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Will RFID Disrupt Your Business?

Companies developing an RFID strategy need to understand whether the technology will support the way they do business—or change it entirely, says author Michael E. Raynor.
By Bob Violino
Sustaining innovations are what enable organizations to appeal to increasingly more demanding customer segments, and hence grow. Sustaining innovations can be incremental, year-by-year improvements, or breakthrough, leapfrog-beyond-the-competition offerings. Either way, as companies move along their sustaining trajectories, they inevitably overshoot at least some, if not much, of the market, effectively leaving behind those segments of the market whose needs can be satisfied with products that are not as good as what the most successful organizations are capable of providing.

Overshooting the market
It is this overshoot that makes disruption possible. Disruptive innovations are inferior to the currently available products, as measured by traditional performance metrics, but they offer other benefits. Typically, disruptive innovations are simpler, more convenient and often less expensive, too.

Such products appeal to new or less demanding customer segments, and these segments present the disruptive innovation with a foothold in the market. Once a foothold is established, the new innovation has a market that will pay for further improvements in its performance, and so a new trajectory of sustaining improvement is created. As the innovation improves, it begins to attract customers in other, more demanding market segments, and the upmarket march has begun. Once the level of performance demanded by mainstream customers has been reached, the disruption is essentially complete. The market’s incumbents might well survive, even profitably, but they are invariably smaller and have limited growth options.

The airline industry offers a good example of disruptive innovation. From the inception of commercial air travel in the post–World War II era through the late 1980s, established airlines introduced a stream of innovations that allowed them to provide ever-better service to their most attractive customers: the relatively price-insensitive business travelers who wanted predictable levels of service to as many destinations as possible.

Sophisticated reservation systems, frequent-flier programs, hub-and-spoke route structures and various classes of service were all crucial to success. And since all the airlines had the same generic strategy, execution was the name of the game: do it better and faster than the competition, because the competition was sure to copy you.
For the first two decades after its launch in 1971, Southwest Airlines labored in relative anonymity. The company was profitable but small, and prospered by bringing low-cost air travel to people for whom the alternative wasn’t another air carrier, but a bus or car.

In the 1990s, Southwest began to eat into the established carriers’ markets, and by May 2003, Southwest had more passengers than any other U.S. airline. What happened? How could a company offering infrequent flights from secondary airports with poor service best the stalwarts of the industry?

Southwest was successful because it disrupted its entrenched competitors. As established air carriers, such as Delta, United and American, fought for higher margins by catering to price-insensitive business travelers, they effectively left behind an increasingly large number of customers.

As the incumbents were on the path to “overshooting” the needs of more of the market, Southwest was busy catching up with the needs of those same customers. The carrier improved significantly in many operational dimensions, but it did not compromise the essence of its strategy. The combination of Southwest’s improvements and the incumbents’ overshoot allowed Southwest to ascend to the summit of its industry. An important learning from the Southwest case is that disruptive innovations are not limited to, or even typically about, technology.

The relativity of disruption
Disruptive innovations are so-called because of the effect a given technological advance has on the business model around which it’s wrapped. Consequently, the same technological innovation can be deployed in sustaining or disruptive ways. It’s the contingent nature of the disruptive or sustaining potential of any given technology that makes it difficult for managers to know how best to respond to a given innovation.

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