Clayton M. Christensen
Disruptive innovation describes a process where a smaller company with fewer resources successfully challenges established incumbent businesses. Incumbents focus on sustaining innovations that improve products for their most demanding and profitable customers. This focus causes them to exceed the performance requirements of average consumers and ignore entirely different segments. Entrants capitalize on this gap by targeting those overlooked segments and delivering a more suitable functionality at a lower price.
True disruptive innovations originate in one of two distinct markets that incumbents neglect. Low-end footholds exist because market leaders provide complex and expensive products to their top tier of customers. An entrant can capture this low end by offering a product that is simply good enough. New-market footholds involve turning previous nonconsumers into new consumers. This occurs when an entrant creates an affordable and accessible solution for individuals who previously lacked the money or skill to use the existing technology.
Great firms often fail because of their reliance on traditional management principles. Practices like listening closely to the most profitable customers and aggressively investing in requested upgrades actually blind these companies to disruptive threats. The very decision making and resource allocation processes that make an established company successful actively reject disruptive technologies because those technologies initially offer lower profit margins and smaller markets.
A company is fundamentally constrained by its value network and the customers who provide the resources it needs to survive. These customers effectively dictate the patterns of resource allocation. Because emerging markets are initially small and do not satisfy the growth needs of a large corporation, the firm cannot justify investing in them. Large firms are pushed continually upmarket toward higher margins while losing the organizational mobility to pursue smaller downward opportunities.
Companies continually innovate to charge premium prices, but eventually the pace of technological improvement outstrips what mainstream customers can utilize. When this performance oversupply occurs, the basis of competition fundamentally changes. Customers stop paying premium prices for functional improvements and instead begin to value new attributes like convenience, reliability, and lower costs. Disruptive products inherently excel in these new attributes, allowing them to invade established markets from below.
The failure of established companies to pursue disruptive innovation is also driven by cognitive biases. Managers in large firms view their existing products and loyal customers as an endowment. Because of loss aversion, these managers weigh the potential losses of abandoning their core market much heavier than the uncertain gains of a new disruptive technology. Startup founders begin with nothing to lose and clearly see the disruptive technology as an unambiguous gain, allowing them to pursue the exact same market data with aggressive enthusiasm.
The term disruptive innovation is frequently misapplied to any successful business that shakes up an industry. A company like Uber actually represents a sustaining innovation because it launched in a well-served market and initially targeted people already accustomed to hiring rides. Uber built its position in the mainstream market by offering a better and more convenient product rather than starting at the low end or creating a completely new market. Identifying true disruption is vital because sustaining and disruptive competitors require entirely different strategic responses.
Disruption is an evolutionary process rather than a fixed product launch. Most disruptive innovations begin as small scale experiments focused on refining a business model. A classic example is the evolution of Netflix, which initially appealed only to niche customer groups willing to wait days for mailed media. Blockbuster correctly ignored Netflix at first because the service did not appeal to the mainstream impulse rental market. Netflix became a lethal threat only when streaming technology allowed it to migrate upmarket and satisfy the core needs of Blockbuster customers.
To survive disruptive technological change, an established firm must create or acquire an independent organization tasked with commercializing the new technology. This autonomous unit must be small enough to get excited about small victories and minor profit margins. By operating outside the established corporate structure, the new unit escapes the suffocating processes and values that prioritize high end sustaining innovations. This allows the new organization to freely iterate and discover the emerging market that actually values the disruptive product.
Finding the right customers for a new innovation requires abandoning conventional market segmentation based on product attributes or customer demographics. Companies must instead focus on the specific circumstances of the customer and understand the exact job that customer is trying to get done. Designing products that help consumers easily complete these specific tasks provides a much clearer pathway to discovering and dominating new markets.
Organizations must align their product architecture with the current competitive landscape. When a product falls short of market expectations, a proprietary and interdependent architecture allows a company to optimize interfaces and significantly boost performance. Once a product exceeds market demands, the architecture must become modular. Modular designs allow for outsourced subsystems and enable the company to offer better speed and convenience at discounted prices. Moving strategically through the value chain prevents total commoditization and preserves profitability.