Business disruption refers to a process where a smaller company with fewer resources than a large company successfully challenges them for market share. As the larger company focus on improving their products or services for their most profitable customers, according to this argument, they over-deliver for some market segments while ignoring the needs of others. An entrant company can disrupt this approach by specifically targeting the neglected market segments and gain a foothold by delivering more targeted functionality – often at a more competitive price.
The incumbent company, because it is focusing on higher profits from specific market segments, often does not respond effectively. The new entrant, having made inroads into the mainstream market, then continues to deliver the performance that neglected customers require and continues to push the advantages that drove their initial success. The incumbent company is disrupted when customers turn to the entrants products in significant volume, threatening their market position.
Business disruption is made possible because incumbent, or established, companies allow entrants to gain a foothold in either neglected areas of the market or in a completely new market that had previously not existed. Business disruption is therefore an ongoing process in which small-scale attempts at harnessing innovation sometimes succeed. When they do so these companies move from the fringe of the market to the mainstream and then gradually begin eroding incumbent companies profitability and market share. This is a process that can take considerable time and this explains why incumbent companies often disregard new entrants until it is too late to effectively compete with them.
Another aspect of disruption is that new entrants often build new business models that are completely different to those of incumbent companies. Apple’s iPhone is a singular example of this. When targeting the market for mobile phone users its initial success was probably due to product superiority and a compelling marketing campaign. The disruptive element, however, was the concept of the phone also acting as a computer and replacing the laptop as a portable device for accessing computer functions. The investment in phone apps, that delivered this functionality, and as a gatekeeper for their sale allowed the company to create an entirely new business model for gaining revenue from customers. In fact it could be said that Apple completely changed the way that people interact with computers by providing an intuitive, easy-to-use interface that did not require any specialized knowledge of computers while still offering all the power and benefits of the computer through their devices.