Although the phrase disruptive innovation is used often, it is best described by Clayton Christensen in his books “The Innovator’s Dilemma” and “The Innovator’s Solution.” Most new technologies are sustaining—they improve the performance of current products along dimensions that the market already values. Rarer disruptive innovations result in products that are worse than current offerings in the near-term, but offer a different value proposition and are directed toward a different set of customers.
There are two types of disruptive innovations: new-market and low-end. New-market disruptions create a new value network (the context in which customers and firms within an industry define what attributes are most important), with different performance attributes. They usually serve customers who would normally not be using the product at all (i.e. personal computers, Bloomberg terminals). Low-end disruptions attack the least-profitable and most overserved customers along attributes that the market currently values (i.e. discount retailing, steel minimills). Both types of disruption eventually end up overtaking or completely replacing current offerings as their performance improves.
There are also two types of sustaining innovations: incremental and breakthrough. Most sustaining innovations are simple, incremental year-to-year improvements. Others are dramatic, breakthrough advances that surpass all current offerings (i.e. contact lenses replacing glasses, airliners replacing other long-distance travel). Many people confuse the terms disruptive and breakthrough. Christensen further distinguishes them by pointing out that disruptive innovations usually do not entail technological breakthroughs. Instead, they package current technologies into a disruptive business model.
So why does it matter if a technology/business model is disruptive or sustaining? To consumers, it doesn’t matter. If a new innovation provides “…a way to do something better than it’s ever done before,” (David Neeleman) then its classification or origin is of no concern. But to both investors and the companies that create the innovations, where they fit in can make a big difference.
Established companies and leaders are usually very good at developing sustaining innovations. It is clear to these firms that their future profits depend on constantly improving technologies/practices, so they invest heavily in creating products and services with higher performance. After all, that’s what their current customers want. It is difficult for a startup or small company to develop a sustaining technology because they lack the resources of the established players.
Disruptive innovations turn things around. Here, the resources and processes of established companies are a hindrance. In the face of disruption, good management is the primary reason incumbents fail. Their downfall is because they listen to their customers and invest in better performance. Startups have the edge here because they can serve different customers (at first) and build their company and cost structures around the new innovation. Along the way, they gain experience, market share, and other first-mover advantages.
In my next post, I’ll take a look at Apple’s products through the lens of the above framework.