Clayton Christenson’s seminal The Innovator’s Dilemma is now 10 years old, and its central idea of “disruptive innovation” is now part of the everyday language of innovation. Recently, I finally read the book after having loosely tossed the term around for a few years. I was shocked to discover that I had misunderstood the concept and made glib assumptions based on sloppy journalistic references. Properly penitent, I began using the term correctly and discovered, to my further shock, that nearly everybody else around me was also using the term incorrectly. By misunderstanding this one critical term, we lose much of the understanding of the innovator’s dilemma discovered by Christenson. Here is a cheat-sheet to help you understand and remember the implications of ‘disruptive.’ Should help elevate your next profound discussion on the nature of innovation. If you already knew the difference, you get to say “Ha ha!” to me.
The innovator’s dilemma is this: a company that does everything by the book — listening to customers, managing by facts, being disciplined about costs and quality, and so forth — can get blindsided by an innovation that rapidly takes away its markets, because it was doing everything right. The innovations that cause this “why bad things happen to good companies” dilemma are disruptive innovations. The signature story of disruption reads as follows: an upstart low-end competitor displaces a much larger incumbent in a market, with the incumbent either retreating upmarket to higher margin/lower volume products or dying out altogether.
Examples are smaller, cheaper hard drives disrupting incumbent hard drive makers, hydraulic shovels disrupting cable-winch shovels (an early 20th century example), PCs disrupting mainframes, ink jet printers disrupting laser printers and, most recently, the Nintendo Wii starting to disrupt the Playstation and the Xbox.
Major though they were, innovations such as CDs, laser printing and jet airplane engines were not disruptive with respect to the technologies they displaced ( cassette tapes, light lens Xerography and piston engines respectively). In each case, the incumbents benefited from these non-disruptive, or sustaining innovations.
The Disruption Pattern
The key point to remember is that disruption is a market/business phenomenon and has little to do with technology per se. In particular, a disruptive innovation may or may not represent a major technical breakthrough. Major breakthroughs, which are called ‘radical’ in Christenson’s model, may or may not be disruptive, while minor, or ‘incremental’ innovations can be massively disruptive. The opposite of disruptive is sustaining. Why and how does disruption happen?
- A disruptive innovation usually starts as a low-quality differentiated product in a low-volume marginal segment of a much larger mature market, which demands attributes that the mainstream market does not, and which is willing to give up performance attributes the mainstream market is not (example, Wii customers willing to give up sheer processing horsepower for 3d input capability).
- A marginal player occupies this segment and starts growing rapidly, solving initial quality problems while retaining a cost advantage.
- The incumbent mature market leader, no matter how visionary, is forced to ignore the opportunity because it does not meet the growth needs dictated by its larger size, and also because the disruptive product is not yet good enough for its mainstream customers.
- The marginal player goes through a learning curve, solves its quality problems and suddenly starts threatening the market leader in its main markets
- The incumbent scrambles to put together a response, nearly always fails because of the disruptor’s head start and optimized culture, and retreats to a higher-end market
Why this happens is as straightforward as it is inevitable. It is an economic analog to the tyranny of majority rule. Good, well-managed companies have highly optimized delivery channels and listening mechanisms wired to their main market segments, and investors watching its performance in those segments. When a company pursues a vector of innovation important to its mainstream customers, it is rewarded by both customers and investors. When it pursues a vector that is irrelevant to mainstream customers (or worse, causes a temporary reduction in performance along key vectors), it is punished for getting distracted. In Christenson’s prototypical example, customers of a given size of hard drive were always interested in more storage at that size, rather than a smaller size. Disruption was fueled by the (at the time) marginal applications for smaller drives.
Distinction from Radical/Incremental
The main reason “disruptive” causes confusion is that it sounds like “major upset,” which suggests that the technological cause should be major as well. This leads us to falsely conflate disruptive innovation with technically radical innovation. So we end up confusing disruptive with radical and sustaining with incremental. The two are orthogonal axes.
In fact, in most documented cases of disruption, the disruptive innovation was a minor/incremental change and well within the technical capabilities of the incumbent (and was often taken to market by a renegade spin off from the original company). Similarly, companies have taken huge risks, massively churned their workforces and mastered extremely complex new technologies for innovations that were valuable to their existing mainstream customers and, therefore, sustaining (example, the Boeing 787, which we discussed before in my review of Wikinomics).
How to Overcome the Dilemma
Customers and investors are able to punish/reward companies to stay away from disruptive innovation because mature companies are structurally set up to feel the pain. Christenson concludes that the only way for an incumbent to pursue a disruptive idea is to separate the new business completely from the culture, processes and market pressures of its old one. This was what worked for the IBM PC. I haven’t yet seen a counter-example to this principle yet.
The Explanatory Gap
The principles of disruptive competition work best to explain direct substitute competitions, like CDs for tapes. When innovations change consumer behaviors and force a redrawing of market boundaries, the explanation provided by the model is incomplete. Changes that come from much larger forces, like the Internet, are not well explained by Christenson’s model. Overloading the term by talking of ‘meta disruption’ as some people like to do, seems to me not very useful.