Creative Destruction and disruption Prof. Paulo Feldmann

The fight between incumbents and entrants ! 1. According to Clayton Christensen Disrupt or be disrupted 2. According to Kenneth Arrow There are 3 strengths : sunk cost, substitution and efficiency

Creative Destruction Markets have times of comparative quietness punctuated by shocks and discontinuations During a period of quietness the companies that have superior products and technologies gain economic profits Entrepreneurs that explore the opportunities created by the shocks enjoy economic profits during the period immediately following the quietness

Why do some companies explore opportunities that work out well and others do not? Not letting these opportunities pass is the essence of entrepreneurship. Or according to Schumpeter : Entrepreneurship is the capacity to act on an opportunity that innovation and discoveries create.

Creative Destruction and Competitive Advantage Creative destruction implies that the mechanisms of isolation that protect the competitive advantage of the company will not be permanent The life expectancy of competitive advantage diminishes to the degree that technology and tastes change

Disruptive Technologies New technologies that offer lesser perceived benefits, but at a much lower cost, could replace the existing ones. Example: Jet ink printers and laser printers A possible defense against disruptive technologies is to better sell the perceived benefits of the old technology.

What is disruption ? A process where a smaller company with fewer resources is able to succesfully challenge established incumbent business . As incumbent focus on improving their products for their most profitable customers they exceed the needs of some segments and ignore the needs of others.    

What does the new entrants do ? They target those overlooked segments gaining a foothold by delivering more-suitable functionality – frequently at a lower price.

How do the incumbents react ? As they are always chasing higher profitability in the more demanding and profitable segments they tend to not answer vigourously

The next step of the entrants They move upmarket delivering the performance that incumbents’ mainstream customers require , while preserving the advantages that drove their early success.

When disruption has occurred ? When mainstream customers start adopting the entrants offering in high volumes .

Disrupters often build business models that are very different ! PC X Minicomputers PC X Typewriter machines Netflix X Blockbusters