Disruptive innovation is a term in the field of business administration which refers to an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products, and alliances. The term was defined and first analyzed by the American scholar Clayton M. Christensen and his collaborators beginning in 1995, and has been called the most influential business idea of the early 21st century.
Not all innovations are disruptive, even if they are revolutionary. For example, the first automobiles in the late 19th century were 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. The mass-produced automobile was a disruptive innovation, because it changed the transportation market, whereas the first thirty years of automobiles did not.
Disruptive innovations tend to be produced by outsiders and entrepreneurs, rather than existing market-leading companies. The business environment of market leaders does not allow them to pursue disruptive innovations when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from sustaining innovations (which are needed to compete against current competition). A disruptive process can take longer to develop than by the conventional approach and the risk associated to it is higher than the other more incremental or evolutionary forms of innovations, but once it is deployed in the market, it achieves a much faster penetration and higher degree of impact on the established markets.
The term disruptive technologies was coined by Clayton M. Christensen and introduced in his 1995 article Disruptive Technologies: Catching the Wave, which he cowrote with Joseph Bower. The article is aimed at management executives who make the funding or purchasing decisions in companies, rather than the research community. He describes the term further in his book The Innovator's Dilemma. 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) and the excavating equipment industry (where hydraulic actuation slowly displaced cable-actuated movement). In his sequel with Michael E. Raynor, The Innovator's Solution, 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". The concept of disruptive technology continues a long tradition of identifying 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 the 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 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.
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."
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. Thus, disruptive technology provides an example of an instance when the common business-world advice to "focus on the customer" (or "stay close to the customer", or "listen to the customer") can 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.
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.
"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 that has lower performance than the incumbent but that 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.
The extrapolation of the theory to all aspects of life has been challenged, as has the methodology of relying on selected case studies as the principal form of evidence. Jill Lepore points out that some companies identified by the theory as victims of disruption a decade or more ago, rather than being defunct, remain dominant in their industries today (including Seagate Technology, U.S. Steel, and Bucyrus). Lepore questions whether the theory has been oversold and misapplied, as if it were able to explain everything in every sphere of life, including not just business but education and public institutions.
In 2009, Milan Zeleny described high technology as disruptive technology and raised the question of what is being disrupted. The answer, according to Zeleny, is the support network of high technology. For example, introducing electric cars disrupts the support network for gasoline cars (network of gas and service stations). Such disruption is fully expected and therefore effectively resisted by support net owners. In the long run, high (disruptive) technology bypasses, upgrades, or replaces the outdated support network.
Technology, being a form of social relationship, always evolves. No technology remains fixed. Technology starts, develops, persists, mutates, stagnates, and declines, just like living organisms. The evolutionary life cycle occurs in the use and development of any technology. A new high-technology core emerges and challenges existing technology support nets (TSNs), which are thus forced to coevolve with it. New versions of the core are designed and fitted into an increasingly appropriate TSN, with smaller and smaller high-technology effects. High technology becomes regular technology, with more efficient versions fitting the same support net. Finally, even the efficiency gains diminish, emphasis shifts to product tertiary attributes (appearance, style), and technology becomes TSN-preserving appropriate technology. This technological equilibrium state becomes established and fixated, resisting being interrupted by a technological mutation; then new high technology appears and the cycle is repeated.
Regarding this evolving process of technology, Christensen said:
"The technological changes that damage established companies are usually not radically new or difficult from a technological point of view. They do, however, have two important characteristics: First, they typically present a different package of performance attributes—ones that, at least at the outset, are not valued by existing customers. Second, the performance attributes that existing customers do value improve at such a rapid rate that the new technology can later invade those established markets."
"When the technology that has the potential for revolutionizing an industry emerges, established companies typically see it as unattractive: it’s not something their mainstream customers want, and its projected profit margins aren’t sufficient to cover big-company cost structure. As a result, the new technology tends to get ignored in favor of what’s currently popular with the best customers. But then another company steps in to bring the innovation to a new market. Once the disruptive technology becomes established there, smaller-scale innovation rapidly raise the technology’s performance on attributes that mainstream customers’ value."
The automobile was high technology with respect to the horse carriage; however, it evolved into technology and finally into appropriate technology with a stable, unchanging TSN. The main high-technology advance in the offing is some form of electric car—whether the energy source is the sun, hydrogen, water, air pressure, or traditional charging outlet. Electric cars preceded the gasoline automobile by many decades and are now returning to replace the traditional gasoline automobile.
"Implementing high technology is often resisted. This resistance is well understood on the part of active participants in the requisite TSN. The electric car will be resisted by gas-station operators in the same way automated teller machines (ATMs) were resisted by bank tellers and automobiles by horsewhip makers. Technology does not qualitatively restructure the TSN and therefore will not be resisted and never has been resisted. Middle management resists business process reengineering because BPR represents a direct assault on the support net (coordinative hierarchy) they thrive on. Teamwork and multi-functionality is resisted by those whose TSN provides the comfort of narrow specialization and command-driven work."
High technology is a technology core that changes the very architecture (structure and organization) of the components of the technology support net. High technology therefore transforms the qualitative nature of the TSN's tasks and their relations, as well as their requisite physical, energy, and information flows. It also affects the skills required, the roles played, and the styles of management and coordination—the organizational culture itself.
This kind of technology core is different from regular technology core, which preserves the qualitative nature of flows and the structure of the support and only allows users to perform the same tasks in the same way, but faster, more reliably, in larger quantities, or more efficiently. It is also different from appropriate technology core, which preserves the TSN itself with the purpose of technology implementation and allows users to do the same thing in the same way at comparable levels of efficiency, instead of improving the efficiency of performance.
As for the difference between high technology and low technology, Milan Zeleny once said:
" The effects of high technology always breaks the direct comparability by changing the system itself, therefore requiring new measures and new assessments of its productivity. High technology cannot be compared and evaluated with the existing technology purely on the basis of cost, net present value or return on investment. Only within an unchanging and relatively stable TSN would such direct financial comparability be meaningful. For example, you can directly compare a manual typewriter with an electric typewriter, but not a typewriter with a word processor. Therein lies the management challenge of high technology. "
However, not all modern technologies are high technologies. They have to be used as such, function as such, and be embedded in their requisite TSNs. They have to empower the individual because only through the individual can they empower knowledge. Not all information technologies have integrative effects. Some information systems are still designed to improve the traditional hierarchy of command and thus preserve and entrench the existing TSN. The administrative model of management, for instance, further aggravates the division of task and labor, further specializes knowledge, separates management from workers, and concentrates information and knowledge in centers.
As knowledge surpasses capital, labor, and raw materials as the dominant economic resource, technologies are also starting to reflect this shift. Technologies are rapidly shifting from centralized hierarchies to distributed networks. Nowadays knowledge does not reside in a super-mind, super-book, or super-database, but in a complex relational pattern of networks brought forth to coordinate human action.
In the practical world, the popularization of personal computers illustrates how knowledge contributes to the ongoing technology innovation. The original centralized concept (one computer, many persons) is a knowledge-defying idea of the prehistory of computing, and its inadequacies and failures have become clearly apparent. The era of personal computing brought powerful computers "on every desk" (one person, one computer). This short transitional period was necessary for getting used to the new computing environment, but was inadequate from the vantage point of producing knowledge. Adequate knowledge creation and management come mainly from networking and distributed computing (one person, many computers). Each person's computer must form an access point to the entire computing landscape or ecology through the Internet of other computers, databases, and mainframes, as well as production, distribution, and retailing facilities, and the like. For the first time, technology empowers individuals rather than external hierarchies. It transfers influence and power where it optimally belongs: at the loci of the useful knowledge. Even though hierarchies and bureaucracies do not innovate, free and empowered individuals do; knowledge, innovation, spontaneity, and self-reliance are becoming increasingly valued and promoted.
|Category||Disruptive innovation||Market disrupted by innovation||Notes|
|Academia||Wikipedia||Traditional encyclopedias||Traditional, for-profit general encyclopedias with articles written by paid experts have been displaced by Wikipedia, an online encyclopedia which is written and edited by volunteer editors. Former market leader Encyclopædia Britannica ended its print production after 244 years in 2012. Britannica's price of over $1000, its physical size of dozens of hard-bound volumes, its weight of over 100 pounds, its number of articles (about 120,000) and its update cycles lasting a year or longer made it unable to compete with Wikipedia, which provides free, online access to over 5 million articles which are updated every day. Wikipedia not only disrupted printed paper encyclopedias; it also disrupted digital encyclopedias. Microsoft's Encarta, a 1993 entry into professionally edited digital encyclopedias, was once a major rival to Britannica but was discontinued in 2009. Wikipedia's free access, online accessibility on computers and smartphones, unlimited size and instant updates are some of the challenges faced by for-profit competition in the encyclopedia market.|
|Communication||Telephony||Telegraphy||When Western Union declined to purchase Alexander Graham Bell's telephone patents for $100,000, their highest-profit market was long-distance telegraphy. Telephones were only useful at that time for very local calls. Short-distance telegraphy barely existed as a market segment, which explains Western Union's decision to not enter the emerging telephone market. However, telephones quickly displaced telegraphs, as telephones offered much greater communication capacity than telegraphs.|
|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 (led by Seymor Cray—daisy chaining his minisupercomputers) became much larger than the market for mainframes.|
|Personal computers||Minicomputers, Workstations. Word processors, Lisp machines|
|Pocket calculator||3.5 standard calculator||Equivalent computing performance and portable|
|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.|
|Smartphones||Personal computers, laptops, PDAs||Smartphones and tablets are more portable than traditional PCs and laptops.|
|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. 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).
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, 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.
|5.25 inch floppy disk drive||8 inch floppy disk drive|
|3.5 inch floppy disk drive||5.25 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 LED displays||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. CRT sets were very heavy, and the size and weight of the tube limited the maximum screen size to about 38 inches; in contrast, LCD and other flat-panel TVs are available in 40", 50", 60" and even bigger sizes, all of which weigh much less than a CRT set. CRT technologies did improve in the late 1990s with advances like true-flat panels and digital controls; however, these updates were not enough to prevent CRTs from being displaced by flat-panel LCD and LED TVs.|
|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.|
|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.|
|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 of plastic had advantages such as transparency, elasticity and combustibility. In the early 21st century, plastics can be used for many household items previously made of metal, wood and glass.|
|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.|
|Music and video||Digital synthesizer||Electronic organ, electric piano and piano||Synthesizers were initially low-cost, low-weight alternatives to electronic organs, electric pianos and acoustic pianos. In the 2010s, synthesizers are significantly cheaper than electric pianos and acoustic pianos, all while offering a much greater range of sound effects and musical sounds.|
|Downloadable Digital media||CDs, DVDs||In the 1990s, the music industry phased out the vinyl record 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 recordings such as records, tapes and CDs.|
|Streaming video||Video rental||Video on demand software can run on many Internet-enabled devices. Since licensing deals between film studios and streaming providers have become standard, this has obviated the need for people to seek rentals at physically separate locations. Netflix, a dominant company in this market, was cited as a significant threat to video stores when it first expanded beyond DVD by mail offerings. The Netflix co-founders approached rental chain Blockbuster LLC in 2000 trying to sell their company. Blockbuster declined and ultimately ceased operation ten years later.|
|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 in the 2010s and shutter lag issues have been largely resolved. 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 make digital cameras the market leader. 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 and fine art. The rise of digital cameras led Eastman Kodak, one of the largest camera companies for decades, to declare bankruptcy in 2012. Despite inventing one of the first digital cameras in 1975, Kodak remained invested in traditional film until much later.|
|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 high-performance CMOS, direct current 5V or 3.3V and two or three amps for low-power 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.|
|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.|
|Desktop publishing||Traditional publishing||Early desktop-publishing systems could not match high-end professional systems in either features or quality, but their impact was felt immediately as they lowered the cost of entry to the publishing business. By the mid-1990s, DTP had largely replaced traditional tools in most prepress operations.|
|Word Processing||Typewriter||The typewriter has been replaced with word processing software that has a wealth of functionality to stylize, copy and facilitate document production.|
|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.|
|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). However, traffic congestion provides a bound on the efficiency of car use, and so rail is still used for urban passenger transport.|
|High speed rail||Short distance flights||In almost every market where high speed rail with journey times of two hours or less was introduced in competition with an air service, the air service was either greatly reduced within a few years or ceased entirely. Even in markets with longer rail travel times, airlines have reduced the amount of flights on offer and passenger numbers have gone down. Examples include the Barcelona-Madrid high speed railway, the Cologne Frankfurt high speed railway (where no direct flights are available as of 2016) or the Paris-London connection after the opening of High Speed 1. For medium-distance trips, like between Beijing & Shanghai, the high speed rail and airlines often end up in extremely stiff competition.|
|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.|
|Transportation network company||Taxis||Ride sharing services that are part of the sharing economy are organized enough to offer lower prices than what traditional cabs charge and absorb much of their former customer base. As of 2017, Uber is continuing to lower its prices in an effort to discourage companies from competing with them.|
The most influential business idea of recent years is Clayton Christensen’s theory of disruptive innovation.
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