When to use it

• To make sense of who the winners and losers are when an industry is going through change.
• To understand whether an innovation is a threat or an opportunity.
• To decide how your firm should respond.

Origins

Academic research has given a lot of attention to innovation over the years. Most people start with Joseph Schumpeter’s notion of ‘creative destruction’, which suggests that the process of innovation leads to new products and technologies, but at the expense of what came before. For example, firms producing typewriters were all ‘destroyed’ when the personal computer took off.

But not all innovation leads to creative destruction – sometimes it helps to support those firms who are already in a strong position. Research by Kim Clark and Rebecca Henderson in 1990 addressed this point by showing that the most dangerous innovations (from the point of view of established firms) were architectural innovations, meaning that they changed the way the entire business system functioned.

Clay Christensen, supervised in his doctoral dissertation by Kim Clark, took this idea one step further by introducing the idea that some new technologies are disruptive: they have a profound effect on the industry, but because of the way they emerge the established firms are very slow to respond to them. Christensen’s ideas were first published in a 1995 article with Joe Bower, and then developed in two books, The Innovator’s Dilemma in 1997 and The Innovator’s Solution (with Michael Raynor) in 2003.

Christensen’s ideas about disruptive innovation have become extremely popular, both because they are highly insightful and also because the emergence of the internet in 1995 meant that a lot of industries experienced high levels of disruption in the ensuing decade.

What it is

A disruptive innovation is an innovation that helps to create a new market. For example, the arrival of digital imaging technology opened up a new market for creating, sharing and manipulating pictures, and replaced the traditional market based on film, cameras and prints. Kodak was wiped out, and new firms with new offerings, such as Instagram, appeared in its place.

A sustaining innovation, in contrast, does not create new markets, but helps to evolve existing ones with better value, allowing the firms within to compete against each other’s sustaining improvements. The arrival of electronic transactions in banking, for example, might have been expected to disrupt the industry but it actually helped to sustain the existing leaders.

Christensen’s theory helps to explain why firms such as Kodak failed to respond effectively to digital imaging. One argument might be that the existing leaders failed to spot these new technologies as they emerged, but this is rarely true. Kodak, for example, was well aware of the threat of digitisation, and even invented the world’s first digital camera back in the 1980s.

In reality, established firms are usually aware of these disruptive innovations, but when those innovations are at an early stage of development they are not actually a threat – they typically do a very poor job of helping to address the existing needs of the market. The earliest digital cameras, for example, had very poor resolution. For an established firm such as Kodak, the priority is to listen to and respond to the needs of their best customers, which means adapting their existing products and services in more sophisticated ways.

Disruptive innovations may start out offering low-end quality, but they become better over time and eventually they become ‘good enough’ to compete head to head with some of the existing offerings in the market. In the world of photography, this transition occurred in the early 2000s with the arrival of digital cameras, and then cameras built in to the early smartphones. Throughout this transition, the established firms often continue to invest in the new technologies, but they don’t do so very seriously – because they are still making lots of money using their traditional technologies.

In contrast, new firms enter the market and throw all their weight behind these disruptive innovations. They often identify new services (such as sharing photos over the internet) and gradually they take market share away from the established firms. By the time the established firm has fully recognised the threat from the disruptive innovation, it is often too late to respond. Kodak spent most of the 2000s attempting to reposition itself as an imaging company, but it lacked the capabilities to make the transition and it was handicapped throughout by the difficulty of transitioning out of its old way of doing business.

Source: Adapted from Christensen, C.M. (1997) The Innovator’s Dilemma: When new technologies cause great firms to fail. Boston, MA: Harvard Business Review Press. Copyright © 1997 by the Harvard Business School Publishing Corporation, all rights reserved. Reprinted by permission of Harvard Business Review.

In summary, disruptive innovations tend to ‘come from below’ – they are often quite simple technologies or new ways of doing things, and they are ignored by established firms because they only address the needs of low-end customers, or even non-customers. But their improvement is then so fast and so substantial that they end up disrupting the existing market.

How to use it

It is obvious that startup firms like disruptive innovations, and indeed many venture capitalists actively seek out opportunities to invest in these types of opportunities. The more interesting question is how established firms use this understanding of disruptive innovations to help protect themselves. The basic advice is as follows:

• Keep track of emerging technologies: In most industries there are lots of new technologies bubbling up all the time, and as an established firm you need to keep track of them. Most of these technologies end up having no commercial uses, or they end up helping you to enhance your existing products or services (that is, they are sustaining innovations, in Christensen’s terms). But a few of them have the potential to be disruptive innovations, and these are the ones you should watch extremely closely. It is often a good idea to buy stakes in small firms using these technologies, and to put some R&D investment into them.
• Monitor the growth trajectory of the innovation: When you see an innovation that is creating a new market, or is selling to low-end customers, you need to monitor how successful it is becoming. Some low-end innovations remain stuck at the low end of the market. Some evolve (for example, through faster computer-processing speeds) and move up to address the needs of higher-end customers. These latter ones are the potentially disruptive innovations.
• Create a separate business to commercialise the disruptive innovation: If the innovation is looking threatening, the best way of responding is to create a separate business unit with responsibility for commercialising that opportunity. This business unit should be given a licence to cannibalise the sales of other business units, and to ignore the usual corporate procedures and rules so that it can act quickly. By giving it a lot of autonomy, the new business unit has the opportunity to behave in the same way as would a startup company. If it is successful, you can later think about how best to link its activities up to the activities of the rest of the firm.

Further reading

Christensen, C.M. (1997) The Innovator’s Dilemma: When new technologies cause great firms to fail. Boston, MA: Harvard Business Review Press.

Christensen, C.M. and Bower, J.L. (1996) ‘Customer power, strategic investment, and the failure of leading firms’, Strategic Management Journal, 17(3): 197–218.

Christensen, C.M. and Raynor, M.E. (2003) The Innovator’s Solution. Boston, MA: Harvard Business Press.

Henderson, R. and Clark, C. (1990) ‘Architectural innovation: The reconfiguration of existing product technologies and the failure of established firms’, Administrative Science Quarterly, 35(1): 9–30.

Lepore, J. (2014) ‘The disruption machine: What the gospel of innovation gets wrong’, The New Yorker, 23 June.