Innovation Strategy

What’s Disruptive Innovation? The Idea’s Creators Think Your Answer Is Probably Wrong.

The latest issue of the Harvard Business Review contains a very interesting debate currently taking place between Clayton M. Christensen, one of the originators (along with Joseph L. Bowers in a 1995 HBR article) of Disruption Theory  (“DT”), and some HBR readers. It’s actually quite a relevant discussion, since the concept of disruption has become such an ubiquitous and influential idea in business.

Christensen’s (and his co-authors Michael E. Raynor and Rory McDonald) open the debate by critiquing the way in which many people use the term “disruptive innovation” these days:

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.

There’s another troubling concern: In our experience, too many people who speak of “disruption” have not read a serious book or article on the subject. Too frequently, they use the term loosely to invoke the concept of innovation in support of whatever it is they wish to do. Many researchers, writers, and consultants use “disruptive innovation” to describe any situation in which an industry is shaken up and previously successful incumbents stumble. But that’s much too broad a usage.

You may be wondering why expanding or morphing the theory of DT so upsets Christensen, but he has some very specific reasons for why he does not think people should label any innovation that upends an industry as “disruptive” :

The problem with conflating a disruptive innovation with any breakthrough that changes an industry’s competitive patterns is that different types of innovation require different strategic approaches. To put it another way, the lessons we’ve learned about succeeding as a disruptive innovator (or defending against a disruptive challenger) will not apply to every company in a shifting market. If we get sloppy with our labels or fail to integrate insights from subsequent research and experience into the original theory, then managers may end up using the wrong tools for their context, reducing their chances of success. Over time, the theory’s usefulness will be undermined.

So what exactly is DT in Christensen’s opinion? In a nutshell “real” DT has the following characteristics:

  1. It is a process, not a product. In other words DT is something a company does not makes.
  2. It starts when a big company underserves a part of its market, and a smaller company emerges to compete for that under-served market, usually by delivering the sufficient value at a lower price.
  3. The larger company, rather than engaging in competition for the under-served market, tries to reinforce its core market position.
  4. If the smaller company continues to take market share from the large company, and forces the larger company to adopt its value proposition and/or business model, then the small company has created a disruptive innovation.

In other words, only at the last stage, “when mainstream customers start adopting the entrants’ offerings in volume,” has disruption really occurred. In this framework, claim the authors, a lot of companies that are commonly labeled disruptive really are not. Take Uber for example. It’s safe to say most people would agree if asked whether Uber has disrupted the taxi business, but the authors would disagree: “Uber’s financial and strategic achievements do not qualify the company as genuinely disruptive—although the company is almost always described that way.”

They give two major reasons for their rejection of Uber as disruptive. First of all, DT theory holds that disruption must begin at the lower end of an existing market, which is not the case for Uber:

It is difficult to claim that the company found a low-end opportunity: That would have meant taxi service providers had overshot the needs of a material number of customers by making cabs too plentiful, too easy to use, and too clean. Neither did Uber primarily target nonconsumers—people who found the existing alternatives so expensive or inconvenient that they took public transit or drove themselves instead: Uber was launched in San Francisco (a well-served taxi market), and Uber’s customers were generally people already in the habit of hiring rides.

Uber has quite arguably been increasing total demand—that’s what happens when you develop a better, less-expensive solution to a widespread customer need. But disrupters start by appealing to low-end or unserved consumers and then migrate to the mainstream market. Uber has gone in exactly the opposite direction: building a position in the mainstream market first and subsequently appealing to historically overlooked segments.

Their second reason is that in their model disruption starts with an inferior product that is initially shunned by most customers:

Disruptive innovations, on the other hand, are initially considered inferior by most of an incumbent’s customers. Typically, customers are not willing to switch to the new offering merely because it is less expensive. Instead, they wait until its quality rises enough to satisfy them. Once that’s happened, they adopt the new product and happily accept its lower price. (This is how disruption drives prices down in a market.)

Most of the elements of Uber’s strategy seem to be sustaining innovations. Uber’s service has rarely been described as inferior to existing taxis; in fact, many would say it is better. Booking a ride requires just a few taps on a smartphone; payment is cashless and convenient; and passengers can rate their rides afterward, which helps ensure high standards. Furthermore, Uber delivers service reliably and punctually, and its pricing is usually competitive with (or lower than) that of established taxi services. And as is typical when incumbents face threats from sustaining innovations, many of the taxi companies are motivated to respond. They are deploying competitive technologies, such as hailing apps, and contesting the legality of some of Uber’s services.

For the authors, Uber’s strategy is an example of what they call “sustaining innovation,” which is when someone improves on a dominant model, e.g., “the fifth blade in a razor, the clearer TV picture, better mobile phone reception.”

In response to Christensen et al.’s rejection of the common interpretation of their own theory, many HBR readers were quick to push back. One reader thought the authors were being too rigid in their definition:

Christensen’s new article is really puzzling. I see a clear distinction between the definition of a phenomenon (i.e., “disruptive innovation”) and the theorization of how and why it happens (e.g., “working on the overlooked and low-end market”). Why can’t we freely say that Tesla and Uber are disruptive indeed, but that this disruption has followed a slightly different process than the one that was theorized 20 years ago?

Another thought the authors were perhaps not seeing the big picture:

I do not agree with the Authors that they do not consider Uber as having done something disruptive. At least in this part of Asia i.e. India they have set different standards for taxi hire and service which was not witnessed here so far.

One writer questioned whether the authors even had the right to try to adjust the definition of DT at this point:

Uber caused the value of a medallion to decrease by 40% in two years. Christensen et al do not “own” the definition of disruption just because of a 1995 article in HBR, and criticizing those who define Uber as disruptive seems an unnecessary way to clarify the theory – a more useful approach could be an extension/offshoot of the theory to incorporate regulated markets.

At this point, you may be questioning the value this debate for anyone besides a few HBR readers? Does it really matter that DT has morphed in a way its creators don’t want to accept? I think that it does, and I agree completely with the four reasons the authors give for trying to keep the original intent and definition of DT:

Reason 1: Disruption is a process that must occur not just the creation of a product:
The term “disruptive innovation” is misleading when it is used to refer to a product or service at one fixed point, rather than to the evolution of that product or service over time. The first minicomputers were disruptive not merely because they were low-end upstarts when they appeared on the scene, nor because they were later heralded as superior to mainframes in many markets; they were disruptive by virtue of the path they followed from the fringe to the mainstream.

Reason 2: Disruptors compete as much by the evolution of a business model as  by the evolution of a product:

Consider the health care industry. General practitioners operating out of their offices often rely on their years of experience and on test results to interpret patients’ symptoms, make diagnoses, and prescribe treatment. We call this a “solution shop” business model. In contrast, a number of convenient care clinics are taking a disruptive path by using what we call a “process” business model: They follow standardized protocols to diagnose and treat a small but increasing number of disorders.

Reason 3: Disruption attempts often fail:

A third common mistake is to focus on the results achieved—to claim that a company is disruptive by virtue of its success. 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.

Reason 4: The focus on disruption and/or being disrupted can be dangerous:

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.

For these reasons, it is important that DT continue to be discussed as a process of evolution and absorption and not just the creation of a better business model. That said, I understand that it’s tempting not to do so. For example, it’s easy to look at a company like Tesla and conclude that DT does not always have to start at the lower end. But I think that Tesla’s impact has been more psychological than material to incumbents to date, and the current infatuation with the company may change when VW, Daimler, BMW and others start to push back on Tesla’s attack on the higher end of their market in the next few years. The same applies to Apple and its watch, or to the many of the Internet of Things startups I see every day.

Rather than critique Christensen and his co-authors for sticking to their specific definition, perhaps the better idea is to pick up the gauntlet thrown down by their work and to find another term that better explains companies such as Apple, which also fails to qualify for the DT tag. Perhaps they should be called examples of “Displacement Innovation,” which I would probably label what happens when one model in a sector pushes out another over time, sometimes quickly and sometimes slowly. This is closer to what Apple has done in mobile and Tesla is trying to do in the auto sector.

In the meantime, it’s a great debate to have, and I give the authors kudos for taking the difficult task of refocusing the debate on DT on what they believe to the right path.

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