Guest blog: Disruptive innovation: What is it and why does it matter?

Written for our partners Economy Standard.

Change is never easy, especially for businesses. Every day is busy and it’s easy to get bogged down in firefighting whilst putting innovative projects on the back burner. Indeed, investing time and money in research and development can simply feel too daunting, especially as innovation can all too easily fail.

But with technology moving on apace, companies that don’t innovate will simply be left behind. Competition is fierce, and with costs increasing and efficiencies essential, R&D is something that cannot be avoided for long.

What is disruptive innovation?

Disruptive innovation occurs when a concept that already exists is transformed into something breakthrough that can be accessed by a wider group of consumers. This could be because it’s become cheaper to manufacture and purchase for example, and could be a product or a service.

We’re not just talking about improving something that already exists; we mean totally redefining the market.

Disruptive innovation also reaches so far that it doesn’t just bring improvements to the industry - it also disrupts the status quo. Once such innovation has taken place, the market is never the same again.

An example of disruptive innovation: The smartphone

The smartphone is a particularly good example of innovation that’s extremely disruptive. Not only did it transform the mobile phone industry and the way we communicate, it also heavily impacted the way we access the internet on the go.

Back in 2007 when the iPhone first exploded onto the technology scene, mobile phones were nothing new. But what this wholly disruptive new innovation did was allow businesses to develop services never seen before. Alongside the advent of apps, it meant connecting with customers in a way that had never been achieved before. In fact, data from Statista shows that more than 50% of all web traffic worldwide is the result of users accessing the internet on their mobile phone.

Why is disruptive innovation so important for businesses?

Disruptive innovation can certainly be daunting, but it can also be achieved in stages. It’s the result of a progressive strategy of innovation, gradually building up to a product or service that completely blows the market apart. Having said that, the pace of innovation needs to be brisk as only the most disruptive innovation has the greatest effects.

The real art of this type of innovation lies in identifying the opportunities to innovate as they arise, whilst at the same time having the creativity (and resources) for R&D to occur. Both employees and customers are a lucrative source of inspiration.

It’s a balancing act between making progress through disruptive innovation and not taking intolerable or unnecessary risks. Yes it’s tempting to keep doing what you do best - “better the devil you know”. But when businesses get too comfortable in a niche, that’s when progress becomes stifled. Kicking back for too long in a comfort zone is not a long-term option if the business is to survive and thrive.

What are the ingredients that make a company innovative?

Companies that are truly hot on innovation stand out from the crowd as they tend to have similar characteristics. These include:

• Having a CEO that takes ownership of the innovation process and who is fully on board with the importance of innovation as a whole.
• Maintaining an active plan for innovation and proactively measuring the results.
• Allocating a committed budget specifically for innovative R&D work.
• Being a leader rather than a follower. In other words, the company is ready to jump on emerging trends as they arise. Yes, reckless risks should be minimised, but exceptionally innovative companies never rest on their laurels.

Questions businesses should be asking for successful innovation

In our experience, there are four main questions businesses should be asking themselves when it comes to tracking and measuring their innovative ambitions:

• What percentage of revenue is made up of products/services the business didn’t offer five years ago?
• What percentage of EBITDA (Earnings before interest, taxes, depreciation and amortisation) is the business spending on innovative work?
• Is the CEO involved?
• What innovations are customers most interested in?

Up to 33% of R&D costs can be reclaimed through R&D Tax Credits

Innovation is a pricey prospect. From purchasing materials and taking on new staff to building and testing prototypes, stumping up the money to finance innovation is often difficult.

The good news is R&D tax relief has existed for over 20 years now that offers up to 33% of qualifying R&D costs back via the R&D Tax Credits scheme. The relief is administered either as a reduction in Corporation Tax or a cash lump sum if the company made a loss. The further good news is that any UK company of any size and in any industry and claim R&D Tax Credits as long as there’s a liability for Corporation Tax. Plus, the range of qualifying R&D activities is deliberately broad - the main thing is that a scientific or technical uncertainty has been tackled.

The take-home message here is that if technical or scientific R&D work has occurred - perhaps involving a new product, service or process or the appreciable upgrade of an existing one - then R&D Tax Credits could well follow.

With various other reliefs also available to encourage innovation (we’re thinking Video Games Tax Relief and Patent Box too), there’s never been a better time engage in disruptive work.