Chapter 16

Disruptive innovation

The big picture

Introduced by Joseph Bowyer and Clayton Christenson in their 1995 article, a disruptive innovation is an innovation that leads to a product or service designed for a new set of customers. By contrast, sustaining innovations are typically innovations in a new technology or application, whereas disruptive innovations change entire markets (Figure 16.1).

When to use it

The use of disruptive innovation helps to answer the question: what can firms do to avoid displacement brought on by radical, technological innovations? Contrary to the popular belief that established companies are unaware of (disruptive) innovations, most companies are hindered by their business environment (or value network) from pursuing them when they first arise. All too often, emerging, potentially disruptive innovations are – like most innovations – not profitable enough at first, and their development can take scarce resources away from other innovations (which are also needed to compete against the current competition). Start-up firms seem not to be hindered in this way and are often disruptive to established firms. Generally there are two types of disruptive innovation:

• Low-end disruption targets segments of the market that are not willing to pay a premium for extra performance. Often these are the least profitable customers. For a disruptive innovation, this is a good segment to start off with, as it is ‘below the radar’ of established firms and allows one to gain a (niche) position in a market. From this position, the disrupting party will seek to improve its profit margin and market position. This requires further innovation to be able to move upmarket and enter the segments where the customer is willing to pay more for greater performance. Once most segments are served, the disruptive party has driven most established companies out of the market and has set the new standard with the once disruptive technology. In some markets, e.g. data storage or computing hardware, developments and innovations speedily follow one another, showing a pattern of this type of disruption.
• New market disruption targets customers who have needs that were previously unserved by existing incumbents, for instance a new or emerging market segment.

How to use it

Disruptive innovation is a method that helps identify and manage potentially disruptive innovations. This is different from just research and development (R&D) management or technology development. The difference is mainly in the scope. Where few technologies are intrinsically disruptive or sustaining in character, a disruptive innovation is identified by the business model that the technology enables. In their article, Bowyer and Christensen suggest the following guidelines on how to foster disruptive innovations within any company:

• Determine whether the innovation is disruptive or sustaining.
• Define the strategic significance of the disruptive innovation.
• Locate the market for the disruptive innovation.
• Place responsibility for building business with the disruptive innovation in an independent organisation.
• Keep the disruptive innovation independent: do not integrate it into mainstream business activities as this tends to lower the disruptive power of the innovation.

The final analysis

Although the concept of disruptive innovation was first received almost as a radical innovation itself, it helps to explain developments in markets and industries. Similar to Moore’s law (i.e. the observation of Gordon Moore, former CEO of Intel, that the number of transistors on integrated circuits doubles approximately every 2 years), disruptive innovation is best used descriptively, although it was presented as a method for spotting and cultivating disruptive technologies.

Disruptive innovation is built on a lot of assumptions, starting with the assumption that one can know which technology has the potential to be disruptive before it is readily available on the market and/or has a performance that is equal to that of the market average of currently available technologies. Next there is the assumption that the performance improvement that is required and expected by the market – based on currently available technologies – is known. The most important assumption is that the market will adopt a technology that outperforms not only the current market average but also the customers’ expectations. It assumes that customers will be in awe and that the market will shift (or a new market will be created) in response to the performance of this technology.

With regard to this latter assumption, disruptive innovation does not take into account any aspects other than the technology’s performance as being decisive for the adoption of the new technology by customers. Assessing the expected trajectory of performance improvement of the potential disruptive technology might better be done in conjunction with other management models, incorporating other market (entry) related factors.

References

Bowyer, J.L and Christensen, C.M. (1995) ‘Disruptive technologies: Catching the wave’. Harvard Business Review 73(1), 43–53.

Christensen, C.M. (1997) The Innovators Dilemma: When New Technologies Cause Great Firms to Fail. Boston MA: Harvard Business School Press.

Leifer, R., McDermott, C.M., O’Connor, C.G., Peters, L.S., Rice, M.P. and Veryzer, R.W. (2000) Radical Innovation: How Mature Companies Can Outsmart Upstarts. Boston MA: Harvard Business School Press.