Will There Be Disruptive Innovation? Identifying Profitable Niche Segments and Product Designs for Small- and Medium-Sized Companies and Startups

Abstract

When an established incumbent already exists in the market, new entrants may consider special entrance strategies for entering that market. Disruptive innovation theory suggests that new entrants may start from a low-end market and then expand into mainstream markets. A recent debate on the theory has questioned its generalizability, but such controversy originates from the attempt to apply it to any business success by a new entrant. However, different innovations require the application of different theories. Therefore, this article identifies a profitable niche market for startups and small- and medium-sized companies based on consumer preferences and determines whether disruptive innovation is likely to emerge in a particular market context. Specifically, this article investigates whether the low-end market is the profitable niche market for market entrance. It uses a choice experiment and a hierarchical Bayesian normal mixture model capable of capturing preference heterogeneity at both the individual and the segment levels to predict market entry implications in an ex-ante fashion for the wearable device market in South Korea. The characteristics of the identified niche market segment and entry product design imply that startups and small and medium-sized companies should be cautious when applying disruptive innovation theory in this context.