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DISRUPTIVE INNOVATIONS AND COMPETITIVE ADVANTAGE

Merian Tete
ABSTRACT
The primary objective for a firm is to maximize profits. If the business was not making profits, then sooner or later
their funds will dry. Hence, establishing the importance of profits. These profits can be earned if a firm has a
competitive advantage. Competitive advantage helps a firm to stand apart from its rivals. Porter had worked on the
competitive advantage in the 1980s. A firm could invest in research and development, and find a better technology for
performing the same activity and get competitive advantage. Christensen has worked on disruptive innovation in
1990’s. Disruptive innovation takes place outside the established firm. Consumers are introduced with new enhanced
attributes. These are different from the ones offered earlier. These are often inferior to the incumbent on different
attributes. This paper tries to build a bridge between competitive advantage and disruptive innovation.
Key words: Competitive advantage, Disruptive innovation, Economies of scale, Innovation, Vertical integration.
Introduction
Milton Friedman argued that the main purpose of a business is to make profits. If the business was not making profits,
then sooner or later their funds will dry. When the funds dry up, there is no reason continue. Therefore, profits are
important. These profits can be made through a monopoly position, product differentiation or first mover advantage
etc. Firms that are able to innovate successfully are able to grow. This growth helps in generation of employment,
which improves the individual’s life in the long run. However, the profits generated by the firms cannot sustain for
long and the firm must be able to stand against their rival. The rivals can surpass the firm, if planning and decisions
about tackling them is not taken with care. Competitive advantage ensures that the rivals are always on their toes to
work harder and also help in earning profits. Innovation is a phenomenon which is catching eyes of many firms. With
Christensen’s work on disruptive innovation, many firms are trying to break the monotony. This paper takes the
theoretical background and tries to build a bridge between competitive advantage and disruptive innovation.
1) Competitive advantage
The basic definition of competitive advantage is when study of more than one firm is done within the same market
and one firm has the ability to earn or probably has the potential to earn a higher profits as compared to its competitors.
In the long run, competition is able to remove any differences that might exist in the profits of the firm. Therefore, the
competitive advantage of the firm is a resultant of a change that has taken place.
The competitive advantage could emerge because of the presence of external or internal change. External changes can
create competitive advantage, if it is able to generate a differential effects with respect to the different resources,
capabilities or positioning in the market. The sources of external change are changing customer demand, changing
prices and technological change etc. The internal changes can create competitive advantage when there are some firms
which have more creative and innovative capability. In simple terms, innovation creates competitive advantage
internally.
1.1) Porter and his work on competitive advantage
Porter (1985) in his work talks about competitive advantage. Competitive advantage is created out of value that a
consumer derives from it. Value that is generated for its buyers and which exceeds the cost of producing it. Value is
the price that a consumer is willing to pay. A superior value is obtained from these products or services, if the prices
are lower than their rivals when they offer the same benefits. There are two types of competitive advantage: cost
leadership and differentiation. These two types could be combined with different activities and arrive at three generic
strategies for exploit competitive advantage. The three strategies are:
i) Cost leadership: A cost leader cannot ignore differentiation. A low cost isn’t enough to get higher returns. The cost
leader must either be at parity or proximity for having a basis for differentiation. Parity lets the cost leader to achieve
higher profits at a faster pace as compared to their rivals. It is a product offering as same as their competitor or a
mixture of some features, that is preferred by the consumers. Proximity as a basis of differentiation, involves a discount
on the price to get market share. This does not offset the cost advantage and earns above – average returns. Cost
leadership is very dependent on preemption, unless major technological change allows a firm to radically change its
cost position. [6]
ii) Differentiation: A firm tries to stand apart from its rivals by offering features that are different from others and
valued by the consumers. The firm identifies the features that are most valued by the consumers and positions it such
that it meets the needs of the consumers. They are rewarded for these features which sets them apart by a premium
price. Differentiation is specific to each industry. If price premium is greater than the additional cost of being unique,
then a firm can achieve and sustain differentiation with an above average performance in their industry. Differentiator
aims at cost parity or proximity.
iii) Focus: This doesn’t involve the choice of any feature that gives the firm either a cost leadership or differentiation,
rather select a group which could be targeted, i.e, generally a company seeks to exploit a niche market.
When a firm introduces a significant technological innovation, it can lower cost and improve differentiation
simultaneously. A firm that is able to be low cost and apply differentiation, then they are the only firm with such a
new innovation in place. As the time passes by, and rivals comprehend the current situation, they also introduce the
new innovation. This puts the earlier firm at disadvantage and is required to tradeoff between the cost leadership and
differentiation.
There are drivers of cost which drive cost and drivers of uniqueness which drive differentiation.
There are 10 drivers of cost: Economies of scale, learning, pattern of capacity utilization, linkages, interrelationships,
integration, timing, discretionary policies, location and institutional factor.
The drivers of uniqueness are policy choices, linkages, timing, location, interrelationships, learning and spillovers,
integration, scale and institutional factors.
These are few drivers of cost and uniqueness, which are common and important for this study:
i) Economies of Scale emerge from the ability of a firm to perform their respective activities efficiently at a large
volume or the ability to have low cost associated with intangibles (R&D, advertising etc) over a sales volume. Porter
distinguished economies of scale and capacity utilization. According to him increasing capacity utilization spreads the
fixed cost over large volumes that are produced. Economies of scale for him was all the different activities operating
at full capacity and more efficiently at a larger scale.
Large scales serve as a driver of uniqueness when the activities which could not be performed earlier at a smaller scale
can be undertaken now. However, it can work in the opposite direction too and large scales can be poor driver of
uniqueness.
ii) Policies adopted by a firm entails cost. It is independent of the cost drivers. Discretionary policy choices are a
reflection of the firm’s policy and they usually tradeoff between cost and differentiation. One of the discretionary
policy other than the cost drivers could be a mix of the variety of products offered. When we talk about policies with
respect to uniqueness of a product or service, we arrive at a differentiation strategy.
iii) Vertical integration
In a value activity, the degree of vertical integration may affect the cost. The inputs could be either purchased or
outsourced from the external parties. Integration can lead to a reduction in cost. The costs of employing the inputs
from the market are dependent on the market prices. Firms can avoid external parties who have a greater bargaining
power. Economies of joint operation can be exploited with integration. But, there can be a perverse effect as well,
where integration can in fact lead to increasing cost. It could happen if the production could become inflexible, the
activity that was shifted in-house could be more expensive. An integration could raise, decline or have no effect on
cost, depending on the input and the value activity involved. De-integration could also be a good way out of the
problems related to cost. Before going in for integration or de-integration, the firm must do a proper assessment of the
benefits and costs involved with both, and choose wisely.
Integration as a differentiation strategy, could be explored depending upon the degree of integration which makes it
unique. Integration could lead to generation of more value activity. These value activities could serve as a
differentiator, keeping in mind that firm can control the performance of these activities better as these activities are
now in-house. De-integration is equally important for consideration.
1.2) Porter’s take on technology and competitive advantage
A firm has two ways to establish itself, either by using cost advantage or differentiation. If technology has a role in
cost advantage or differentiation, then we can say that technology is affecting competitive advantage. The activities
to produce a product or a service, use technology in every step of value chain. A firm could invest in research and
development, and find a better technology for performing the same activity and get competitive advantage.
Technology affects competitive advantage by influencing the drivers of cost and uniqueness.
1.3) Christensen and his understanding of competitive advantage
Competitive advantage, from the past to the present as per Chiristensen [1]:
i). In the 1960s and 1970s, the competitive advantage was determined from the economies of scale. In economics, this
concept is used to describe the cost advantage obtained by the firm because of its scale of operation, i.e, the cost
is reducing with the increase in the scale of the operation. The total cost comprises of fixed cost and variable cost.
When the number of units produced are large and the fixed cost, well is fixed, then per unit fixed cost is declining. On
the other hand, the economies of scale would also be able to reduce variable cost with efficient production. In the
present times, most companies are moving away from the concept of economies of scale and trying to find alternatives.
ii). Economies of scope is a concept which states that the average cost of production declines as there is an increasing
variety of products produced. It gives cost advantage to the firm when it produces products that are complementary.
iii). Vertical integration and non-integration as competitive advantage.
When the firm decides to outsource a part of its production to the supplier that adds value to the product, then, these
three conditions must be fulfilled. First, is to clearly give the information about the required feature to the supplier.
Second, the technology for assessment of the required features must be present with both the involved parties and
must be accessible. Third, if the delivered products show variation from the required features, then the firm must be
given the information. If these are met, then the outsourcing shall take place, otherwise not. The key to all the factors
was clear delivery of information. Suppose there was no information available at every stage. Then an integration is
bound to take place to make sure that the information moves swiftly.
Vertical integration takes place when a firm tries to compete against other firms for consumers and the existing
products is unable to fulfil the needs of the consumers. An integrated firm interacts with each subsystems to make the
most of the available resources. If the present products have outperformed the needs of the consumers, then the way
companies compete has to change. Choosing to improve upon the already existing products will not help in earning
profits, innovation comes to rescue. This innovation must be done in such a way that the value addition process must
be outsourced. Hence, de- integration will take place in the markets where customers are overserved by the product.
It is clear from the above theoretical discussion that there is a difference in the ideas of competitive advantage between
Porter and Christensen.

2) Innovation
Innovation is different from an invention and creating prototypes. It refers to commercialization of the technology.
Invention is the construction of the new product and processes. The process followed for the development and
diffusion of innovation consists of three phases, brainstorming for new ideas, development of the new idea and finally
the implementation of the idea. Brainstorming for new ideas requires perfect knowledge about the market, government
and the society. The process of development translates the mere idea into something tangible.

Figure1: Model of disruptive innovation.[5]

Christensen studied the disk drive industry and three important components were discussed by him. First, his discovery
is applicable to many industries, where the speed of technological progress is way ahead of the consumers demand
for higher performing technology. This can be seen in figure 1. There is a technology performance gap, where the
incumbent firm has produced a higher amount than demanded. This is a gateway for new entrants. Second, in the
industry an important distinction between the types of innovation had emerge. Sustaining innovation takes place in
the already established firm. Consumers are offered better attributes or features than the ones that were offered before.
Such innovations lead to improvement in the product, service and process. This lets incumbents to sell more to the
consumers at higher profit. The other kind of innovation is disruptive. Disruptive innovation takes place outside the
established firm. Consumers are introduced with new enhanced attributes or features. These are different from the
ones offered earlier. These are often inferior to the incumbent, based on different attributes. These are cheap. Third,
the existing consumers and the profit of the incumbent pose a restriction on the already established firms. The
established firm fail to invest in new innovation. This gives the new entrants a chance to take the road less travelled.
The consequences of entering an area with no customer and low investment funds, leads to a poor quality product or
service because the firm in not motivated enough and has less resources.
According to Christensen (1997), one of the major route taken by the firms is through disruptive innovation. He
explained that the disruptive innovation can reach masses through two phases. In the first phase, the innovation is
introduced and its performance is poor on some features. The consumers of established firms know that they can’t
compromise with these features and this opens a door to new consumers in a market. These new consumers are targeted
and lured with lower prices. In the second phase, after the time the firm has established itself in the new market, it
moves ahead and starts satisfying the needs of the consumers of established firms and removes the established firm
from the mainstream market.
When is a technology disruptive? Disruption is seen in the actual sense because it leads to changes in the market
structure. For instance, if robots take over the jobs of humans, there will be a new army of reserved workforce. This
means that the humans will be displaced. This displacement will bring its own set of problems. Robots are machines
which would entail additional cost of wear and tear. The displaced human workforce will generate a huge reserve
army of labour. This reserve army of labour would be willing to any work at any low cost. This will not only increase
crime rates but create a hostile environment for everyone in the society. Another kind of disruption can occur when
initially the products or services offered were not upto the demands of what the consumers wanted. But now the
product is improved so much so that the consumer is unable to absorb the improved product or service. This is known
as overshooting the market.
Factors that influence technological innovation:
i) Degree of present knowledge: Scientific knowledge will lead to new discoveries and a huge base of knowledge will
ensure that technological development will happen.
ii) Stage of Product life cycle: The identification of the stage in which the product or service lies creates a push for
research and development. Hence, leading to innovation.
iii) Political support and financial assistance: Political support and financial assistance is required to carry out
research and development activities. If these do not support, then there is no chance for technological innovation.
2.1). Disruption and Business Strategy
The first question that arises is, what is a business strategy? A strategy is a blueprint for the future. It is a way through
which long term goals will be achieved. A business strategy, it is a procedure which helps the firm to reach their goals,
execute different tasks, follow up and evaluate to reach the ultimate goal.
This leads to the next question, i.e, what should the business strategy look like in the face of disruption? Many studies
have been done where incumbent firm is removed from the leader position when a disruptive technology enters. But
in some studies observations were made about the incumbent firm, that they were still the leaders and did not loose
their place in the face of disruption. The reason being that the incumbent firm create separate units which primarily
focus on development and commercialization of the new innovation. However, a firm can differ in its response to
disruption. The other strategies that could be taken up by the firm could be:
i). Incumbent firms could aggressively invest in their existing capabilities and try to improve their performance. This
can be used to delay the introduction of the disruption or can be used to deprive the new entrant so that it retrieves
back.
ii). When the incumbents face challenges from the new entrant, which would de-throne them from their position of
the leader, the incumbent firm could acquire the new entrant. After acquiring the new entrant, it could license its
technology and sell it for profit.
iii). Technology reemergence strategy, which is nothing but old technology rising from its death. A concept given
by Ryan Raffaelli [11]. He studied how the Swiss watch industry reinvented itself.

3) Disruptive Innovation Today

3.1). Product Innovation: A new product or service which are newly developed and has not been used before ever.
This may consist of improvement in the product specification, material used and ease of using it. Some examples of
them are:
i). Internet based entertainment services such as Netflix, Amazon prime, Voot (India), Hot star (India) are preferred
by many young individuals today. The convenience of watching the particular show at any time with the preferred
pace was not available until Netflix came into the picture. The on demand service of has broken down the model of
traditional broadcasting. Hence, disrupting cable services.
ii). Online learning platforms for online education are causing disruption in the area of higher education. The courses
available on the platform provide certificates after assessment. Such courses are trying to fight against the courses
available by the regular channel. Khan Academy, IIMBx (India) and Coursera are some of the organizations which
provide online courses and certifications.
3.2). Process Innovation: A new developed production or distribution method. Which may consist of new
software, techniques or equipment. Some examples of them are:
i). 3D printing process builds from scratch a three dimensional object. It uses computer aided design(CAD). The
process adds material in a particular order. Hence, it is also called additive manufacturing. 3D printer can build
anything from a house to a button. Research is still going on with its use in bio printing. Their aim is to build human
tissues. Autodesk and a dutch design company called MX3D are working together for Amsterdam (city) to build a
bridge over a canal. Apart from this, houses are being build using 3D printer for refugees and for people who cannot
afford expensive houses. 3D printing is causing disruption in the manufacturing industry.
ii). Traditional banking and transaction system have been disrupted by Paytm (India), PhonePe (India) and Google
pay. In the future, cryptocurrency can take over as a payment mechanism. In India, Direct Benefit Transfer (DBT) is
being used to transfer directly to the individuals, which is disrupting the transaction system.

Conclusion
Porter has contributed immensely to the area of competitive advantage. His work goes back to the 1980’s, which is
applicable even today. Section 1 covers his work on competitive advantage. This paper has tried to look at the
competitive advantage of a firm and disruptive innovation. It is clear that competitive advantage has existed way
before disruptive innovation. Christensen was the one to coin the term “disruptive innovation” and his work goes back
to the 1990’s. His work is still relevant today and is used extensively. He talks about competitive advantage too, which
is covered in section 1.
This paper is using the available literature to understand the relationship between competitive advantage and disruptive
innovation. Porter’s work on competitive advantage was studied along with Christensen’s understanding of
competitive advantage. It was clear that there were some differences in their understanding. However, in this paper
Porter’s work on competitive advantage has been studied, to understand disruptive innovation. In Porter’s work,
competitive advantage could be pursued by the firm if:
i. Firm has cost leadership.
ii. Firm has something that differentiates it from its rivals.
iii. Firm who selects niche market and makes relevant changes in its product or service to serve that segment of the
market.
Moving ahead, with this theoretical background and study the model of disruptive advantage, it is evident that the
disruptive innovation has competitive advantage. To begin with this analysis, the new entrant has priced the new
innovation so low, that there is cost leadership. The new innovation is unable to meet the expectations of the customers
of established products and hence has built a niche market for itself. The disruptive innovation is different from the
sustaining innovation. Hence, it clearly, fulfils all the three points. The model of disruptive advantage, clearly states
that as the new entrant gains popularity among the established consumers, it de-thrones the established firm and takes
over. To conclude, the theoretical background of competitive advantage provides a clear understanding of why the
new entrant takes over the market with disruptive innovation.

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