Managing Innovation

This report discusses disruptive innovation theory and its application on Spotify. It explores the principles, processes, benefits, and limitations of disruptive innovation. It also provides an overview of the historical development of Spotify and its business model.

Managing Innovation

Table of Contents
INTRODUCTION...........................................................................................................................3
Disruptive innovation theory...........................................................................................................3
Definition, principles and processes of this theory......................................................................3
Evaluation of this theory..............................................................................................................6
Application of disruptive theory on Spotify....................................................................................7
Company background..................................................................................................................7
Historical development..............................................................................................................10
Disruptive innovation for future development..............................................................................10
Future Development..................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Innovation can be defined as idea, practice or product that is perceived as something new
or something that has not been in existence. Changes made in existing products are also
sometimes considered as innovation (Christensen and et.al., 2018). Innovation is highly
important for the growth and development of the organisations. This report will discuss about
disruption innovation theory, disruptive innovation is an innovation that creates new market and
value network and eventually disrupts an existing market and value network. This type of
innovation displaces established market-leading firms, and products. Disruptive innovations are
mainly produced by outsiders known to be entrepreneurs and or organisations that are start-ups
rather than existing market leader organisations. Disruptive innovations, in other words can be
explained as innovation or products and services they are new and their existence lower market
value for other existing products to fulfil similar needs. This report will discuss about disruptive
innovation theory and later discussion will contextualise Spotify. Followed by this report will
involve discussion regarding future development Spotify can make under as per disruptive
innovation theory.
MAIN BODY
Disruptive innovation theory
Definition, principles and processes of this theory
Disruptive innovation can be defined as described as a process in which a product or
service initially takes place at bottom of the market. This product and service provided is less
expensive and highly accessible and in harsh ways moves upmarket and eventually displacing
established competitors of the company. Disruptive innovation term was coined by Professor
Clayton Christensen at Harvard Business School and then become ubiquitous. Unlike
breakthrough technologies that make existing and good products better, disruptive innovations
make products and services more accessible and affordable and this makes them available to the
larger population (Zach, Nicolau and Sharma, 2020).

Principles of Disruptive Innovations
Companies depends on customers and investors for resources
This is first principle of disruptive innovation that for the purpose of financial and other
resources companies and disruptive innovators mainly depends on customers and investors.
Disruptive innovators do not consider the idea that customers do not want yet. This means that
they believe that their innovation, product is required for customers. Investor is another
important element of disruptive innovation in which companies depends on investors for the
resources because disruptive innovation has high demand in market. This is the reason that
disruptive innovations require high amount of investment and this requirements can only be
fulfilled by investors,.
Small markets do not solve growth needs of large companies
This principle of disruptive innovation states that it is not possible for large and
successful companies to enter into or create a disruptive market. This is because disruption starts
at small level and it is easy for a small company to grow in small market and then create a large
market for their products and innovation whereas large companies’ growth needs cannot be
fulfilled by small markets of disruptive innovation (Emile and Chenevier, 2017). Large
companies often wait that companies of disruptive innovations or disruptors are large enough in
order to be bought by them. This is because these way disruptors will be able to contribute in
their growth. This is also one of the reasons that disruptors are created by new innovators or
outsiders rather than existing market leaders.
Markets that do not exist cannot be analysed
This means that gathering data and conducting research with old techniques when there is
no existing market is impossible. This is why disruptive innovators needs to ensure that they are
not using existing planning and research technique for their disruptive innovations. In order to
make research it is important that organisations are using explorative research when they are
applying disruptive innovation and planning of the company also needs to be based on
explorative research of the market regarding innovative product (Leavy, 2018). In other words,
disruptors innovations are new and there is no existing market for them, this way they do not

have any market place or customers on the basis of which they can undertake their planning and
execute. Exploratory research allows them to identify and understand bigger market and plan
accordingly to bring their disruptive innovation.
An organisation’s capabilities reside in its processes and values
This means that organisations’ capabilities reside in two main areas one is its processes
and another values. Processes are those methods through which inputs like material, information,
labour is transformed into output that has higher value. Values are those criteria in which
managers and employees make decisions regarding organisations. But these capabilities of the
organisation also define its disabilities. This means that employees of the organisation are
flexible and they can be trained according to requirement bit processes and values are not
flexible and are very difficult to change.
Technology supply may not equal market dominance
This principle states that over-satisfying needs of original customers, create a vacuum for
disruptive technology. This means that customers of the company by sustaining innovation may
create vacuum for disruptive technologies (Flavin, 2017). Technology supply then may not equal
to market dominance.
Process for Disruptive innovation
Conception
Conception is concerned with conceptualisation and planning of the innovative ideas. In
order to bring innovative idea into existence and turning ideas into innovation it is important that
it is conceptualised. In other words, before creating any innovative product or service it is
important that it is explained and its feasibility and market potential is analysed. Conception of
idea that there can be a application where individuals can stream different audios and songs in
their languages in their mobile.
Implementation
This is another step in process of innovation in which conceptualised idea and planning
contribute in implementation of the plan and create innovative product that can be utilised to

attain the purpose of innovation (Zhang, Daim and Zhang, 2019). Implementation requires
organisation and coordination of material and human efforts. Implementation is development of
the product which has been conceptualised. In this firstly, Spotify firstly conceptualised idea of
an application and implementation involves creation of the application on the basis of idea in
order to fulfil the objective. This implementation caused Spotify to be utilised by customers.
Marketing
This is another step in process of disruptive innovation. Marketing involves
communication to potential customers and this aims at informing market about existence of the
innovation and encouraging and motivating them to buy the product. Marketing involves several
elements communicating through different channels and platforms and different ways that
innovations influence potential customers.
Evaluation of this theory
Benefits of this theory
Disruptive innovation theory involves disruptive innovations that cause failure of existing
products in the market. There are several benefits of this innovation theory. Disruptive
innovation can contribute in the growth of the companies that adapt to changing trends.
Disruptive innovation has benefit for both businesses as well as customers, businesses can
achieve extensive in growth in short time whereas customers get benefit in terms of the products
that are cheaper, better and easily accessible (Vecchiato, 2017). Disruptive innovation enables
small company and start-ups to effectively compete with existing market leaders and give them
tough competition along with getting competitive advantage. With help of this small companies
and start-ups can easily expand in their respective markets. Disruptive innovations many of the
times are bought by big organisations at high prices. Existing companies with help of disruptive
innovation can strengthen their market positions and they also have enough investment and
resources so that they can sustain in market by making sure that the product is accessible at mass
level. Spotify also benefited its customers as company enables people to stream different types of
music on their phone. In disruptive innovations when small organisations and start-ups are
bought by big organisations, they become open to new opportunities regarding innovation and
development and they also have resources and employees to work on new opportunities.

Limitations of the theory
There are several benefits of disruptive innovations and these are for innovators,
organisations and customers but it does not make disruptive innovation free of disadvantage and
limitations. It is very difficult for existing big organisations to adapt disruptive innovation
because doing so will negatively affect their existing market and their existing customers.
Further disruptive innovation also requires different strategic processes. This means that existing
organisations must be aware of opportunities and especially unanticipated opportunities and not
just to identify it but to utilise it as well (Gobble, 2016). For small organisations and start-ups, it
is not always possible that their disruptive innovation will be successful and sustaining in
market. This means that they come along with possibility of failure when customers cannot
consider usefulness of innovation as innovators has identified. For example- if people are not
interested in streaming music over their phone and are not ready to leave existing practices of
streaming music in such situation Spotify would not have become successful. Even in case
disruptive innovations are successful they do not guarantee quick returns very fast. In case they
have been funded by venture capitalist they are highly impatient to get profit. Disruptive
innovation when identify and understand that they are going to be successful in such situation
they need to have effective capacity for mass production. This means that with speed growth of
Spotify it needs to ensure that it has music of different languages and it also has audio and media
to be used by different types of customers.
Application of disruptive theory on Spotify
Company background
Spotify is a Swedish-based audio streaming and media services provider. Company was
founded in 2006 and was launched in 2008. It was founded by Daniel Ek and Martin Lorentzon
and is headquartered at Stockholm, Sweden. Operating in audio streaming and podcasting
industry Spotify has around 299 million users. In order to complete all the activities of the
company it has employed around 4400 employees (Vonderau, 2019). Spotify is owned by
Spotify AB, publicly traded company on New York Stock Exchange. Spotify offers digital
copyright restricted recorded music and podcasts and along with this it also has 60 million songs
from record labels as well as media company.

Services of Spotify are provided using freemium model, this means that its services are available
to all but in order to get premium services customers have pay. In its services basic features are
free with advertisement and limited control and additional features of this software can be
accessed by premium subscription. Presently Spotify has 299 million active monthly users along
with 138 million paying subscribers. Spotify pays royalties based on the number of artists
streams as a proportion of total songs streamed. Spotify distribute approximately 70%to right
holders and they pay artists based on their individual agreements. Following its foundation and
its international launches Spotify became successful in short-time (Aguiar and Waldfogel, 2018).
There are several reasons that contributed to success of Spotify such as agile adaptation. This
means that Spotify disrupted the way people used to discover and use music.

Business model canvas of Spotify
Key Partners
 Record labels
 Rights
holders
 Cloud
providers
 Acquisition
 Independent
artists
 Third-party
integration
Key Activities
 Online web
 Desk and
mobile app
 Product
roadmap
 Music library
management
 Marketing
 Legal
 Content
acquisition
Value Proposition
 Free music
streaming (with
ads)
 Access
 Spotify provides
access to 60
million songs
 Personalisation
 Effective
advertisement
platforms
Customer
Relationship
 Streaming on-
demand
 Automated
 Micro-segment
 Online
 Community
 Co-creation
Customer
Segment
 Free users
 Advertisers
 Developers
Key Resources
 Employees
 Brands
 Talent
 Innovation
 Culture of the
company
 Big data
 Open music
model
 DRM (Digital
rights
management)
protection
Channels
 Spotify.com
 Web app
 Mobile app
 TV
 Cars
 App store
Cost Structure
 Pays royalties
 Bandwidth cost
 Administration cost
 Copyrights and licensing fees
Revenue Streams
 Operates under freemium model (basic
services are free and additional services are
paid)
 Revenue us created by selling premium
streaming and advertising placements to third
party

Historical development
Spotify was developed once it was realised by the creators that, music was very restricted
as it was available on CD so individuals could only listen if they have CD player and that too is
limited to 60-90 minutes of music (Fleischer and Snickars, 2017). This frustration cause
innovation and Spotify was developed. It was a disruption to existing practices as they did not
accept that practice and the way things were done in music industry and they changed the way it
was done. Spotify identified the opportunity while other distributors and musicians were
experiencing impact of internet in and as illegal streaming. This means that while others saw
problem Spotify saw opportunity. Spotify was founded in Sweden and was launched in 2008 and
in 2009 Spotify opened public registration service in UK and in 2011 Spotify was launched in
US. Spotify also has acquired many organisations and small businesses along with partnering
with big organisations like Sony.
Development and growth of Spotify outlines that they have created a disruptive
innovation considering problems as opportunity. They also applied main elements of disruptive
theory that are cheaper, and easily accessible. This means that even with its premiums services
access to unlimited music is highly cheaper than it was earlier and along with this, it is also
easily accessible because of its availability is several channels and places.
Disruptive innovation for future development
Future Development
Spotify has gained immense success in its industry and there is lot of scope remains for
the company that they can utilise to grow further. Some of the sources inform that Spotify
looking to monetise podcast and has considering this as a big opportunity for the company in
future (Nwachukwu, Chládková, and Fadeyi, 2018). Though Spotify is presently also doing well
in podcast but it still has reached to just 14% of its user base with spoken-word content and is
looking to increase this to 20%. This means that company started with music streaming and has
grown enormously, now it is looking at podcast as an opportunity for future growth and success
of the company. Concerned with this Spotify also consider increasing podcast hours and volume.
As per CEO of the company, Podcast users are not only more engaged overall but because of
their engagement they are listening to more music. This way podcast presents an effective

opportunity to be utilised by Spotify and this suggests that in future major focus of the company
for its growth and expansion lies in podcast.
Spotify for its future is considering podcast but there are few other strategies and
opportunities that Spotify can utilise. This involves streaming its personalised music. This means
that Spotify is a big organisation and with big artists and singers it can create its own music
which is only available on Spotify (Company Info, 2020). In this strategy of Spotify, they needs
to collaborate with biggest celebrities and musicians and singers, this will encourage potential
customers to download and use Spotify. Further, for initial time this can be kept premium and
this will also increase subscribers of the company. This way not only users but subscribers of the
company will also increase. Disruptive element in this is exclusiveness of the music that is only
available on Spotify and users will be able to access music at low prices. In this strategy it is
important that along with attractive and effective music, artist do have strong fan following that
encourages people to use Spotify. This strategy is similar to celebrity endorsement but in context
of Spotify creating music will be more realistic and will provide it an effective opportunity to
grow and attract customers. Element that differentiate and add value in this is that existing
customers can access music at other platforms as well and there are strong competitors for the
company. Creating own music will reduce competition in the industry and Spotify will be able to
attract more users.
Other than this, Spotify can also consider audio books to stream on its platforms. This is
another service that Spotify can provide to its customers. Concerned with audio books Spotify
can restrict its use to premium users and those who have subscribed for the services of Spotify.
Market for audio books is growing and has a very high scope for growth and its applications and
this is why this can be utilised by Spotify (Tattersall Wallin and Nolin, 2020). The way Spotify
created disruption in music industry and way of streaming music availability of audio books will
also become disruption. This means that along with unlimited music users will also have access
to unlimited books and in this they will be able to find everything at single platforms. This has
potential for success because unlike music industry it has less competition and potential market
for this service is large and this is why streaming audio books will be a great opportunity for
Spotify to expand its operations and become more successful.

CONCLUSION
On the basis of above discussion, it can be concluded that Spotify was one of the biggest
disruptive innovation of present times. This was not only innovated successfully but has also
maintained its successful innovation and this innovation brought immense success for Spotify.
Innovation of Spotify has all the features that are there in theory of disruptive innovation theory,
this means that disruptive innovation has product that is cheaper, adds value and easily
accessible. Spotify also is cheaper compared to old music using practices, add value as it
provides unlimited music to its users and along with this it is easily accessible to its customers.
This means that music and services of Spotify are available on computers and mobile that
everyone having these can easily access to Spotify and listen to unlimited music in it. Spotify has
maintained its success and considers that now podcast has an opportunity for them to grow
further. Along with certain future development ideas were provided in this report and in short
these ideas involve creating personal music that is only available on Spotify and along with this
streaming audio books so that users along with unlimited music can also listen to unlimited audio
books and making it a premium service will enable Spotify to increase its subscribers as well.

REFERENCES
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Online
Company Info. 2020. [Online]. Available Through: < https://newsroom.spotify.com/company-
info/>.
Daniel Ek on expanding Spotify in 2020. 2020. [Online]. Available Through:
<https://themusicnetwork.com/daniel-ek-spotify-in-2020/#:~:text=Looking%20ahead
%20to%202020%2C%20Spotify,to%20become)%20the%20world's%20No.>.