*2.5.4 Inside and outside the core innovations*

As we identified three areas of innovation, core, adjacent and transformational, we note too that the terms 'core' and 'outside the core' have been popularized. In our model 'outside the core' consists of both adjacent and transformational innovation, as indicated in **Figure 3**.

## **2.6 Transformational and disruptive innovation**

As we described, transformational innovation develops breakthroughs in products, services, or business models that are designed for markets that do not currently exist. In this section, we address the difference between transformational and disruptive innovation. Many corporate entrepreneurs, R&D staff and researchers discuss and use the term 'disruptive innovation'. However, we want to define this term as it was originally identified by Clayton Christensen. Christensen was a business guru who is best known as a key figure at the Boston Consulting Group (BCG) and a professor at Harvard Business School. He indicated that large, established firms have difficulty in developing disruptive innovation because of the following unique elements of this type of innovation. First, disruptive products are simpler and cheaper. They generally promise lower margins not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. Third, a leading firm's most profitable customers generally do not want, and initially cannot use, products based on disruptive technologies. By and large, disruptive technology is initially embraced by the least profitable customers in a market ([24], p. xix).

According to Christensen's definition, the solution developed through disruptive innovation is not meant for an organization's current customers, but, instead, it creates new markets. For those reasons, we can see that disruptive innovation fits in our model as part of 'outside the core,' and specifically as transformational innovation. What is unique, however, about disruptive innovation is that it arises from the low or

*The three levels of innovation identified as core and outside the core (adjacent and transformational).*

less expensive end of the market, where large, established companies are uninterested in the innovation. It just does not represent enough profit margin for them.

From this definition of disruptive innovation, and integrating it with the model of the three levels of innovation as depicted in **Figure 3**, readers should understand that all disruptive innovations would fall into transformational innovation, but not all transformational innovation is disruptive. Using our examples of transformational innovation described above, perhaps the example that best fits as a disruptive innovation is that of Amazon's AWS. Here, innovators did not initially understand that they had something they could commercialize or sell to external organizations. They developed a market for something that did not exist. Similarly, OpenAI unknowingly created a new market with ChatGPT. It initially launched the service at no cost to users. A subsequent fee-based model was released using a US\$20 monthly subscription. That is at the bottom end of the market, where large corporate organizations would find it difficult to realize substantial profit margins. For these reasons, ChatGPT also stands as a good example of a transformational innovation that is also disruptive.
