Disruptive innovation was first introduced by Harvard Business School professor Clayton Christensen in a 1995 Harvard Business Review (HBR) paper co-written with Joseph Bower. The concept was further elaborated and popularized in Christensen’s 1997 bestseller The Innovator's Dilemma, and in the articles and books he’s written or co-authored since then. Few business concepts have been as long and widely used.
But as often happens with serious ideas once they become popular, disruptive innovation has joined the pantheon of trendy, overused business buzzwords, - stretched and applied way beyond its intended meaning. It’s even led to a rather strong backlash in a 2014 New Yorker article by Harvard history professor Jill Lepore.
20 years after its introduction, Christensen has revisited his original concept in What is Disruptive Innovation?, co-written with Michael Raynor and Rory McDonald, and just published in HBR’s December issue. The authors aim to define what disruptive innovation is and what it isn’t, as well as to update the theory based on the experiences of the past two decades.
“The theory of disruptive innovation… has proved to be a powerful way of thinking about innovation-driven growth…,” they write. “Unfortunately, disruption theory is in danger of becoming a victim of its own success. Despite broad dissemination, the theory’s core concepts have been widely misunderstood and its basic tenets frequently misapplied. Furthermore, essential refinements in the theory over the past 20 years appear to have been overshadowed by the popularity of the initial formulation. As a result, the theory is sometimes criticized for shortcomings that have already been addressed.”
Sustaining innovations are incremental improvements to existing products and services, often in response to the requirements of a company’s most demanding and profitable customers. Disruptive innovations, on the other hand, start life as simpler, more convenient, less expensive good enough offerings. They appeal to new or less-demanding customers whose needs have not been served by incumbent providers, mostly because they’re not as profitable as their present customers.
What makes disruptive innovations dangerous to incumbents is that, if allowed to gain a market foothold, they can get on a learning curve of rapidly improving quality and capabilities while preserving the lower prices and/or ease-of-use that drove their early success. They might well end up creating new markets and toppling the incumbents from their leadership position. “When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.”
Distinctions between disruptive and sustaining innovations are sometimes tricky. It’s rare that a new offering is inherently one or the other. It often depends on the strategies adopted by the various companies involved and on the dynamics of the marketplace.
Uber is a case in point. Everyone will agree that Uber’s phenomenal growth is transforming the taxi industry around the world. “But, is it disrupting the taxi business?” While many would say that Uber is obviously a disruptive innovation, Christensen et al disagree. As they explain, Uber is actually more of a sustaining than a disruptive innovation for two main reasons:
“Disruptive innovations originate in low-end or new-market footholds.” Uber didn’t originate as either a significantly less expensive, low-end alternative to taxis, or as a service for people that never took them before. In fact, most of Uber’s early customers were generally people used to taking taxis. What Uber did is increase the total demand for such rides by developing a more convenient service at affordable prices.
Instead of first appealing to low-end or unserved consumers and then migrating to mainstream markets, Uber actually went in exactly the opposite direction. It first provided a more convenient solution in mainstream markets, and only later, has it expanded to offer rides in under-served neighborhoods.
“Disruptive innovations don’t catch on with mainstream customers until quality catches up to their standards.” When first appearing in the the market, disruptive innovations are inferior to the offerings of incumbent companies. Only as their quality and capabilities improve do they start competing directly with incumbents by attracting mainstream customers.
This was not the case with Uber. From its beginning, Uber competed head-on with existing taxi services, making it easier get a taxi using Uber’s smartphone app and not having to worry about payments. Moreover, the rating approach used by Uber ensured higher standards than with typical taxis. These innovations are sustaining in nature, the kinds of innovations that established taxi companies should have implemented themselves to better serve their existing customers.
Why didn’t the taxi industry accelerate its own sustaining innovations to beat Uber back, as the theory of disruption would predict? The HBR paper notes that Uber is an outlier, most likely due to the regulated nature of the taxi industry. By closely controlling the number of taxis and the prices they charge, the taxi industry had no incentives to innovate. Their customers had nowhere else to go, so little attention was paid to the sustaining innovations most industries invest in.
“Why does it matter what words we use to describe Uber,?” asks the paper. “The company has certainly thrown the taxi industry into disarray: Isn’t that disruptive enough?”
If disruption is a real business theory rather than a marketing term for anything new, it must be applied correctly to realize its benefits. This isn’t easy, as the Uber example shows. The paper discusses four points about disruption that have been often misunderstood:
Disruption is a process. It should not be used when referring to a product or service at a specific point in time, but rather to the expected evolution of that offering over time. There is a difference between a small competitor with an interesting offering and one with a potentially disruptive trajectory that over time could become a big competitive threat.
“Disrupters tend to focus on getting the business model, rather than merely the product, just right. When they succeed, their movement from the fringe (the low end of the market or a new market) to the mainstream erodes first the incumbents’ market share and then their profitability… The fact that disruption can take time helps to explain why incumbents frequently overlook disrupters.” Netflix versus Blockbuster is a case in point discussed in the paper.
Disrupters often build business models that are very different from those of incumbents. Apple’s App Store is used as a prominent example. “The product that Apple debuted in 2007 was a sustaining innovation in the smartphone market: It targeted the same customers coveted by incumbents, and its initial success is likely explained by product superiority. The iPhone’s subsequent growth is better explained by disruption - not of other smartphones but of the laptop as the primary access point to the internet. This was achieved not merely through product improvements but also through the introduction of a new business model. By building a facilitated network connecting application developers with phone users, Apple changed the game. The iPhone created a new market for internet access and eventually was able to challenge laptops as mainstream users’ device of choice for going online.”
Some disruptive innovations succeed; some don’t. This is a common mistake. If an innovative business succeeds, as has been the case with Uber, people assume that it must thus be disruptive. “But success is not built into the definition of disruption: Not every disruptive path leads to a triumph, and not every triumphant newcomer follows a disruptive path.” Many startups fail to win a foothold in the market even though their innovation is truly disruptive. And others succeed against entrenched incumbents through superior operational innovations that are sustaining in nature.
“If we call every business success a disruption, then companies that rise to the top in very different ways will be seen as sources of insight into a common strategy for succeeding. This creates a danger: Managers may mix and match behaviors that are very likely inconsistent with one another and thus unlikely to yield the hoped-for result.”
The mantra “Disrupt or be disrupted” can misguide us. This is a very important point for established companies. Successful companies - especially market leaders being chased by small and large competitors - must achieve a delicate balance between carefully managing their existing operations, and embracing disruptive innovations that will propel them into the future. But each requires a very different management style.
“Incumbent companies do need to respond to disruption if it’s occurring, but they should not overreact by dismantling a still-profitable business. Instead, they should continue to strengthen relationships with core customers by investing in sustaining innovations. In addition, they can create a new division focused solely on the growth opportunities that arise from the disruption. Our research suggests that the success of this new enterprise depends in large part on keeping it separate from the core business. That means that for some time, incumbents will find themselves managing two very different operations.”
“We still have a lot to learn… and much work lies ahead…” write the authors in conclusion. “Disruption theory does not, and never will, explain everything about innovation specifically or business success generally. Far too many other forces are in play, each of which will reward further study. Integrating them all into a comprehensive theory of business success is an ambitious goal, one we are unlikely to attain anytime soon… As an ever-growing community of researchers and practitioners continues to build on disruption theory and integrate it with other perspectives, we will come to an even better understanding of what helps firms innovate successfully.”