What is Disruptive Innovation?

Can your company be Disruptive? A lot seem to want to be. In the hypercompetitive digital world everybody is looking for an edge and being “Disruptive” sounds like a good way to be clever and beat the competition.

The term is used (or overused) usually to show that one is “thinking outside the box.” Yet Disruptive Innovation isn’t about being wily or cunning, it is about passion and privation. Companies who seek it should be careful what they wish for.

When Clayton Christensen coined the term “Disruptive Innovation” in his classic book, The Innovator’s Dilemma, he had something very specific and counter-intuitive in mind. It challenged previous assumptions about how business works.

He named it aptly, because Disruptive Innovation isn’t about being clever at all, but presents firms with some very difficult choices. As a matter of fact, if you’re an established company, the competitor you drive crazy might be yourself.

Why Do Successful Companies Fail ?

What Christensen set out to learn was, “How can great firms fail?” As a newly minted professor at Harvard, he wanted to find a common problem and prescribe a solution. He researched companies like Sears, DEC, and Xerox – all paragons at one time that eventually became well publicized laggards. His initial assumption was that these companies had somehow lost their way, but what he found was that they were actually following time-tested and honored principles.

They had great management: All of the corporations mentioned above were not only market leaders, but had competent, professional management. Their leaders were hailed as innovative geniuses and graced the covers of top business magazines. They were smart, disciplined and well versed in the latest management practices. They were asked to speak at top business schools and other CEO’s sought them out for advice.

They listened to their customers: The companies he studied didn’t have their heads in the sand. They met with customers regularly, listened to what they had to say and then strove to make products to meet their needs.

They spent heavily in R&D while relentlessly pursuing profits: The failed companies that Professor Christensen studied were not content with the status quo. They invested aggresively in the newest technologies and even pioneered innovations. They constantly sought not only to grow revenues, but profits and for years they delivered superior returns to their shareholders. These firms were fierce competitors!

A Surprising Answer

Obviously there was something counter-rational going on. How can well managed companies, the ones that did all the right things, fail so miserably and so fast? He found that just a few years after these companies were widely heralded business press darlings, they were just as widely panned for being foolishly mistaken on obvious trends. What had happened?

The answer he found was startling. These once great firms didn’t fail because of what they did wrong, but because of what they did right! They listened to their clients, invested heavily in the future and vigorously pursued above average profit margins. They, in effect, did everything that his own institution had taught students of business to do for generations!

What happened is that they fell prey to Disruptive Innovations. However, these innovations weren’t disruptive just because they made big enterprises fail. They all followed a specific pattern.

What Makes A Company Disruptive?

Professor Christensen discovered that in certain situations, firms revolutionize a market by pursing unusual business practices:

They make products that aren’t good enough for existing customers: One of the most shocking things that he found was that established companies miss out on Disruptive Innovations because they listen to their customers and give them more of what they are asking for. Remember the weird people who bought digital cameras when they were expensive and didn’t take good pictures? How could Kodak make money in what was a niche market when their customers were asking for better film?

Professor Christensen makes the point in a paradox: The most money is to be made where the product isn’t good enough, once it is, it becomes a commodity and profits fall. Business schools teach that successful firms should seek profits, so entrenched companies are happy to cede these lines of business to new competition. However, as the technology improves, the new firms advance further and eventually traditional firms have no place to retreat to.

There is no profitable market for what they are offering: If there was a current market for the “Next Big Thing,” it would actually be the “Current Big Thing.” Established companies with big R&D budgets and large, effective sales forces would have a clear advantage in this type of innovation. Christensen calls it a “sustaining innovation” and it goes on all of the time. Big companies are actually extremely good at it.

Disruptive Innovations are so difficult for established companies to pursue because there is no money in them. However, the opportunity might be big enough for a small company and then as the technology improves, you have the “Next Big Thing.”

It can’t make money in the conventional way: A Disruptive Innovation represents a fundamental shift in value that requires a change in the way business is done (remember, Kodak made their money in film, not cameras). You can find fairly extreme (and exciting!) examples of this in Chris Anderson’s new book Free.

Do You Really Want to Pursue Disruptive Innovation?

So if you want to aspire to Disruptive Innovation you will need to think of something that doesn’t work very well, has no market for it and no clear path to profitability (as Google did when “Search was dead”). That takes passion. If there are big budgets, nice offices or fancy cars in the parking lot, it probably either isn’t disruptive or it won’t be successful.

Nevertheless, the term “disruptive” has become so fashionable that even self styled “experts” are confused about it. A few years ago I attended a publishing course at Stanford University and a woman was giving a lecture on Disruptive Innovation. I asked her whether she was referring to the term in a general sense or using the Christensen term specifically. To which she replied, “Both.”

I was annoyed at first but then I thought, “Hey, she’s not a very good speaker, people aren’t interested in what she is saying and she’s not getting paid for this.” Maybe she’s got something there…

– Greg