Innovation Theory: Disruptive Innovation Theory
The current competitive business environment underscores the importance of pursuing innovation. Innovation can give a company a competitive advantage over its rivals and ensure its survival in an environment characterized by competitive pressure. Failure to innovate can have wide-ranging implications for an organization. The paper provides a comprehensive analysis of the disruptive innovation theory and its applications in the real business world. This theory is reinforced by King and Baatartogtokh (2015), who argue that it is influential and widely accepted; its feasibility, predictive power, and generalizability are rarely disputed. Despite the contentions, it is inarguable that this theory has a significant influence on the business industry. This paper will discuss the principles and processes of the disruptive innovation theory. It looks at how HelloFresh’s products and services have developed through the years and how the chosen theory applies to its historical development. It also provides recommendations on how the company can use the theory in its future development.
Elements of Disruptive Innovation
Disruptive innovation theory has gained considerable attention in the business industry over the past two decades. Christensen et al. (2018, p. 1043) described disruptive innovation as “a process whereby a company with fewer resources successfully challenges established incumbent businesses.” Christensen, the founder of the theory, asserts that incumbents tend to overfocus on their most profitable goods/services and customer segments, ignoring other customer segments (Christensen et al., 2018). Therefore, market entrants can disrupt the industry by targeting the ignored customer segments and gain a foothold in those markets. The new entrant will take a position at the bottom of the market and offer value to overlooked customers- usually at a low price, and then work their way up the market from that position. When incumbents fail to respond to the entrant’s performance aggressively, the new entrants will gain a foothold in those market segments. The incumbents then move upward, delivering their offerings to the incumbents’ profitable customer segments while retaining the value that gave them their early success.
Theories have been suggested to explain the forces behind the upmarket movement. One theory suggests that the incumbents replace low-margin businesses with high-tier markets while pursuing profitability. This replacement creates a vacuum that pulls the new entrants into the marketplace. According to Christensen et al. (2018), disruption occurs when the new entrants gain the incumbents’ customers in large numbers or when the incumbent’s customers adapt their offerings in large volumes. Any innovation that a new market entrant undertakes that causes shuffling in the market are considered disruptive.
Disruptive innovation is always misused to refer to new threats or significant changes in the market. Christensen, Raynor, and McDonald (2015) note that people refer to new technologies or start-ups that alter competition patterns and shake up the industry as disruptive innovations. This view is misleading because not all innovations are disruptive innovations. A disruptive innovation only occurs when the incumbents lose market leadership to new entrants (Christensen et al., 2018). The incumbent does not necessarily need to exit the market; instead, they need to lose their positions to new market players for disruption to occur. For example, traditional department stores are still operating 50 years after discount stores disrupted the market (Christensen, Raynor, and McDonald, 2015). Although discount stores took the leading position, the traditional markets did not exit the industry. Therefore disruptive innovation occurs when a market leader loses its position to an entrant.
There are also different types of disruptive innovation, including low-end and new-market disruption. A low-end disruption occurs when a business enters the market’s bottom and serves the customers in new ways (Larson, 2016). This disruption type offers customers products with low performance but at a lower price. On the other hand, new-market disruption occurs when a business targets non-consumption or customers willing to pay for a product but cannot afford it. Therefore, the business finds ways to radically transform the product in a manner that new customer segments are created (Christensen and Bever, 2014). Usually, technology is involved in eliminating non-consumption and makes a revolutionary impact.
Another essential concept about disruptive innovation is that it can happen even in the absence of success. Christensen et al. (2018) state that “innovation can be disruptive regardless of its outcome.” Not all companies that pursue disruption achieve success, and not all new market entrants that succeed are disruptive. This assertion highlights the view that disruption is a process rather than a product or service (Christensen, Raynor, and McDonald, 2015). Contrary to the popular opinion that innovative disruption is a successful product or service at a fixed time, Christensen et al. (2018) define it as a process whose success or outcome is irrelevant in its definition. For example, the first minicomputers were not disruptive when they entered the market but were later considered superior to the traditional products. Netflix was launched in 1997 but did not become disruptive until recently when it became popular.
Theory Evaluation
Benefits
The theory’s prescriptions can shape current innovation ideas and lead to practical and statistically significant improvements. Disruptive innovation involves change and providing something valuable to the market. It encourages innovative thinking, which can substantially benefit the typical consumers (Benzidia, Luca, and Boiko, 2021). For example, new entrants can improve the performance of a product or service or introduce unique attributes. The better a product/service novelty is, the greater its value to a customer (Benzidia, Luca, and Boiko, 2021). Another study by Silva, Styles, and Lages (2017) showed that disruptive innovation positively impacts economic performance. Fernández-Mesa and Alegre (2015) can create a competitive advantage, and companies can benefit from economies of scale (Grant, 2019). Additionally, given the current business environment, companies can achieve long-term success and survive the competitive pressure in the industry (Satell, 2015). Innovation involves generating new ideas or processes, and companies can capitalize on these and transform them into performance outcomes.
Limitations
The disruptive innovation theory has had a significant influence on the business industry. However, the theory has been criticized on theoretical and practical grounds. The validity and generalizability of the theory have never been tested despite its widespread use. Christensen and Bever (2014, para. 7) state that “investments in different types of innovation have different effects on growth but are all evaluated using the same.” There are different types of innovation, and each has varying competitive effects and yields in various marketplaces. Thus, the theory cannot be applied to all disruptive innovations. Concerning its validity, a theoretical analysis by Weeks (2015) showed that the theory lacks consistency in its unit analysis and does not adequately account for the managerial agency. King and Baatartogtokh (2015) claim no affirmative evidence or numerical measures exist to confirm the theory’s proof. Another study showed that the disruptive innovation that Christensen described is rare in the real world (Hutt, 2016). It is rare for disruptive innovation to occur in any industry.
As mentioned earlier, for disruptive innovation to occur, the incumbents must overlook new entrants’ performance when they enter the market. However, King and Baatartogtokh (2015) show that most incumbents always effectively respond to any potential threats; hence, disruption is rare. This finding is consistent with Week’s (2015) finding that the theory does not fully account for managerial agency. Christensen’s assumption that disruptive companies always beat the incumbents can lead to erroneous predictions. Although King and Baatartogtokh (2015) note that this theory encourages businesses, it cannot replace research and market analysis. Managers need to carry out a deep market analysis of an industry’s competitive nature since the theory does not address such critical questions.
For example, should an incumbent stay in the market and incur the cost of competing with incumbents with substantial resources and capabilities? This situation is similar to the capitalist dilemma, which refers to the investor’s conflict of choosing between making an investment that will result in short time profitability or a market-creating innovation that will lead to long-term profitability (Cochran, 2014). Because market-creating innovations do not lead to immediate results, managers tend to avoid them. Recall that it was earlier mentioned that disruptive innovation may take time, even decades, for its benefits to be realized. In this case, new market entrants will frequently face the capitalist dilemma: should they pursue a profitable but deteriorating business, or should they avoid it? The disruptive innovation theory does not address these questions despite advocating for the innovation type.
Application of the Disruptive Innovation Theory in the Historical Development of HelloFresh
Company Profile
HelloFresh is a meal-kit company that offers food boxes of fresh ingredients and recipes to customers’ homes. It operates five brands HelloFresh, EveryPlate, Chefs Plate, Green Chef, and Factor75. The company claims it provided about 600 million meals across 14 countries in 2020 (HelloFresh, 2020, para. 4). Global professional chefs prepare the meal kits in a manner that a customer only needs to follow a recipe card’s information. The meal kits contain a deconstructed meal comprising premeasured groceries/ingredients and step-by-step instructions on cooking professional meals (HelloFresh, 2020). Customers then use the ingredients to make food using the recipe cards, which typically take around 30-40 minutes.
The company recognized that many working professionals had busy lifestyles and found cooking a challenge. Although the professionals desired healthy homemade, they either lacked the skills or the time to prepare the meal or shop for the ingredients. Therefore, most preferred takeaway food, which was faster and more convenient than cooking. However, the disadvantage of ordering takeaway foods is that there were expensive and unhealthy. Therefore, HelloFresh created its product offerings by combining the benefits of takeaway foods (convenience) and homemade foods (healthy and affordable). It also eliminated the time taken to shop for ingredients and research recipes.
Business Model
HelloFresh uses the e-commerce model that combines SaaS and the classic e-commerce model. The eCommerce subscription model involves providing continuous and recurring consumable products to customers while receiving regular payments for the services (HelloFresh, 2020). This model is not exactly unique in the food industry, but the company combines its model with SaaS. SaaS involves using technology to track and identify customer behaviors to personalize their services (HelloFresh, no date). The company uses Big Data to collect data from inventories, supply chains, and customer data to make predictions and gain insights on how to increase value for their customers. The technology-mediated predictions help to improve customer experiences by making accurate predictions of the recipes or ingredients the customers might want next.
Application of the Innovation Theory to the Company’s Historical Development
Traditionally, ordering fast foods was convenient because it saved the time needed to research recipes and cook. At the time of its innovation, the company’s existence was deemed unworthy. Supermarkets were a norm and constituted the lifestyle routine of many people. Supermarkets were easily accessible to people in urban areas, and people could not understand why anyone would need a food subscription service (Morrison, 2020). However, HelloFresh has changed habits by offering better offerings than supermarkets: convenience, affordability, and timeliness.
What makes HelloFresh revolutionary is that it reduces the number of checkpoints a product needs to reach a customer. The traditional meal-kit supply chain was complex due to import barriers, the technology required to keep food cold, and resource-intensive labor (Port, no date). A meal-kit company, especially international companies, needed clearance at the border before their products were allowed in a particular country. Even in domestic markets, raw materials had to go through several checkpoints before reaching a customer. HelloFresh disrupted the industry by using an integrated vertical supply chain model, something traditional supermarkets have not accomplished.
A vertical integration supply chain takes complete control of its industrial processes, including the production and distribution processes. Moltz (2019) demonstrates that vertical integration supply chains help reduce costs, enhance quality control, and ease information flow across the supply chain. HelloFresh buys directly from suppliers; food is tested and prepared in its kitchens and delivered straight to customers. The company makes a profit margin of +/- 60%, possibly because fewer companies and processes are involved in its supply chain. By eliminating the middle man, the company significantly reduced the storage and transportation costs. Because HelloFresh purchases the produce in bulk, they can overrun the fresh produce’s cost (Katte, 2017). These offerings allow the company to compete across two industries: the retail and fast food industry. It was also able to break from competing on prices by using this model. HelloFresh is 75% cheaper than traditional grocery stores because it eliminates the middleman (“The business model of HelloFresh,” 2020 para. 7). The company sources its products directly from suppliers and sells them to customers.
The company has achieved global leadership in its industry because it reacted to customer trends and invested in technology that helped them outcompete its competitors (Katte, 2019). The company capitalized on the increasing popularity of fresh produce instead of the conventional refrigerated produce sold by incumbents such as Woolworths and Coles (Reuter, 2020). As mentioned by Christensen et al. (2018), a disruptive innovation occurs when a company takes market leadership. The fact that supermarkets are still in operation even after HelloFresh took leadership confirms Christensen et al.’s assertion (2018) that market leaders do not necessarily need to exit the market for disruptive innovation to occur.
Various scholars have noted that the company has not achieved profitability despite its market leadership. However, Christensen et al. (2018) state that disruption can occur regardless of the entrants’ performance or success. HelloFresh initiated a transformation in the industry by deploying dynamic and robust capabilities to detect market opportunities. Additionally, Guardiola (2019) notes that HelloFresh’s packaging hasn’t yet been introduced in the market. The packaging is designed to meet package compatibility, have sufficient insulation, and be affordable, improving the company’s production efficiency (Guardiola, 2019). The way HelloFresh has redesigned its packaging is disruptive since it improves its production efficiency and does not currently exist in the market.
Application of the Innovation Theory to the Company’s Future Development
One of the common problems experienced by HelloFresh is customer retention. The company finds it challenging to retain active users in the industry, including its main competitor Blue Apron (Chapman, 2018; Rey and Dolla, 2017; Trivedi, 2017; Wells, 2017). According to McCarthy (2017, para. 4), about 83% of Hello Fresh’s customers fall out after six months. It spends approximately 28% of its revenues on marketing in the 2018 fiscal year. Various studies have shown that customer retention can help any company, including start-ups, to survive competitive pressure (Simanjuntak, 2019). Masarifoglu and Buyuklu (2019) state that any company with a subscription model such as that of HelloFresh needs an effective retention strategy to survive. Finding new customers in a subscription model is difficult and costly due to the high marketing campaigns involved in attracting new customers (Masarifoglu and Buyuklu, 2019). Accordingly, this paper argues that if HelloFresh does not implement an effective retention strategy, it will lose its market position.
HelloFresh can achieve this goal by pursuing the blue ocean strategy. The blue ocean refers to a market space currently inexistent in the market but offers vast opportunities for profits. This strategy is a form of “market-creating innovation” that involves creating a market segment that makes existing competition largely irrelevant by capturing new demand (Denning, 2017). Instead of competing for existing demand, the innovative company creates its own market untainted by competition. HelloFresh can capitalize on its SaaS model to integrate its product with its customers’ lives. It should collect more data on its customers’ lifestyle and diet preferences and use the data to create new demands. For example, it can collect enough information to create a customer’s lifestyle routine and then offer products that match or complement those routines. Provided that HelloFresh protects its ideas from imitation, it can acquire a strong brand name and win a competitive advantage for up to 10 to 15 years. This idea is disruptive because it adds new attributes to the current offerings. Instead of only offering healthy produce at an affordable price, the company aligns them with a customer’s routine; hence, creating more value.
The second idea is to accrue benefits for their customers by offering the best food experiences. For example, it can provide a valuable incentive after a customer has purchased five meals. The incentives can offer discounts for one week after a customer reaches a particular target. For example, it can provide its meal kits at half the price for one week when a customer attains a target. The idea here is to improve customer experiences by allowing them to accrue benefits. When a cash discount for a given timeframe is offered, the customers can save money.
Amazon uses this strategy; for example, it can offer customers $1 when purchasing a product. In addition to earning the dollar, Amazon will ship the product to the customer for free. This way, the customer gains value from the purchased product and accrues benefits from earning the dollar. Similarly, HelloFresh should aim to offer its customers something more valuable than their value propositions. This recommendation is based on the idea that retaining current customers is cheaper than acquiring new ones. It is not a low-end disruptive innovation that serves customers in new ways. As mentioned earlier, a low-end disruption offers customers products with low performance but at a lower price.
Conclusion
This report provided a comprehensive description of the main concepts of disruptive innovation and applied them to HelloFresh company. The disruptive innovation theory has been applied to the historic and future development of the company. The above analysis shows that disruptive innovation occurs when a) an incumbent loses its leadership position to a new market entrant and b) when the entrant acquires the incumbent’s customers in large numbers. HelloFresh disrupted the food industry by disrupting the meal-kit supply chain. It uses an integrated supply chain where it takes complete control of its production and distribution, significantly reducing costs. This supply chain is disruptive because the incumbents, supermarkets, have not adopted or used it. It changed existing demands and habits by offering convenience, affordability, timeliness, etc. As the literature above points out, disruptive innovation can occur even in the absence of success. HelloFresh has not achieved profitability despite taking market leadership. However, it can achieve it by pursuing market-creating innovation or the blue-ocean strategy.
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