From the December 2005 issue of Entrepreneur

One of your competitors has just released an innovative product or service. You must find a way to respond--fast--because this new idea is shaking up the market.

It's called disruptive innovation, and it happens when something new overturns a market, forcing everyone else to either adapt or die.

Disruption is all around us: The iPod rocked the music distribution model, and Dell's direct-to-consumer ordering process still has competitors analyzing their supply chains.

Entrepreneurs continue to be innovators, but large companies are getting better at anticipating disruption. "There's a lot of misunderstanding of what disruption is. Usually, people associate it with technology, and that's not necessarily true," says Luda Kopeikina, author of The Right Decision Every Time and CEO of Noventra, a Boca Raton, Florida, consulting firm that helps large companies spot disruptions and bring innovative ideas to market. "If a competitor brings out something that totally invalidates your product line, you [have] a serious problem."

Pardon the Interruption
Disruptive products and services can be tricky to pick up on because they don't start in the middle of the mainstream market, says Scott Anthony, co-author of Seeing What's Next and partner at Innosight, a Watertown, Massachusetts, innovation consulting firm. He says the first people to adopt such products and services are consumers who are willing to trade performance for lower-priced or easier-to-use products, or who are not in the market in the first place.

Established companies can miss incomings on the radar because they're so distracted by their own success. Anthony notes it was a record time for CD sales when MP3 technology first entered the marketplace. "The thing that's so tricky," he says, "is that everything an established company is trained to do--watch your markets carefully, listen to your best customers, innovate to meet their needs--oftentimes causes them to miss some of these disruptive transformation trends." Today, Apple Computer commands about 80 percent of the MP3 player market while Sony, which enjoyed strong CD sales in the 1990s, claims only a miniscule amount of the market.

Another surprising detail about disruptive innovations is that they're initially less effective and more costly than mature products, says Ed Roberts, chair of the Massachusetts Institute of Technology Entrepreneurship Center and a professor at MIT's Sloan School of Management in Cambridge, Massachusetts. "Because of that," he says, "they're ignored for a long time by existing companies in the market."

You can't afford to ignore the rumblings, however. A few years ago, Scott Alyn saw fewer business opportunities in his market as improvements in broadband and fiber optics pushed product development offshore. "In 2002, we just took our lumps," says Alyn, founder of Electronic Source Co., a 55-employee Van Nuys, California, company that assembles printed circuit boards for clients such as Raytheon.

Two years ago, the company decided to become a niche player, altering its business model from quick-turn assembly house to turnkey solutions provider and investing in new equipment to follow an industry trend toward miniaturization. "When you find you're being impacted by a disruptive innovation, you first must understand the implications," Alyn, 41, says. "Sometimes the response to a disruptive innovation is in itself the disruptive innovation."

To spot competitive threats, smart companies survey their least demanding or former customers to see what they're buying. "If you do that," Anthony says, "you might be able to spot that attacker when it's early enough to do something about it." They scan other industries for products and trends that will eventually affect them.

Kopeikina mentions Whirlpool, which foresaw today's popular polyesters entering the market and invented a washing machine with a cool-down cycle. "They really anticipated the disruption issue," she says.

Entrepreneurs who rest on their laurels will get laid to rest in an increasingly disrupted marketplace. "Disruptive innovations are more quick in coming," Alyn says. "[They] require a company to be more agile." His company's agility is paying off: Sales for Electronic Source Co. are projected to increase from $3 million in 2004 to $3.6 million in 2005.