Through the past 15 years my colleagues and I have wrestled with disruption in many contexts. That’s no surprise, since Clayton Christensen co-founded our company in 2000, five years after his Harvard Business Review article with Joseph L. Bower “Disruptive Technologies: Catching the Wave” introduced the idea of disruption to the mainstream market.
Christensen and two co-authors revisit where disruption theory stands today in a new HBR article, “What Is Disruptive Innovation?” And my company’s experience over the past 15 years – consulting with global giants, working alongside mid-sized companies in emerging markets, investing in wide-eyed entrepreneurs, and advising government officials – highlights four reasons why disruptive innovation theory should be a key component of any good strategist’s toolkit.
First, disruption directs you to look in places you might otherwise ignore. Christensen’s research shows that disruption often starts at a market’s edges. Sometimes that is in relatively undemanding
tiers, such as how mini mill manufacturers started in the rebar market. Disruption also takes root with customers that historically were locked out of a market because they lacked specialized skills or sufficient financial resources to consume existing solutions. Sometimes the place to look is in physical locations where consumption was historically difficult if not impossible. Finally, fringe markets like hackers or students can put up with the limitations that often characterize early versions of disruptive ideas.
As Ted Levitt pointed out 55 years ago, companies develop significant myopia over time, only seeing things that are squarely in the mainstream of their market. Disruptive innovation theory expands your view, increasing the odds that you spot important trends early.
Of course, the more places you look, the more things you see. No company has the capacity to respond to every trend they identify. That’s the second advantage that comes from using disruptive innovation theory: it helps you to separate the early-stage developments that have the highest potential to drive change from those that are likely to fizzle.
Does the upstart have a unique way that makes it easier and more affordable for target customers to get the innovation job done? Are they following a business model that looks unattractive to market leaders? One yes bears watching; two yeses is a standup moment. For example, in the late 1990s Netflix introduced its subscription model, which let consumers rent DVDs without worrying about late fees. Market leaders such as Blockbuster earned substantial profits from late fees, and used those fees as a way to drive customers to return hot movies quickly and therefore guarantee their availability. The rest, of course, is history.
The third advantage of disruption theory is it helps to make predictions. As Christensen, Michael Raynor, and Rory McDonald noted in their new article: “The theory of disruption predicts that when an entrant takes the incumbent competitors head-on, offering better products or services, the incumbents will accelerate their innovations to defend their business.” This prediction is why the authors’ assessment that Uber doesn’t completely fit the pattern of disruption (which I wrote about previously) matters. We can predict with great certainty that the incumbents against which Uber is fighting will be motivated to respond, and will use every tool at their disposal to fight back. The taxi market is fragmented, and customers in many markets report significant frustration around reliability, cab cleanliness, and more, giving Uber a great chance of success. But it has to fight fiercely for every inch.
In contrast, in many markets room-sharing-platform Airbnb has grown without significant response from hotel operators. If you compare the snapshots of Uber and Airbnb on Crunchbase one fact stands out: Uber has had to raise 3.5 times the amount of capital Airbnb has raised ($8.2 billion versus $2.3 billion) even though it is a younger company. Uber knows its battle against incumbents will prove costly.
Finally, inside an organization, proper use of disruptive innovation theory informs key strategic decisions. Companies are wired to do what they currently do better and more efficiently. Disruptive innovation theory holds that incumbents need to create substantial organizational space to commercialize ideas that don’t fit existing systems. Creating and managing separate organizations often entails significant investment and management attention, so it makes sense to only do so in specific circumstances.
Disruptive innovation theory doesn’t answer every strategic question, of course. In fact, many clients express surprise that we aren’t dogmatic about precisely defining whether an idea is disruptive or not. Why? The world is complicated, and the ultimate question isn’t whether an innovation is disruptive or not. More important is whether it is a good idea or not.
All good ideas have three pieces:
First, they target a real market need, even if that need can’t be readily articulated by the customer.
Second, they deliver against that need consistently in the face of current and future competition.
Third, the numbers work, allowing the company to create and capture value.
The rest is academic.
The business world is complicated. Individuals make seemingly strange decisions all the time; predicting such decisions with precision is next to impossible. Running side-by-side strategic experiments of industry change with a real control borders on impossible. The disruptive innovation model isn’t, and never will be, perfect. Christensen and his co-authors note, “Disruption theory does not, and never will explain everything about innovation specifically or business success generally.” I agree. But, by helping strategists look in different places and see things in different ways, there is little doubt that it is useful. And that’s all you can really ask for.