Innovation’s Uncertainty Factor

For the past two decades, companies have assumed that they know the disruption playbook. It’s an S curve of progress: a series of cumulative advances as a new value proposition progresses to outperform a given industry’s prevalent offers. A company introduces gradual improvements in a new, innovative value proposition. Initially, the offering is not attractive to mainstream users and established incumbents, but eventually it becomes good enough and then achieves market dominance. Disruption of the incumbent is complete.

This perspective on disruption provides a valuable guide with respect to how investment returns on innovative efforts may unfold over time. Progress during early efforts tends to be slow, followed by takeoff and a period of sustained growth.

The launch of Netflix’s DVD-by-mail service at the turn of the century represents a classic example. The service was initially targeted at movie enthusiasts who were early DVD adopters. These were consumers who agreed that the trade-off of selecting films through online search was worth the wait (often several days) for the movies to arrive in red envelopes in the mail. At the time, this value proposition was not attractive compared with the mainstream video rental market. However, as Netflix improved its offer — via an unlimited subscription service, an online recommendation engine, a more efficient distribution network, and newer and original content — the company was able to disrupt video rental incumbents such as Blockbuster.

But this view of disruption is oversimplified or, at a minimum, incomplete. What the prevailing imagery for S-curve progress misses is the fact that there is significant uncertainty regarding the rate of progress within the new disruptive value proposition. Some innovations can reach mainstream status in a matter of years, whereas others may take decades. And others, despite their disruptive potential, may never reach fruition. Video streaming services took off rapidly around the globe in a matter of years. In contrast, it has taken online degree programs more than a decade to establish a strong foothold in the education sector. And gene therapy, touted as a major advance in personalized medicine for several decades, has yet to take off.