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Disruptive Innovation

Disruptive Innovation is a term coined by Clayton M. Christensen the Robert and Jane Cizik Professor of Business Administration at the Harvard Business School. He first used the term in his 1997 book The Innovator’s Dilemma Harvard Business School Press, Cambridge, MA. (Please note that as an Amazon Associate I earn from qualifying purchases.)

The term was used to replace and enhance upon the earlier “disruptive technology” term also put forward by Christensen.

Innovation is disruptive if it ultimately replaces the technology that preceded it.

disruptive innovation

(Graphic credit: Ben Vickery)

Incremental innovation or sustaining innovation improves the performance of established products or services along the dimensions of the expectation of that product or services mainstream customers.

Disruptive innovation initially underperforms along these dimensions. They introduce products and services that are not as good as what exists in the market, but which are simpler in function, more convenient and cheaper on the pocket than existing items.

They often start with much market uncertainty and therefore small market share.

Companies established in the market are cautious about embracing the new technology as this may mean abandoning their current, profitable customers while they aim for initially a new smaller market with inferior technology.

What happens over time though is that the new technology improves, the performance increases and the disruptive innovation starts to gain customers from the established product or service.

Disruptive technologies usually have more flexibility, are cheaper and have wider applicability and so ultimately outsell what they replace.

Incumbents (the largest company in a certain industry) are more accustomed to sustaining innovations so as to meet the needs of their high-end / most-profitable customers.

However, if they don’t act then they basically leave the door open for new entrants who will make advancements to their products and ultimately be competing head-on with their high-end customers.

Therefore incumbents basically have three choices to stay in the game, they can either:

  1. Change the processes and values of their current organization
  2. Acquire a different organization
  3. Create an independent organization

Disruptive technologies can also lead to what is known as discontinuous innovation i.e. innovation that if adopted requires a significant change in behavior.

“Sometimes disruption comes from giving consumers what they want, not what you want to give them.” – Bob Pittman the founder of MTV who is now the head of Clear Channel Radio

In Bob’s experience, providing convenience to the customer can often lead to disruptive innovation.

Below is a series of videos where Clayton Christensen gives a talk on this topic, particularly as it relates to education…

Summary Of A Talk On Disruptive Innovation by Dr. Clayton Christensen

He talks about how typical models of innovation would follow ideas put forward by marketing, i.e. we classify products into categories and we segment products by customer types. Innovative products are aimed at say an average customer. Dr. Christensen suggests that people buy (or hire) products to do a job for them. He then continues to discuss some research they did at a fast-food restaurant related to milkshakes. The question asked was what job are people hiring a milkshake to do for them?

To find the answer to what job is this milkshake doing for you? Customers were asked the question first thing in the morning after they had purchased one. To explain further they were asked what products they hired to do the job on other days. The job they were trying to fulfill was something to do with the hand while driving and something to fill them up on a long commute to work.

Competitor products to the milkshake were bananas (too quick), donuts (sticky, don’t tell spouse), bagels (too dry), snickers (too guilty)

Milkshake fills and takes 20 minutes to finish. To improve they had to understand the job. Ideas for improvement were to make more viscous so that it takes longer to consume and to add fruit for more variety as opposed to health reasons as people were not hiring a milkshake for health reasons.

Understanding the job that a product performs is critical for improved insight and for customer relevance.

Drucker: “Customer rarely buys what the company thinks it is selling them.”

Education’s job could be said to be “to want to feel successful and have fun with friends”. This could compete with gangs, athletic clubs and not just other educational facilities.

He then went on to give an example of innovation starting out as expensive and centralized and over time innovations get them to decentralized and cheap. The example he gave was a mainframe computer (large organizations), the mini-computer (now accessible by departments), the personal computer (now accessible from home), the notebook (can now be carried around), the handheld (can now be placed in a pocket).

Disruptive innovations drive decentralization by making a product that isn’t as good as its predecessor but is simpler and more convenient. As the innovation gets better and better it ultimately replaces its predecessor. E.g. people rarely buy a desktop PC now as a laptop or a handheld is sufficient. Because new entrant products are so simple the providers of existing products don’t move into the new product area. This is a model of disruptive innovation.

The trajectory of the technological process almost always outstrips the customers’ ability to use technology.

The word disruptive is used for products that rather than sustaining the product improvement trajectory they are bringing to market a product that is a lot more affordable and simpler to use. Incumbents are great at sustaining innovations but they always lose when one of these disruptive innovations emerge.

Digital Equipment Corp (DEC) was a highly regarded company in the ’70s and early ’80s. Known for creating mini computers and much of their success was attributed to their excellent management abilities. However, in 1988 they fell off of the radar – this was attributed to their stupidity in management.

How can a company great at management become useless at management in such a short period of time? And why did so many other big mini computer manufacturers follow the same fate? – Because they were suddenly competing with the personal computer market. But the first personal computers weren’t great and many were sold simply as toys.

The dilemma companies such as DEC faced was to continue selling bigger and better products for higher margins or to get into the new entrant game that consisted of products with lower margins and that were not matched to their customer’s needs.

In economics, competition is said to drive process down, however on a sustaining trajectory competition actually drives prices up.

Costs increase as businesses compete with one another.

Disruptive decentralization of industries drives prices down. Future healthcare will only become cheaper as more and more technology is used to give less expensive local health care professionals the means to perform what was once only available at the hospital.

Elite colleges centralized higher education. State universities gave a broader level of education at a lower cost and now we have online learning that brings the learning to the student.

Allowing decentralization as in the above two examples is what makes it affordable.

Industries are disrupted as they are moved towards decentralization. It is almost always entrant companies that take out the leader in the industry. The exceptions to this are companies that create separate business units. For example, IBM who set up new business units first for the mini-computer, later the PC and now they are in the service industry. 

When considering biological evolution “individual organisms don’t evolve, they are born and then they die. A population can evolve as the mutants generally gain market share.” This is analogous to a business unit that is designed to do one thing. A corporation evolves by starting and shutting down individual business units.

A business model is built around a value proposition which is a service or product that someone hires to get a job done. To deliver the value proposition a number of resources (people, technology, facilities, etc.) are added. Next processes to support the value proposition come into place and eventually, the business model becomes locked. Future innovation has to fit this business model in order to continue.

To get innovation to fit you need the powerful people within an organization to approve. To get the approval you often have to modify the original idea. So you make changes put forward by the vice president of sales, the chief financial officer, etc. Eventually, you have a completely different output, i.e. an innovation that fits the business model rather than the needs of the market.

“The next insight from the study of innovation relates to the architecture of products”. Components of products depend on the design of other products. For example, if you were to customize 100 lines of Microsoft Windows then you could have to change 1000 interrelated lines resulting in lots of additional costs.

Modular components fit together in clearly specified ways. Dell computers and the Linux operating system have modular customizable components.

Independent architecture is expensive to customize. Many things scream out for customization, but there is often a conflict between the need to standardize and a need to customize.

In terms of teaching delivery of content could be done by software which can be made modular/scalable which could help enable customization while meeting standards.

Dr. Christensen then discusses a case study of vacuum tubes that used to be used in electronic components in the early half of the 20th century. Vacuum tubes were large but were disrupted by the smaller transistor that could not handle the power.

One of the first uses of a transistor was in a hearing aid around the early 1950s. Next Sony created a pocket radio around 1955. This was poor quality when compared to the large vacuum-driven radios of the day but was cheap when compared.

Around 1959 Sony created the first transistor television. Even though this was poor quality when compared to other technologies it now made televisions affordable and accessible to a much larger market.

In the mid-1960s, solid-state electronics advanced so much that big, quality products were able to be built with transistor technology which ultimately led to many vacuum technology-based companies disappearing. The transistor was a good example of disruptive innovation.

He then gives another example of teaching, saying that nonstandard courses are becoming too expensive to operate. For example, the German teacher is now too expensive for the educational establishment. As these classes go students get directed to online learning courses – which are inferior to instructor-led but are better than the current offering of nothing.

When new technology takes over from old it almost always follows the ‘S’ curve pattern. The problem is that industry leaders often don’t see this as a big problem.

It is possible mathematically to estimate a prediction from an ‘S’ curve plot of when disruptive innovation is going to take over from the existing market leader.

Using this method of estimating Dr. Christensen predicts that by 2019 up to 50% of learning could be based on online learning courses.

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