Disruptive innovation

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Types of Innovation[1]
Sustaining
An innovation that does not affect existing markets.
Evolutionary
An innovation that improves a product in an existing market in ways that customers are expecting. (E.g., fuel injection)
Revolutionary (discontinuous, radical)
An innovation that is unexpected, but nevertheless does not affect existing markets. (E.g., the automobile)
Disruptive
An innovation that creates a new market by applying a different set of values, which ultimately (and unexpectedly) overtakes an existing market. (E.g., the lower priced Ford Model T)

A disruptive innovation is an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology. The term is used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in a new market and later by lowering prices in the existing market.

In contrast to disruptive innovation, a sustaining innovation does not create new markets or value networks but rather only evolves existing ones with better value, allowing the firms within to compete against each other's sustaining improvements. Sustaining innovations may be either "discontinuous"[1] (i.e. "transformational" or "revolutionary") or "continuous" (i.e. "evolutionary").

The term "disruptive technology" has been widely used as a synonym of "disruptive innovation", but the latter is now preferred, because market disruption has been found to be a function usually not of technology itself but rather of its changing application. Sustaining innovations are typically innovations in technology, whereas disruptive innovations change entire markets. For example, the automobile was a revolutionary technological innovation, but it was not a disruptive innovation, because early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. The market for transportation essentially remained intact until the debut of the lower priced Ford Model T in 1908.[2] The mass-produced automobile was a disruptive innovation, because it changed the transportation market. The automobile, by itself, was not.

The current theoretical understanding of disruptive innovation is different from what might be expected by default, an idea that Clayton M. Christensen called the "technology mudslide hypothesis". This is the simplistic idea that an established firm fails because it doesn't "keep up technologically" with other firms. In this hypothesis, firms are like climbers scrambling upward on crumbling footing, where it takes constant upward-climbing effort just to stay still, and any break from the effort (such as complacency born of profitability) causes a rapid downhill slide. Christensen and colleagues have shown that this simplistic hypothesis is wrong; it doesn't model reality. What they have shown is that good firms are usually aware of the innovations, but their business environment does not allow them to pursue them when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from that of sustaining innovations (which are needed to compete against current competition). In Christensen's terms, a firm's existing value networks place insufficient value on the disruptive innovation to allow its pursuit by that firm. Meanwhile, start-up firms inhabit different value networks, at least until the day that their disruptive innovation is able to invade the older value network. At that time, the established firm in that network can at best only fend off the market share attack with a me-too entry, for which survival (not thriving) is the only reward.[3]

The work of Christensen and others during the 2000s has addressed the question of what firms can do to avoid oblivion brought on by technological disruption.

History and usage of the term[edit]

The term disruptive technologies was coined by Clayton M. Christensen and introduced in his 1995 article Disruptive Technologies: Catching the Wave,[4] which he co-wrote with Joseph Bower. The article is aimed at managing executives who make the funding/purchasing decisions in companies rather than the research community. He describes the term further in his book The Innovator's Dilemma.[5] Innovator's Dilemma explored the cases of the disk drive industry (which, with its rapid generational change, is to the study of business what fruit flies are to the study of genetics, as Christensen was advised in the 1990s[6]) and the excavating equipment industry (where hydraulic actuation slowly displaced cable-actuated movement). In his sequel with Michael E Raynor, The Innovator's Solution[7] Christensen replaced the term disruptive technology with disruptive innovation because he recognized that few technologies are intrinsically disruptive or sustaining in character; rather, it is the business model that the technology enables that creates the disruptive impact. However, Christensen's evolution from a technological focus to a business modelling focus is central to understanding the evolution of business at the market or industry level. Christensen and Mark W. Johnson, who cofounded the management consulting firm Innosight, described the dynamics of "business model innovation" in the 2008 Harvard Business Review article "Reinventing Your Business Model".[8] The concept of disruptive technology continues a long tradition of the identification of radical technical change in the study of innovation by economists, and the development of tools for its management at a firm or policy level.

In the late 1990s, the automotive sector began to embrace a perspective of "constructive disruptive technology" by working with a consultant David E. O’Ryan, whereby the use of current off-the-shelf technology was integrated with newer innovation to create what he called "an unfair advantage". The process or technology change as a whole had to be "constructive" in improving the current method of manufacturing yet disruptively impact the whole of the business case model resulting in a significant reduction of waste, energy, materials, labor or legacy costs to the user.

In keeping with the insight that what matters economically is the business model, not the technological sophistication itself, Christensen's theory explains why many disruptive innovations are not "advanced technologies", which the technology mudslide hypothesis would lead one to expect. Rather, they are often novel combinations of existing off-the-shelf components, applied cleverly to a small, fledgling value network.

The theory[edit]

Christensen defines a disruptive innovation as a product or service designed for a new set of customers.

"Generally, disruptive innovations were technologically straightforward, consisting of off-the-shelf components put together in a product architecture that was often simpler than prior approaches. They offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from, and unimportant to, the mainstream."[9]

Christensen argues that disruptive innovations can hurt successful, well managed companies that are responsive to their customers and have excellent research and development. These companies tend to ignore the markets most susceptible to disruptive innovations, because the markets have very tight profit margins and are too small to provide a good growth rate to an established (sizable) firm.[10] Thus disruptive technology provides an example of when the common business-world advice to "focus on the customer" ("stay close to the customer," "listen to the customer") can sometimes be strategically counterproductive.

While Christensen argued that disruptive innovations can hurt successful, well managed companies, O’Ryan countered that “constructive” integration of existing, new, and forward thinking innovation could improve the economic benefits of these same well managed companies, once decision making management understood the systemic benefits as a whole.

How low-end disruption occurs over time.

Christensen distinguishes between "low-end disruption" which targets customers who do not need the full performance valued by customers at the high end of the market and "new-market disruption" which targets customers who have needs that were previously unserved by existing incumbents.[11]

"Low-end disruption" occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the performance of the product overshoots the needs of certain customer segments. At this point, a disruptive technology may enter the market and provide a product which has lower performance than the incumbent but which exceeds the requirements of certain segments, thereby gaining a foothold in the market.

In low-end disruption, the disruptor is focused initially on serving the least profitable customer, who is happy with a good enough product. This type of customer is not willing to pay premium for enhancements in product functionality. Once the disruptor has gained a foothold in this customer segment, it seeks to improve its profit margin. To get higher profit margins, the disruptor needs to enter the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disruptor needs to innovate. The incumbent will not do much to retain its share in a not so profitable segment, and will move up-market and focus on its more attractive customers. After a number of such encounters, the incumbent is squeezed into smaller markets than it was previously serving. And then finally the disruptive technology meets the demands of the most profitable segment and drives the established company out of the market.

"New market disruption" occurs when a product fits a new or emerging market segment that is not being served by existing incumbents in the industry.


Examples of disruptive innovations[edit]

Category Disruptive Innovation Market Disrupted by Innovation Notes
Communication Email Postal mail E-mail has replaced postal mail because it can be sent from one place to another place in few milliseconds, without wasting paper and spending money for postage stamps.
Telephones Telegraphy When Western Union infamously declined to purchase Alexander Graham Bell's telephone patents for $100,000, their highest-profit market was long-distance telegraphy. Telephones were only useful for very local calls. Short-distance telegraphy barely existed as a market segment, which explains Western Union's decision.[citation needed]
Computing hardware Minicomputers Mainframes Minicomputers were originally presented as an inexpensive alternative to mainframes and mainframe manufacturers did not consider them a serious threat in their market. Eventually, the market for minicomputers became much larger than the market for mainframes.
Personal computers Minicomputers, Workstations. Word processors, Lisp machines
Pocket calculator 3.5 Standard Calculator[1] Equivalent computing performance and portable[5]
Digital calculator Mechanical calculator Facit AB used to dominate the European market for calculators, but did not adapt digital technology, and failed to compete with digital competitors.[12]
Smartphones Personal computers Smartphones and tablets can be used everywhere. The computational power of high end smartphones is similar to the performance of personal computer, but requires smaller footprint and power compared to a personal computer, at the same time a smartphone does not need to be attached to a wireline IP network.
Data storage 8 inch floppy disk drive 14 inch hard disk drive The floppy disk drive market has had unusually large changes in market share over the past fifty years. According to Clayton M. Christensen's research, the cause of this instability was a repeating pattern of disruptive innovations.[13] For example, in 1981, the old 8 inch drives (used in mini computers) were "vastly superior" to the new 5.25 inch drives (used in desktop computers).[9]

However, 8 inch drives were not affordable for the new desktop machines. The simple 5.25 inch drive, assembled from technologically inferior "off-the-shelf" components,[9] was an "innovation" only in the sense that it was new. However, as this market grew and the drives improved, the companies that manufactured them eventually triumphed while many of the existing manufacturers of eight inch drives fell behind.[13]

5.25 inch floppy disk drive 8 inch floppy disk drive
3.5 inch floppy disk drive 5.25 inch floppy disk drive
Bernoulli drive and Zip drive 3.5 inch floppy disk drive
CDs and USB flash drives Bernoulli drive and Zip drive
Display Light-emitting diodes Light bulbs A LED is significantly smaller and less power-consuming than a light bulb. The first optical LEDs were weak, and only useful as indicator lights. Later models could be used for indoor lighting, and now several cities are switching to LED street lights. Incandescent light bulbs are being phased out in many countries. LED displays and AMOLED are also becoming competitive with LCDs.
LCD CRT The first liquid crystal displays (LCD) were monochromatic and had low resolution. They were used in watches and other handheld devices, but during the early 2000s these (and other planar technologies) largely replaced the dominant cathode ray tube (CRT) technology for computer displays and television sets, although CRT technologies have improved with advances like true-flat panels and digital controls only recently.[citation needed]
Manufacturing Hydraulic excavators Cable-operated excavators Hydraulic excavators were clearly innovative at the time of introduction but they gained widespread use only decades after. However, cable-operated excavators are still used in some cases, mainly for large excavations.[14]
Mini steel mills Vertically integrated steel mills By using mostly locally available scrap and power sources these mills can be cost effective even though not large.[15]
Plastic Metal, wood, glass etc. Bakelite and other early plastics had very limited use - their main advantages were electric insulation and low cost. New forms had advantages such as transparency, elasticity and combustibility. In the early 21st century, plastics can be used for nearly all household items previously made of metal, wood and glass.[citation needed]
Medical Ultrasound Radiography (X-ray imaging) Ultrasound technology is disruptive relative to X-ray imaging. Ultrasound was a new-market disruption. None of the X-ray companies participated in ultrasound until they acquired major ultrasound equipment companies.[16]
Music Digital synthesizer Electronic organ and piano Synthesizers were initially low-cost, low-weight alternatives to electronic organs and acoustic pianos. Today's synthesizers feature many automated functions and have replaced them for home and hobby users.[citation needed]
Downloadable Digital media CDs, DVDs In the 1990s, the music industry phased out the single, leaving consumers with no means to purchase individual songs. This market was initially filled by illegal peer-to-peer file sharing technologies, and then by online retailers such as the iTunes Store and Amazon.com. This low end disruption eventually undermined the sales of physical, high-cost CDs.[17]
Photography Digital photography Chemical photography Early digital cameras suffered from low picture quality and resolution and long shutter lag. Quality and resolution are no longer major issues and shutter lag is much less than it used to be. The convenience of small memory cards and portable hard drives that hold hundreds or thousands of pictures, as well as the lack of the need to develop these pictures, also helped. Digital cameras have a high power consumption (but several lightweight battery packs can provide enough power for thousands of pictures). Cameras for classic photography are stand-alone devices. In the same manner, high-resolution digital video recording has replaced film stock, except for high-budget motion pictures.[citation needed]
High speed CMOS video sensors Photographic film When first introduced, high speed CMOS sensors were less sensitive, had lower resolution, and cameras based on them had less duration (record time). The advantage of rapid setup time, editing in the camera, and nearly-instantaneous review quickly eliminated 16 mm high speed film systems. CMOS-based cameras also require less power (single phase 110 V AC and a few amps for CMOS, vs. 240 V single- or three-phase at 20-50 A for film cameras). Continuing advances have overtaken 35 mm film and are challenging 70 mm film applications.[citation needed]
Publishing Computer printers Offset printing Offset printing has a high overhead cost, but very low unit cost compared to computer printers, and superior quality. But as printers, especially laser printers, have improved in speed and quality, they have become increasingly useful for creating documents in limited issues.[citation needed]
Desktop publishing Traditional publishing Early desktop-publishing systems could not match high-end professional systems in either features or quality. Nevertheless, they lowered the cost of entry to the publishing business, and economies of scale eventually enabled them to match, and then surpass, the functionality of the older dedicated publishing systems.[citation needed]
Wikipedia Traditional encyclopedias Traditionally edited general encyclopedias have been displaced by Wikipedia, the free, non-profit, community-edited online encyclopedia. Former market leader Encyclopædia Britannica ended print production after 244 years in 2012.[18] Britannica's price of over $1000, its physical size of dozens of volumes, its weight of over 100 pounds, and its update cycles lasting a year or longer were all annulled by Wikipedia. Microsoft's Encarta, a 1993 entry into professionally edited digital encyclopedias, was once a major rival to Britannica but was discontinued in 2009.[19] Wikipedia's lack of price, unlimited size and instant updates are the primary challenges for profitable competition in the consumer market.


Transportation Steamboats Sailing ships The first steamships were deployed on inland waters where sailing ships were less effective, instead of on the higher profit margin seagoing routes. Hence steamships originally only competed in traditional shipping lines' "worst" markets.[citation needed]
Automobiles Rail transport At the beginning of the 20th century, rail (including streetcars) was the fastest and most cost-efficient means of land transportation for goods and passengers in industrialized countries. The first cars, buses and trucks were used for local transportation in suburban areas, where they often replaced streetcars and industrial tracks. As highways expanded, medium- and later long-distance transports were relocated to road traffic, and some railways closed down. As rail traffic has a lower ton-kilometer cost, but a higher investment and operating cost than road traffic, rail is still preferred for large-scale bulk cargo (such as minerals).
Private jet Supersonic transport The Concorde aircraft has so far been the only supersonic airliner in extensive commercial traffic. However, it catered to a small customer segment, which could later afford small private sub-sonic jets. The loss of speed was compensated by flexibility and a more direct routing (i.e. no need to go through a hub). Supersonic flight is also banned above inhabited land, due to sonic booms. Concorde service ended in 2003.[20]

See also[edit]

Notes[edit]

  1. ^ a b c Christensen 1997, p. xviii. Christensen describes as "revolutionary" innovations as "discontinuous" "sustaining innovations".
  2. ^ Christensen 2003, p. 49.
  3. ^ Christensen 1997, p. 47.
  4. ^ Bower, Joseph L. & Christensen, Clayton M. (1995). However the concept of new technologies leading to wholesale economic change is not a new idea since Joseph Schumpeter adapted the idea of creative destruction from Karl Marx. Schumpeter (1949) in one of his examples used "the railroadization of the Middle West as it was initiated by the Illinois Central". He wrote, "The Illinois Central not only meant very good business whilst it was built and whilst new cities were built around it and land was cultivated, but it spelled the death sentence for the [old] agriculture of the West."["Disruptive Technologies: Catching the Wave" Harvard Business Review, January–February 1995
  5. ^ a b Christensen 1997.
  6. ^ Christensen 1997, p. 3.
  7. ^ Christensen 2003.
  8. ^ Johnson, Mark, Christensen, Clayton, et al, 2008, "Reinventing Your Business Model, Harvard Business Review, December 2008.
  9. ^ a b c Christensen 1997, p. 15.
  10. ^ Christensen 1997, p. i-iii.
  11. ^ Christensen 2003, p. 23-45.
  12. ^ Sandström, Christian G. (2010). "A revised perspective on Disruptive Innovation – Exploring Value, Networks and Business models (Theisis submitted to Chalmers University of Technology, Göteborg, Sweden)". Retrieved 2010-11-22. 
  13. ^ a b Christensen 1997, p. 3-28.
  14. ^ Christensen 1997, pp. 61–76.
  15. ^ Christensen 2003, pp. 37–39.
  16. ^ Christensen 2003, p. 64.
  17. ^ Knopper, Steve (2009). Appetite for self-destruction : the spectacular crash of the record industry in the digital age. New York: Free Press. ISBN 1-4165-5215-4. 
  18. ^ Bosman, Julie (13 March 2012). "After 244 Years, Encyclopaedia Britannica Stops the Presses". The New York Times. Retrieved 1 April 2012. 
  19. ^ Tartakoff, Joseph. "Victim Of Wikipedia: Microsoft To Shut Down Encarta". paidContent. Retrieved 1 April 2012. 
  20. ^ "Concorde grounded for good". BBC News, 10 April 2003. 10 April 2003. Retrieved 4 May 2012. 

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