Disruptive Innovation
Toppling Giants with New Inferior Innovation (without them realising)
Quick disclaimer for people looking for a single right answer:
This is not maths or physics, this is management, and as such there are no definite right or wrong answers. Not all the data will always fit the theories. But that doesn’t mean they are not still useful in helping you understand the general trends, work out what might be going on under the surface and make complex decisions.
One theory may seem to contradict another, whilst some may use similar terms and language but mean different things. So before making a decision, consider the implications of a few theories, treat them cautiously but with respect. On this page I introduce one such theory that has it’s supporters and it’s opponents, but even so, it’s still a powerful insight into what might be transferable to whatever situation you find yourself in.
The three themes to innovation:
Clayton Christensen (the inventor of the theory of disruptive innovation) broadly classes innovation (the competitive landscape between companies) into three different themes:
Sustaining Innovation
Making the same (more or less) things better and better. The general progression of the iPhone might be a good sustaining innovation example. The basic premise of the idea remains the same, but each year it improves. I understand this to mean a combination of incremental and breakthrough innovation, because in both cases the market and customer is clearly understood so you know what you need to do to better serve them, regardless of it being a small gradual improvement or a large step change in the technology employed to do that.
Efficiency Innovation
Producing something similar to the competition but at a much lower cost. When Toyota first began competing with American car companies in the US the domestic established firms took around 60 days to build a car. This meant for every car there was around 60 days of work-in-progress inventory needing to be stored, managed and paid for. Toyota could build a similar car in 2 days. Even if the basic cost of the vehicle was the same Toyota saved so much money in comparison to the competition through radical process improvement that they had more money to invest in new better cars or processes or perhaps just bigger sales promotions.
Disruptive Innovation
Christensen’s breakthrough piece of research, a type of competitive behaviour where a cheaper, inferior product, slowly takes over the whole market, pushing out all the incumbents. Whilst not as common as the previous two, it was a controversial new theory because he suggested that the incumbents are almost powerless to prevent it. Their need to chase better profitability and ‘sensible’ business decisions makes it happen. As you might imagine, this was not a welcome revelation for business schools.
Disruptive. How the big guys can lose by doing everything right.
In the world of business and competition new things are happening all the time, new products come out that are better than what you have, and customers move around. Sometimes things happen that mean your business might have to change what it does or how it does it, and yes that is 'disrupting’ to your business as usual. But it is not necessarily ‘disruptive’, as Christensen defines it.
Why is this difference important?
It’s important because when he released his theory, it blew a huge hole in decades of business school teaching and went completely against the conventional logic of how to tackle new competitors.
His theory follows the idea that:
Situations will occur (the arrival of a new lower cost competitor or service provider) where it will make sense for you to abandon that activity and move your business up the value stream, focusing on higher profit margin offerings, shedding costs and becoming more profitable in the process.
This is exactly what a classic MBA business course would encourage leaders and managers to do. It makes good business sense to move upstream, chase the more profitable customers, ditch the overly competitive low value items and the costs associated with them, thus becoming more profitable and more successful. However what Christensen identified was that in some circumstances this situation can repeat itself over and over again, each time the company moving further upstream until eventually there is no room left and they find themselves without a business at all.
This is problematic because unless you are aware of this big picture trend, you may be racing towards the end of the game with a big smile on your face, until it’s too late.
The act of moving upstream, may require you to create new innovative offerings and services. This is called “Sustaining Innovation” and is the opposite side of the coin to “Disruptive Innovation”. It is not a free ride, but it is the more obvious decision because you’re aiming to produce something you know your customers want. Rather than reinvent yourself to fight over something that didn’t seem worth defending in the first place.
The ‘Innovator’s Dilemma’
Clayton Christensen was a Harvard Professor who first created the term through his extensive business research. A fascinating thinker who sadly died not long ago and whose fresh insight I’m sure will sadly be missed. He’s written several books on this topic of Disruptive Innovation but he’s also recorded some great video lectures on the topic. Two you should definitely find the time to watch follow here if you want to better understand the concepts.
In his own words, the problem with understanding and defending against Disruptive Innovation is that:
“in every company, every day, every year, people are going into senior management and saying ‘I’ve got a new product for us’. Some of those involve making better products that you can sell for higher profits to our best customers, but some cause you to have to go after new markets, to people who aren’t your customers and the product you want to sell them is so much more affordable and simple that your current customers don’t want it.
So the choice you have to make is: “Should we make better products that we can sell for better profits to our best customers or maybe we should be worse products that none of our customers would buy and would ruin our [profit] margins”… So the dilemma is why would you ever invest to defend the lowest profit end of your business?”
So the cycle of disruptive innovation continues again and again.
The Innovator’s Dilemma in seven pictures
Why companies are unable to see the threat or are unwilling to change direction until it’s too late.
1. Trying to satisfy ever increasing customer demands.
2. Business as usual, the firm is always trying to improver performance and profit.
3. A new lower performance technology appears but it’s much cheaper to produce.
4. A new technology is spotted, but why invest in defending an unattractive market when we can find new better ones?
5. The Disrupter gains ground quickly, closing the performance gap and stealing the lower profitability customers.
6. Technology development plateaus and the established firm is eventually overtaken.
7. The cycle repeats with the arrival of a new challenger.
Just two players at a time?
Don’t forget, when I say an established firm, incumbent or challenger, it may not be just one firm. This is a phenomenon that can affect whole industries. Which makes the innovator’s dilemma even harder to navigate at the time. Not only are new challengers appearing and disappearing all the time, but all your competitors (doing a similar thing to you) are still trying to beat you at the things you currently do. So each arrow in the pictures above might represent 1, 2, 5, 10 or perhaps even hundreds of businesses, all trying to fight for customers at the same time.
Which is even more reason not to divert resources to an unattractive new market full of risk.
Like a Greek tragedy on repeat, each time a new hard disk invention was created it was ‘birthed’ in the labs of the current industry ‘Kings’. But was thrown out unwanted into the wilderness. Finding a new home in a new chaotic part of the computer hardware industry it would rise up and eventually usurp its father to claim the crown for itself. Unfortunately the fairy tale never lasted long because they would make all the same mistakes of their parents and a once rejected children would come back for revenge, again and again and again.
An extensive hour long lecture with loads of great examples on how this concept works in the real world. Well worth the time to watch.
1 small problem…Disruptive is just too good a word.
Unfortunately for Mr Christensen, he coined a term that just sounded too great.
It’s just a great way of describing a new idea, business or product. Everyone doing anything new wanted to be called disruptive, it sounds exciting and became a startup buzzword, attached to every crazy idea. Sadly however it misses the whole point that Clayton was trying to get to and gives people a false impression of what it is without his deeper insight.
It’s also used incorrectly very often, a sort of Chinese Whispers of bloggers and authors only half reading something or instead of reading Christensen’s books themselves, perpetuate the falsehood by quoting other incorrect sources.
So I highly recommend his book “The Innovator’s Dilemma” and watching his videos to understand it properly.
One significant criticism of the theory is that it’s great for academic discussion of the past, but not very useful for steering and guiding decision makers in the present. Especially since most new ideas fail, you can’t spend all your time and money chasing potential disruptive innovations… so whilst I believe it’s important to be aware of these trends, it’s not something that should dominate your thoughts. There are plenty of other reasons why companies fail to see competition or fail to adapt accordingly once the future is obvious.
Other reasons big champions fail?
As I’ve said above, not every time a big champion of industry, a big business with plenty of resources fails was because they were disrupted as Clayton defined it. Sometimes they just make bad decisions.
One of these bad decisions (only obvious in hindsight) that seems to be made over and over again is due to what is now known as Architectural Innovation (discovered by Rebecca M. Henderson and Kim B. Clark in 1990).
If your whole organisation is designed and built up around the shape of a certain thing that has made you very successful in the past. Any new creation that means you have to change this organisational structure will be resisted covertly and overtly by the organisation. It just doesn’t fit with how we’ve always done things… Kodak with the digital camera, Sony with the MP3 player, Xerox with the personal computer, the British army with the introduction of the Tank.
Whilst all these creations we’re invented by the current champion, they didn’t fit within their organisational structure and would have caused too much painful change to so were ignored, sold or licensed to competitors. Until it was too late.