. Understanding this process can empower aspiring entrepreneurs to seek opportunities to disrupt industries, and seasoned professionals to strategically avoid disruption.

In the online course Disruptive Strategy , Christensen explains that there are two types of disruptive innovation: low-end and new-market. Low-end disruption is when a company uses a low-cost business model to enter at the bottom of an existing market and claim a segment.

An example of a low-end disruption is the rise of retail medical clinics in the healthcare space. Large medical centers handle everything from a sinus infection to open-heart surgery and employ specialists to care for various injuries and ailments.

Typically, the more serious the injury or illness, the more expensive the cost to the patient. According to the RAND Corporation , roughly 90 percent of visits to retail clinics are due to 10 acute conditions, including sore throat, ear infection, and conjunctivitis. This enables retail clinics to own that low-end market segment.

Over time, retail medical clinics may evolve to offer more specialized services, causing medical centers to back out of additional market segments.

By continuing to claim increasingly specialized and profitable market segments, retail medical clinics can disrupt the medical industry. The story of AirnBnb started when the founders were forced to think of ways to cover their rent. At that time, they lived in San Francisco and had heard there was a big conference coming to town, due to which, all of the hotel rooms were sold out.

As the guys were looking for a quick way to make a little extra money, they decided to give people the opportunity to stay at their place and sleep on an air mattress. After securing their first bookings and gaining a few positive experiences as hosts, they decided to share the idea with others and target some other upcoming conferences in other cities.

However, the idea wasn't a success from the get-go as they were lacking proper funding and the business idea was so different from what people were used to. During that time, the economic situation was still on their side as people needed extra income and they kept raising more money to make AirBnb a legitimate business. In the beginning, AirBnb focused on matching travellers who were looking for a less expensive alternative to living in a hotel with hosts who could provide them with an opportunity to live like locals while making a few extra bucks.

After securing their first premium listing, the business started to gain traction and enjoying positive network effects between the community of hosts and guests, by enticing more users to join and participate. After getting more and more listings, and eventually reaching the mainstream, it has expanded its offerings by targeting high-value customer segments with AirBnb Plus and Luxe concepts, which are new premium tiers of services on its platform.

Although the company has faced a lot of legal resistance, it has managed to build a business that has 5 million lodging options across 81, cities in the world, having more rooms available than any other major hotel chain. Compared to a traditional hotel industry, AirBnb's competitive advantage is the variety of accommodation options it is able to provide.

People can choose between a number of unique listings, such as boats, tents, tree houses, and villas whereas when staying at any of the major hotels, the experience is more or less the same. The platform creates value both for the demand and supply side as it connects the guests and hosts.

In addition, it enables user generated content on the destination locations as well as the individual homes and rooms.

Another factor most hotels can't compete with is the price. Because of AirBnb, people have more opportunities to travel without having to break the bank. In most homes, there's a washing machine for doing your laundry and a kitchen for cooking your own food.

Large groups can share one big apartment instead of having to book multiple hotel rooms. As the examples show, creating the next disruptive, billion-dollar business idea doesn't happen in the blink of an eye. You need the right capabilities to be able to actually see beyond the industry norms and the right timing to get people to actually care about your idea. To disrupt a market, you must be willing to cannibalize your existing business, be nimble and embrace taking risks.

Complacency breeds failure. Only the paranoid survive. Although these new entrants might be targeting a different customer segments at the moment, you don't want to miss potential growth opportunities by only focusing on what's working at the moment for your current customer base. To keep up with the ongoing change, it's critical to ask the right questions and keep the customer at the core so you're up-to-date on what they actually want and need.

Business model innovation can be used to change how your company delivers value to the customers or captures it from the market. A concrete tool for business model innovation is The Business Model Canvas — a template by that can be used to describe, design, challenge and pivot your business model.

It works in conjunction with other strategic management and execution tools and processes and is best for designing and validating a scalable business model within the market. With the help of the The Business Model Canvas, you can define, and map nine key strategic areas related to external and internal factors to understand what is required to make your idea a real business.

Disruptive innovation should be approached in an iterative manner and with patience. As the aforementioned examples show, none of the businesses were successful from the get-go, but had to go through several phases in order to finally reach the mainstream and to sustain their position in the market. In the process of uncovering more disruptive opportunities, moving ahead early and getting excited about small gains is the key.