Disruptive Innovation Assignment: Case Analysis of Spotify

Question

Task: Choose an organization and prepare a disruptive innovation assignment comprised of the following three sections:

1. Describe, in detail and in your own words, one or two innovation theories of your choice. Deep knowledge of one major innovation theory will be enough as a basis for a high mark, and you should not choose more than two innovation theories.

2. Apply your chosen theory (or theories) to explain the historical development of one or more products and/or services for your selected organisation.

3. Apply your chosen theory (or theories) to recommend possible future development pathways of your products or services for your selected organisation.

Answer

Introduction
There are a number of innovative products and services that are released in the market. In the current times, it is extremely essential for the business firms to be able to maintain and offer the element of innovation to the customers and the end-users. There are various innovation theories that have been developed which can be used by the business firms. One such theory is the theory of disruption. It is the innovation theory that supports the idea of innovation-driven growth. The theory considers the innovation as disruptive if it can create new markets and networks along with the disruption of the existing establishment in the market. Quite often, the concepts and mechanisms that are described in the disruption theory are misunderstood by the business entities. The disruptive innovation is the one in which a new or a smaller company can challenge the established business or organization and can gradually overpower the market giants.

Innovation Theory
Definitions, Principals and Processes of the theory
The theory of disruption as an innovation theory was coined by Clayton Christensen in early 1990s. The theory involves the concepts through which the new players can disrupt and overpower the established market entities. The theory describes disruptive innovative as a process that can be applied to the smaller companies or the ones with lesser number of resources to challenge the established businesses and markets. The smaller companies can enter the market at the lower levels and can gradually move up the level in a continuous manner. There are certain steps that are often followed to carry out such a process.

The established business firms usually target and appeal to the customers that can provide them with the highest revenues. The needs and expectations of the customers downmarket are often ignored. The new entrants analyse these ignored market segments and provide them with the desired products and services at the reduced costs. The larger organizations do not put focus on such minor changes and new entrants. After capturing the ignored segments, the new entrants then target the mainstream customers and begin to move up the ladder. As soon as the new entrants succeed to attract the mainstream customers of the established set-up, it is considered as the disruptive innovation. There are certain concepts and theories that are a part of the disruptive innovation theory. There are also certain misconceptions that the businesses have that lead to the significant failures and inability to effectively make use of the theory.

All Innovations are not disruptive
Disruption in the common language is a term that refers to any activity, action, or event that may cause interruptions of the regular flow or progress. However, the same definition does not apply to the businesses. If this definition is followed then there will be disruptions that will occur at every second. This is because the market is dynamic and is volatile.

There is misuse of the word disruption that is often witnessed in the case of the theory. It is necessary to first have clarity on the meaning of these words and concepts. Disruption in the case of disruptive innovation is the event when the established firms face the repercussions of ignoring certain market segments which are taken over by the smaller entities and the mainstream customers are also targeted eventually.

Low-End or New-Market
There is no generic way in which disruption may occur in the market. There are different varieties that may be involved. These may be broadly classified in two categories as low-end and new-market disruption. The former is the one that emerges at the lowermost level of the market and provides the services or products that may just be good enough for the ignored market segments. The establishment firms move upwards and the new entrants get to capture the customers at the lower/ignored segments. On the other hand, the new-market disruption is the one wherein the businesses compete against the non-consumption in the lower margin sectors. The primary difference between the two is the focus area. The low-end disruption is the one in which the focus is put on the overserved customers and the Newmarket is the disruption in which the focus is put on the underserved customer groups(Christensen and Euchner, 2011).

Due to the differences in the focus customers, the strategies that are used in both the cases is also different.

Defined Process
It is often believed that the disruption lies in the product or a service that the business firm may create. However, disruption can be rightfully stated as a process. It is not possible to determine whether the innovation is disruptive or not in one day. The launch of a particular product or service does not decide if the innovation is disruptive or not. There is a defined timeframe that goes by in deciding if the innovation is disruptive(Christensen and Euchner, 2020).

Effective Decision-Making
The disruptive innovations may not necessarily be carried out only by the start-up firms. The already established business organizations can also cause disruptions by launching a new product or service that may disrupt the markets. The identification of the true targets is very essential in the disruptive innovation method(Christensen and Euchner, 2020). There are various products and services that the organization works upon. All such products or services cannot be called disruptive. Also, not all of these products or services can capture the entire markets.

Such understanding and clarity is not only essential for the established businesses but can also offer immense benefits to the new entrants in the market. The identification of the possible target markets and the opportunities can be done so that the effective and disruptive creations can be launched in the market(Coomber, 2014).

The graphical illustration of the disruptive innovation theory can be done in the following figure(Coomber, 2014).

Disruptive Innovation Theory
Evaluation of the theory (Benefits and limitations)
There are a number of benefits of the disruptive innovation theory. The organization will be able to expand the existing market or will be able to determine the niche with the aid of the disruptive innovation theory(Denning, 2016). The consumer preferences and demands are not static and these keep on changing. It is necessary for the business firms to be able to identify the area of opportunity in such changing environment. It is possible that the initial phase may not provide the successful results(King, 2017). There may be lower gross margins that may also be associated for a certain period of time in the beginning. However, with effective volume and scale, the business firms with the disruptive innovations can generate huge values and can also overtake the established firms. The lower market tiers are associated with the lower margins and are usually not very attractive to the larger and established firms(Maas and Ester, 2016). This creates the space at the lowest levels for the new disruptive competitors to set foot in the market.

The disruptive innovation theory also provides the business firms with the ability to improve the business processes and operations in the entire procedure. There is a lot of market research and analysis that is involved in the disruptive innovation models and theories. In these processes, the organizations get the ability to reflect on their own shares, strengths, and weaknesses. The reflection on the processes enables the ability to incorporate or adapt to new processes and changes. It is extremely necessary to be able to determine some of the new areas of improvement. The disruptive innovation model provides the mechanism to carry out the improvements and developments.

When a new entrant or an existing organization looks to disrupt the market, there are various resources that are incorporated. This is because there is a lot of planning and analysis that goes by. It is also essential that there is effective leadership that is involved with the contribution of the leaders from a wide range of backgrounds. The organizations can get the benefit of including the diverse range of employees with an exceptional set of skills and capabilities. This is beneficial for the organizations for the future developments as well. The dedicated and skilled resources can always contribute towards the organization success and growth. It is always essential for the business firms to be able to expand and determine the new opportunities that can be capitalised upon. The disruptive innovation theory enables the organizations to determine the market opportunities and the aspects of organizational growth. There are also a few limitations that are associated with the disruptive innovation theory. The first and the foremost is the lack of understanding and clarity on the theory. A number of business firms are merely incorporating the theory without actually understanding the meaning of the same. There is a separate strategy process that is essential for the implementation of the disruptive innovation theory. There are some of the unanticipated opportunities that can be associated with the markets. There are scenarios wherein the determination of such opportunities is not done in an effective manner. There is also slower growth that is associated with the disruptive innovations. There are several months or few years that may go by in the establishment of the customer base.

Application of the Innovation Theory in the Historical Development Context
Company Background
Spotify streaming service is the Swedish company that was launched in 2008 and it is an audio-streaming and media service company. It is a digital music service that includes the right music or podcast on the website or the mobile app. The access to the app is possible on the mobile devices or desktops. There are millions of tracks that the users can access on Spotify streaming service. There are certain tracks and services that are available on Spotify streaming service for free of cost. There is also subscription that the users can avail and can get the complete access to all the tracks.

The business model that Spotify streaming service uses is the freemium business model(Pedrero-Esteban, Barrios-Rubio and Medina-Ávila, 2019). The revenues are generated with the selling of the premium streaming subscription to the end-users and the advertising agencies. The organization came up with a new website called Spotify streaming service for Artiststhat incorporated the business model of the organization. The organization gets the content from the major record labels along with a number of independent artists. The copyrights holders are provided with the royalties for the streamed music. The 70% of the overall revenue is paid to the copyrights holders. There is not a fixed rate that applies to the specific tracks or podcasts. There are a number of factors that are considered in the determination of the rate that include the home country of the user and the royalty rate of the individual artists. There is an unlimited subscription package that is associated with the organization.

The Business Model canvas of Spotify streaming service is covered below.

Historical Development
Spotify streaming service has been able to make use of the disruptive innovation theory in the past to carry out the development that it has made so far. To go-to market strategy that was adopted by the business firm enabled it to develop a large audience base. It was done through controlled scaling as per the geographic region. The company first rolled out in Europe in 2008 and it later expanded to the United States in 2011. The company initially worked with the invite-only system. There is significant buzz that Spotify streaming service was able to generate that resulted in the high demands through perceived scarcity. The use of the disruptive innovation theory also enabled the organization to keep a track of its growth using the viable cost structure. The freemium services launched by the company attracted a large initial audience. The company then made use of this customer base to further expand its market. It then offered the solutions that attracted the customers associated with iTunes and other piracy software. This is the application of the concepts and principles of the disruptive innovation theory.

The organization made use of the inherent social nature of music so that it could generate interest among the customers. The earlier piracy software and channels destroyed the value for music in order to generate the revenues. The organization also made effective use of the social channels and platforms so that the enhanced value could be generated from the market. Spotify streaming service made use of the growth-oriented social features to generate increased interest among the customers. These include the shared links and playlists along with the enhanced integrations with the popular social networking mediums. It launched integrations with Facebook, PlayStation, and Uber in 2011, 2014, and 2016 respectively(Soper, 2016). All of these mechanisms have enabled Spotify streaming service to maintain its exceptional base in the market. It has also assisted the organization to take over iTunes and the other giants(Savvides, 2020).

Application of the Innovation Theory in the Future Development Context
Future Development
The application of the disruptive innovation theory can also be done in the future development of Spotify streaming service. There is a continuous increase in the number of creators that are engaged with Spotify streaming service. There is a considerable growth that is necessary in the future as well. For this purpose, it is necessary for Spotify streaming service to have the continuous engagement from the labels, publishers, and the artists. There are over 50 Million tracks that are available on Spotify streaming service and the number shall witness significant growth on a daily basis.

The use of the disruptive innovation theory can be done by Spotify streaming service to increase the discoverability for the podcasts(Stine SchmiegLundgaard et al., 2019). The podcasts users on the medium are not only more engaged but there is also enhanced listening to the music that can be attained with the aid of the podcasts. There are some of the emerging technologies that Spotify streaming service can incorporate so that it may continue to disrupt the markets. The Internet of Things (IoT) and Artificial Intelligence (AI) are the two emerging models that are gaining tremendous grounds. The use of these two technologies can be done by Spotify streaming service to carry out effective podcast discoverability. There are also a large number of capabilities that can be provided to the artists using the IoT and AI technologies. The remote mixing is one such feature that may be included. The expansion of personalization is the key. It is also essential for Spotify streaming service to continue to target the global markets. The company recently came up with the testing of the Premium Duo Payment Plan. It was the plan that was specifically developed for two people living at the same place(Singh, 2020). The testing of the plan was done in the lower market segments, such as Denmark, Holland, Chile, Colombia, and Ireland. The tests shows effective outcomes and it is probable that the expansion of the plan can be done in Australia and the global rollout. There is always the evaluation and comparison of Spotify streaming service with Apple’s iTunes. In order to maintain an edge over the iTunes, it is essential for Spotify streaming service to continue its innovation and disruption.

The combination of technology and the market shall be targeted by Spotify streaming service. It now has an edge as it has emerged as the largest digital music subscription service across the globe. There are some of the newer markets of the organization that have now shifted to the shorter subscription plans. Such alterations and changes or in other words, disruption will continue to take place in the future. Spotify streaming servicewould probably need to keep using the disruptive innovation theory and must continue to experiment with the weekly and daily samples. There has also been significant increase experience by Spotify streaming service in the number of re-joins. In the previous quarter, the organization witnessed 42% of additions of the previous users. This is a sign that there is increased demand of the services in the market of the former users and re-joins. It is, therefore, essential that the effective combination of the market analysis and the technological functions and systems is done.

The consumer inclinations and demands are not static and these continue evolving. It is essential for Spotify streaming service to have the option to distinguish the area of change in such evolving climate. There might be lower gross margins that may likewise be related for a specific timeframe before attractive margins begin to show up. In any case, with successful volume and scale, Spotify streaming service can produce immense qualities and can likewise continue to maintain an edge over the competitors in the market. The use of the disruptive innovation theory will continue to be valuable for Spotify streaming service.

Conclusion
The report covers the details of the innovation theory as the disruptive innovation theory. There are a number of misconceptions that are associated with this theory which results in the higher chances of failure when the businesses adopt the innovation theory(Birnbaum et al., 2005). However, the business firms that succeed in understanding and correctly implementing the theory can witness exceptional outcomes. One such organization that is discussed is Spotify streaming service. It is a Sweden company that provides the digital music streaming services to the customers. The disruptive innovation theory comes with its own share of benefits and drawbacks(Terry, 2020). There are newer markets that the businesses can get to explore and identify with the aid of the theory. The capitalization of these theories enables the business firms to achieve and maintain an edge in the market. It is also seen that the business organizations fail to understand the meaning and utility of the theory which leads to the inability to achieve the expected and intended outcomes. There is also slow growth that may be witnessed in the initial period which can be a cause of concern for certain organizations. The correct selection and adequate implementation of the theory is extremely crucial will help many launch disruptive products in the near future.

References
Birnbaum, R., Christensen, C.M., Christensen, C.M. and Raynor, M.E. (2005). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Academe, [online] 91(1), p.80. Available at: http://web.mit.edu/zolot/Public/Innovator’s%20Dilemma%20excerpt.pdf.

Christensen, C. and Euchner, J. (2011). Managing Disruption: An Interview with Clayton Christensen. Research-Technology Management, 54(1), pp.11–17. Christensen, C. and Euchner, J. (2020). Managing Disruption. Research-Technology Management, 63(3), pp.49–54.

Coomber, S. (2014). THE DISRUPTIVE ENTREPRENEUR. Business Strategy Review, 25(4), pp.70–73.

Denning, S. (2016). Christensen updates disruption theory. Strategy & Leadership, 44(2), pp.10–16.

King, A. (2017). The Theory of Disruptive Innovation: Science or Allegory? Entrepreneur and Innovation Exchange, pp.3–6.

Maas, A. and Ester, P. (2016). Silicon Valley. Planet startup. Disruptive innovation, passionate entrepreneurship & high-tech startups. Amsterdam: Amsterdam University Press.

Pedrero-Esteban, L.M., Barrios-Rubio, A. and Medina-Ávila, V. (2019). Teenagers, smartphones and digital audio consumption in the age of Spotify streaming service. Comunicar, 27(60), pp.103–112.

Savvides, L. (2020). Spotify streaming service vs. Apple Music: The best music streaming service is... [online] CNET. Available at: https://www.cnet.com/news/apple-music-versus-Spotify streaming service-best-music-podcasts-streaming-service-price-catalog-features-plans-compared/ [Accessed 13 Nov. 2020].

Singh, M. (2020). Spotify streaming service expands Premium Duo subscription tier aimed at couples to US, India, dozens of other markets. [online] TechCrunch.

Available at: https://techcrunch.com/2020/07/01/Spotify streaming service-expands-premium-duo-subscription-tier-aimed-at-couples-to-u-s-india-dozens-of-other-markets/ [Accessed 13 Nov. 2020].

Soper, T. (2016). Spotify streaming service becomes first music platform to integrate with Facebook Messenger. [online] GeekWire. Available at:
https://www.geekwire.com/2016/Spotify streaming
service-becomes-first-music-platform-integrate-facebook-messenger/ [Accessed 13 Nov. 2020].

Stine SchmiegLundgaard, Claus A Foss Rosenstand and Aalborg Universitet. Center For InteraktiveDigitaleMedier&Oplevelsesdesign (2019). Investigating disruption?: a literature review of core concepts of disruptive innovation theory. Aalborg: Aalborg University Press. Terry, O. (2020). Disruption Innovation and Theory. Journal of Service Science and Management, 13(03), pp.449–458.