According to The Harvard Business Review, “Disruptive innovations are like missiles launched at your business.” Okay, well maybe that’s a rather dramatic way to phrase it, but there are others who put it more mildly. In fact, far from seeing disruptive innovation as a missile, some describe it as a good thing. The Clayton Christensen Institute wrote, “It’s important to remember that disruption is a positive force. Disruptive innovations are not breakthrough technologies that make good products better; rather they are innovations that make products and services more accessible and affordable, thereby making them available to a much larger population.”
So what is disruptive innovation? Essentially, it’s any innovation that disrupts an existing market and value network, eventually displacing the old with the new. However, a detailed understanding of disruptive innovation requires a little more nuance.
According to the theory of disruptive innovation, disruptive technologies allow startups to carve a dent in the market share of – or completely displace the market for – existing established companies. It’s not just badly run established companies that are at risk from the effects of disruptive innovation, though. (Plus, badly run companies are always at risk, not just as the result of disruptive innovation.) Well-run companies are at risk, too.
Most companies tend to innovate faster than their customers need. That is, they end up producing things that are beyond the needs of their existing customer base. That doesn’t make these innovations useless – it just means that they are marketed to the high-end users, who traditionally buy products that generate a higher profit margin. People with the disposable income to upgrade or buy the latest gadget will do so, but most of the market doesn’t need to buy it. Ultimately, though, it is by staying one step ahead of customers’ needs that companies are able to maintain their customer base.
The kinds of innovations that allow companies to maintain their current customer base are called sustaining innovations. When Apple releases its newest iPhone, that’s a sustaining innovation. The creation of smartphones in the first place, however, would be a disruptive innovation. There will be more on examples of disruptive innovation later, but first let’s talk some more about the difference between sustaining innovations and disruptive innovations.
The key difference between the two terms is that sustaining innovation does not create new markets. Nonetheless, sustaining innovation is the lifeblood of most established companies. As one business guru writes, “Companies pursue these sustaining innovations at the higher tiers of their markets because this is what has historically helped them succeed: by charging the highest prices to their most demanding and sophisticated customers at the top of the market, companies will achieve the greatest profitability.”
There are different types of sustaining innovations, though. There are revolutionary sustaining innovations and there are evolutionary sustaining innovations. A revolutionary sustaining innovation is an unexpected innovation that is novel but essentially does not affect existing markets. An evolutionary sustaining innovation, on the other hand, is an innovation that improves a product in an expected way. So, a revolutionary sustaining innovation would be Apple’s initial creation of the iPad, whereas an evolutionary innovation would be the next generation of Apple iPhone.
In a 1995 article for Harvard Business Review, Clayton Christensen – the man who is generally credited with spreading the theory of disruptive innovation – wrote, “The research shows that most well-managed, established companies are consistently ahead of their industries in developing and commercializing new technologies—from incremental improvements to radically new approaches—as long as those technologies address the next-generation performance needs of their customers. However, these same companies are rarely in the forefront of commercializing new technologies that don’t initially meet the needs of mainstream customers and appeal only to small or emerging markets.”
Those technologies that don’t initially meet the needs of current mainstream customers or that appeal to emerging markets are exactly the ones that become disruptive innovations. So essentially, the business model that most established companies rely on just isn’t conducive to disruptive innovation. Most of what companies do is try to maintain the customers they have and attract new customers (but without losing the ones they have). Thus, when they create new products, they are targeted to the existing customer base. Companies often solicit customer input on product improvements and offerings. Those sources of input lead to the creation of sustaining innovation – and ultimately some sustaining innovation is necessary in order for companies to retain their customer base and maintain profitability.
Although profitability is necessary for sustaining a company – hence the name – the model used to sustain profitability falls apart when a disruptive innovation comes along. One way that disruptive innovations can work is by coming in at the bottom of the market and basically taking over. That is, disruptive innovations can make things accessible to low-end users who historically haven’t been able to access services or products due to cost or skill requirements. As a result, these innovations disrupt the market and take over, often by starting at the bottom.
In her criticism of the theory of disruptive innovation, Jill Lepore offers a humorous summary of the concept. She writes, “The problem was the velocity of history, and it wasn’t so much a problem as a missed opportunity, like a plane that takes off without you, except that you didn’t even know there was a plane, and had wandered onto the airfield, which you thought was a meadow, and the plane ran you over during takeoff.” In that colorful analogy, the plane is the disruptive innovation and the person being run over is the existing company that is practicing sustaining innovation.
To continue with Lepore’s analogy, though, there are two ways in which planes can run down existing businesses. That is, there are two main types of disruption. There is new market disruption and there is low end disruption. Low end disruption was somewhat discussed above. Essentially, low end disruption consists of innovations that target low end users, those who do not need the full performance of the high end customers. This kind of disruption happens when product improvements happen at a quicker rate than most customers adopt. Customers decide that they don’t need the latest and greatest technology until a disruptive innovation comes along and offers a lower performance but with certain perks. Low end disruption targets the least profitable customers, those who are content with something that is good enough and won’t pay top dollar for added functionality.
On the other hand, new market disruption occurs when a product or service targets a new market not currently served by existing companies in the industry.
One final thing to understand about the basics of disruptive innovation is that an invention or technology is not disruptive in and of itself. That’s why it’s called “disruptive innovation” and not “disruptive technology.” What makes an innovation disruptive is its application. One excellent example of this is the automobile. When it was first invented, the automobile was very expensive. It was a luxury item and as such it wasn’t available for mainstream consumers. Thus, it didn’t disrupt any existing transportation markets because most people couldn’t afford cars and had to continue using horse-drawn vehicles. However, when the more affordable Model T Ford debuted in 1908, cars began to move into the mainstream and eventually completely disrupted the horse-drawn carriage market. Thus, it isn’t necessarily the invention but its availability and application that makes it disruptive. In the case of the car, the invention required additional innovation in terms of production in order to become a disruptive innovation.