Now Is the Time to Revisit Disruptive Innovation
Few business concepts have been as long and widely used as disruptive innovation, first introduced by Harvard Business School professor Clayton Christensen in a 1995 Harvard Business Review paper co-written with Joseph Bower, and later elaborated on in 1997′s The Innovator’s Dilemma.
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.
In the middle of this backlash–coming, ironically, at a period when we seem to see nothing but disruptive innovation all around–Mr. Christensen revisits 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.
“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.”
What’s disruptive innovation all about? The paper succinctly defines disruption as “a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.” In the past 10 years I’ve given a number of seminars and a few course on innovation, so let me also address the question in my own words by first explaining the distinction between disruptive and sustaining innovations.
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 Technologies Inc. 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, Mr. 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. 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.” This was not the case with Uber. From its beginning, Uber competed head-on with existing taxi services, making it easier to 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 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 often build business models that are very different from those of incumbents. Apple’s App Store is used as a prominent example. “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. 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.
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. “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,” they write.
“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.”
Irving Wladawsky-Berger worked at IBM for 37 years and has been a strategic advisor to Citigroup and to HBO. He is affiliated with MIT, NYU and Imperial College, and is a regular contributor to CIO Journal.