Big Management Ideas - Disruptive Innovation Defined

Friday, 06. December 2013

As previously reported on this blog, Harvard Business School Professor Clayton Christensen was yet again named the most influential management thinker alive by Thinkers50. Christensen is best-known for his groundbreaking idea of disruptive innovation which has shaped a whole generation of managers and remains as relevant and as urgent as ever. Still many people are confused about what exactly disruptive innovation is and how it impacts business strategy. So, let’s try to clear things up a bit.


Sustaining vs. Disruptive Innovation

In his sentinel book The Innovator’s Dilemma (1997), Christensen identified two distinct types of technologies: sustaining and disruptive. Sustaining technologies target demanding, high-end customers by improving the performance of established products. Some sustaining technologies are minor incremental improvements, such as new product features. Others are breakthrough innovations which promise significant improvements in performance compared with existing products. This is where most of the confusion comes from. As Anthony Scott writes in his book The Innovator’s Guide to Growth (2008), “the error people make most frequently is assuming that a great leap forward in performance is synonymous with disruption.”

Disruptive innovations, however, are not revolutionary technological innovations that make a good product or service a lot better. Rather, they transform products or services that were historically only accessible to consumers with a lot of money or a lot of skill by making them much more affordable and accessible to a larger population of consumers. These products and services are not nearly as good as the currently available offerings but provide other benefits which make them appealing to new or less-demanding customers: they are “cheaper, simpler, smaller, and, frequently, more convenient to use.” (1997)

An often cited example (2003) to illustrate the difference between breakthrough innovations and disruptive innovations is the invention of the automobile vs. the introduction of the Ford Model T. Christensen explains that although the automobile was a revolutionary new technology, it was not a disruptive innovation, because early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. The market for transportation essentially remained intact until the debut of the lower priced Ford Model T in 1908 which made higher speed, motorized transportation available to the masses. It totally changed the transportation market while the automobile didn’t.

Over time, the performance of these inferior products improves enough to intersect with the needs of more demanding customers. They grow up-market eventually killing the established competitors.


The Innovator’s Dilemma

Christensen states that large well-established companies typically excel at developing sustaining technologies because they have not only the required motivation but also the necessary resources to win” (2003). Pursuing these kinds of innovations at the top of the market allows them to make better products that they can sell for higher profit margins to their best customers. Naturally, they invest heavily in R&D programs and pay very close attention to their customers’ needs. For start-up companies that lack the resources of the established players it is very difficult to compete when it comes to sustaining innovations.

However, in their efforts to make products better and better, the large companies “often overshoot their market: they give customers more than they need or ultimately are willing to pay for.” (1997) By doing so, they unwittingly open the door to disruptive innovations at the bottom of the market paving their own way to demise.

Established companies miss opportunities for disruptive innovations and eventually fall because they are focused on their customers, invest in better performance, and try to everything right. They face the “dilemma” whether they should protect their core business at the higher tiers of the market or move into new or lower-end markets that, at least at first, offer fewer profits.

Start-ups, on the other hand, are much better equipped for disruptive innovations, as they can serve different customers and are less risk-averse and more flexible than well-established, already successful firms.


The Innovator’s Solution

In his follow-up book with co-author Michael E. Raynor, The Innovator's Solution (2003) Christensen replaced the term disruptive technology with disruptive innovation because he recognized that few technologies or product ideas are intrinsically disruptive or sustaining in character when they emerge in the innovator’s mind; rather, it is the business model that the technology enables that creates the disruptive impact. Disruptive technologies need to be “fleshed out into a strategic plan in order to win funding,” he says. When managed right, disruptive innovations can have great growth potentials.

“A disruptive business model that can generate attractive profits at the discount prices required to win business at the low end is an extraordinarily valuable growth asset. When its executives carry the business model up-market to make higher-performance products that sell at higher price points, much of the increment in pricing falls to the bottom line and it continues to fall there as long as the disruptor can keep moving up, competing at the margin against the higher-cost disruptee.”

To succeed at disruptive innovation, Raynor and Christensen recommend large established companies to set up a new business unit for it, as a business unit cannot disrupt itself. For instance, Charles Schwab did this in the late 1990s when it created a separate organization to build an online trading business. It turned out to be so successful that the company shut down its original organization of telephone brokers.

The disruptive innovation model can be applied to any industry as well as to the non-profit and government sectors. Here is a video in which Christensen explains his model using the example of the PC.

 


Literature

Christensen, Clayton M. (1997). The innovator’s dilemma. HBR Press.

Christensen, Clayton M. (2003). The innovator’s solution. HBR Press.

Scott, A. (2008). The innovator’s guide to growth. HBR Press.