Disruptive innovation has been a buzzword since Clayton Christensen coined it back in the mid 1990s to describe the way in which new entrants in a market can disrupt established businesses. It’s gained even more prominence in the past two decades as companies like Uber, Lyft, Etsy, and countless other startups have emerged with a goal of changing their respective industries.
For a term thrown around so frequently, it’s surprising how often it’s misunderstood. What does “disruptive innovation” actually mean, and how can today’s businesses—both the disruptors and the disrupted—form an understanding that will allow them to spot potential opportunities and threats?
This post explores disruptive innovation and offers four key concepts that can help you apply the theory to your business.
What Is Disruptive Innovation?
According to Christensen, disruptive innovation is the process in which a smaller company, usually with fewer resources, is able to challenge an established business (often called an “incumbent”) by entering at the bottom of the market and continuing to move up-market. This process usually happens over a number of steps:
- Incumbent businesses innovate and develop their products or services in order to appeal to their most demanding and/or profitable customers, ignoring the needs of those downmarket.
- Entrants target this ignored market segment and gain traction by meeting their needs at a reduced cost compared to what is offered by the incumbent.
- Incumbents don’t respond to the new entrant, continuing to focus on their more profitable segments.
- Entrants eventually move upmarket by offering solutions that appeal to the incumbent’s “mainstream” customers.
- Once the new entrant has begun to attract the incumbent business’s mainstream customers en masse, disruption has occurred.
4 Tips for Understanding the Theory of Disruptive Innovation
1. Not All Innovation Is Disruption
According to Merriam Webster, disruption is "to cause (something) to be unable to continue in the normal way: to interrupt the normal progress or activity of (something)." If this definition is applied to business, then really anything that enters a market and is successful can be seen as "disruptive." At least that’s how the term is often used today.
But this isn’t how Christensen defined it when writing in the 1990s.
An article by Ilan Mochari discusses the misuse of the word disruption when referring to business. As he clarifies, disruption is "what happens when the incumbents are so focused on pleasing their most profitable customers that they neglect or misjudge the needs of their other segments."
2. Disruption Can Be Low-End or New-Market
Disruption can come in different varieties: Low-end disruption and new-market disruption.
- Low-end disruption refers to businesses that come in at the bottom of the market and serve customers in a way that is "good enough." These are generally the lower profit markets for the incumbent and thus, when these new businesses enter, the incumbents move further "upstream." In other words, they put their focus on where the greater profit margins are.
- New-market disruption refers to businesses that compete against non-consumption in lower margin sectors of an industry. Similar to low-end disruption, the products offered are generally seen as "good enough," and the emerging business is profitable at these lower prices.
The main difference between the two types lies in the fact that low-end disruption focuses on overserved customers, and new-market disruption focuses on underserved customers.
3. Disruptive Innovation Is a Process, Rather Than a Product or Service
When innovative new products or services, such as Apple’s iPhone or Tesla’s electric car, launch and grab the attention of the press and consumers, do they qualify as disruptors in their industries?
In the Harvard Business Review, Christensen cautions that it takes time to determine whether an innovator’s business model will succeed. He cites Netflix as an example that didn’t threaten Blockbuster at first; its DVDs-by-mail service didn’t satisfy customers who wanted to get their hands on the latest new release instantaneously. But in shifting to an on-demand streaming model, Netflix siphoned away Blockbuster’s core users before the company could stage an adequate response.
Will the next new launch be a flash in the pan, or a formidable competitor? Keeping a close eye on the process, and being able to determine whether that product or service is evolving its business model to better serve customers’ needs, will help you evaluate the extent of the threat.
4. Choose Your Battles Wisely
If you’re currently an incumbent, you want to be on the lookout for potentially disruptive emerging businesses. It’s important to note, however, that not all new entrants will prove to be disruptive.
Every fire doesn’t need to be extinguished, nor will it threaten your house. If you treat every fire as dangerous because someone else calls it “disruptive,” you’ll soon discover it’s not possible to put every fire out and, in the interim, will waste your resources. The fires you have to worry about are the ones that truly threaten you. Understanding the correct meaning and application of the word “disruption” will help you identify and target true threats.
On the other hand, new entrants can also benefit from achieving a better understanding of disruption, as it will help you identify opportunities to start or scale your business. An understanding of disruption, coupled with Christensen’s other theory of "Jobs to be Done," can help you create products and services that will be desired by customers and, ideally, left alone by incumbents.
Understanding the Impact of Disruptive Innovation
Whether you're an incumbent intent on defending your market share and profits or you are a new entrant seeking to grab a piece of the pie, understanding disruptive innovation as a process can offer valuable insights you can incorporate into your business plan.
Do you want to learn more about disruption and explore other theories from Professor Christensen? Our six-week online Disruptive Strategy course will equip you with the tools, frameworks, and intuition to develop executive-level strategy and organize for innovation.
This post was updated on August 30, 2019. It was originally published on November 15, 2016.
