The idea of disruptive innovation was introduced by Harvard Business School Professor Clayton M. Christensen in the mid 1990s in his book, "The Innovator's Dilemma". Since then, the concept has worked its way into the mainstream lexicon, especially in the world of Silicon Valley.
It’s hard to throw a stone in San Francisco without running into some company claiming to disrupt the startup space. Even TechCrunch, Verizon Media’s tech-focused news publisher, adopted the term for its series of worldwide conferences, TechCrunch Disrupt, but what exactly is it?
At its heart, disruption theory isn't just theory — it's a business model that allows a startup to edge out a large competitor by forging a market with its underserved customers and rising to the top — just as Google, Tesla and Amazon have done.
TL;DR (Too Long; Didn't Read)
Disruptive innovation is the idea that new entrants can outcompete an established company by targeting mainstream customers with new business models, good products, or disruptive technology that sets them apart from existing competition.
What Is Disruptive Innovation?
In the 25 years since the theory of disruptive innovation first hit Harvard Business School, its meaning has morphed. Startup founders have co-opted the word “disruption” to mean any innovation the company has made within its market, but that’s not the case. Tech falls in and out of fashion all the time, and old tech makes way for new tech, but true disruption is an actual business model that goes beyond doing something better than the current mainstream market.
The theory of disruptive innovation alleges that a small company with less-traditional resources than its established competitor (i.e., a startup versus a massive company like Apple) can outcompete the bigger company by targeting a segment of the market that has largely been ignored. Typically, this segment is the bottom of the market — the people who have been pushed aside because they’re not as profitable as other segments — but it can also be a new market that serves the established business's core group of consumers.
Innovation vs. Disruptive Innovation
Innovation and disruptive innovation are frequently mixed up because both have the ability to absolutely change the way society operates. A massive company like Uber may not be disruptive (though it’s frequently mislabeled as such), but it has changed the way the general population hails cabs.
Similarly, Theranos — a blood-testing company that was largely labeled a health care disruptor before its demise — was only disruptive in the sense that widespread fraud charges landed the company an HBO documentary and a whole lot of bad press. It wasn’t disruptive in the sense that Clayton Christensen described because it was only improving on technology that was widely used in an existing market.
The business model is what determines whether a company is disruptive or simply innovative. A typical business has a top-down approach and will first focus on the broadest, most profitable customer segment before expanding to the needs of smaller, less-lucrative segments. Disruptive innovators generally do the opposite and work from the bottom up.
For example, a company that uses the disruptive innovation model will typically launch its business by offering a new product or technology to the bottom of the market at a lower price than its established competitors. As the disruptor expands, it will steadily push that product up-market until it has usurped its established competitor’s foothold (or at the very least will sit right beside the competitor). The disruption happens when the established company starts losing its core consumers to the disruptor.
This is also not to say that disruptors don’t ever improve upon technology because that's absolutely necessary. New technology is part of the reason a startup can outcompete a long-standing corporation with a massive consumer base. Disruptors just take a bottom-up approach or use those improvements to forge an entirely new market.
How to Become a Disruptive Innovator
There’s more than one way to become a disruptive innovator. It just depends on the business model. Companies may disrupt an existing market through:
- Creating obsolescence
- Creating new technology
To understand how these methods work, it’s important to take a look at the companies that have successfully done it.
Disruption Through Trendsetting: Motorola
Some could argue that the Motorola Razr V3 disrupted the flip-phone space in 2004 when it hit the market but not because it had any sort of groundbreaking phone technology.
Plenty of tech companies were introducing flip phones with color screens and internet-surfing capabilities. In an era when cellphones were all business and utility, the Razr just looked cool, and according to PC Magazine, the sleek design helped the Razr sell more than 130 million units, making it one of the most successful phones of all time.
Disruption Through Obsolescence: Netflix
There’s a reason you don’t see video-rental stores very often anymore. Netflix managed to completely disrupt the home-movie space because it created obsolescence, but it didn’t just do it with its major competitor, Blockbuster. It also disrupted itself.
When Netflix started, the company was merely improving upon the video-rental space. The premise was simple: It would mail consumers DVD rentals right to their homes. It was the same core service as Blockbuster but with none of the hassle of actually leaving the house. As it caught on, video-rental stores began to suffer.
Netflix didn’t fully disrupt the video-rental space — essentially gutting an industry and cutting down fellow startups like Redbox in the crossfire — until it began to expand its streaming business by offering first-run movies.
This service allowed customers to choose movies on demand without the time or foresight required to mail videos back and forth. After that, Blockbuster was obsolete, but so was Netflix’s DVD mail-in service. Today, only one Blockbuster remains out of the 9,000 stores that existed during the company’s peak, and just 2.7-million people use Netflix’s DVD service out of its 139-million subscribers.
Disruption Through Technological Innovation: Apple
Even if a company already has a large market share in an industry, it doesn't mean it can't become a disruptor. Apple is renowned for disrupting the music-tech world with the creation of the iPod. This innovation tapped into a problem music listeners already had. Consumers were already listening to digital music, but it wasn't portable and had to first be burned to a CD before it could be played on a portable CD player.
Apple's iPod along with iTunes revolutionized the way consumers purchased and listened to music. The iTunes store created a brand-new market for digital music sales (previously, MP3s were not monetized). It also rendered the portable CD player obsolete. The new technology also made way for the iPhone, the arguable crowning achievement of the company.
Does Disruptive Innovation Have a Proven Competitive Advantage?
In a world without disruptive innovation, small companies would virtually never be able to compete with longstanding businesses unless they had mass backing, years of development or an idea so good that it’s absolutely undeniable. Even with that, you’d still need to convince consumers to ditch a trusted brand for a new product that is for the most part exactly the same as what they already have. Instead, disruptors generally gain a competitive advantage by price cutting the big guys and focusing all of their resources on innovation, even if the product may not be as good to start.
For example, consider the business model for a large company that makes personal computers, tablets and smartphones but wants to disrupt in the minicomputer space. Its business model may not support creating cheaper, lower-quality goods, which means launching a competitive line of minicomputers will take more money and more time. On top of it, this type of company generally has pressure to dump the majority of resources into its already-established products, leaving minicomputer innovations at a disadvantage.
Instead, a smaller PC company can dedicate 100% of its resources to customer needs and innovations within the minicomputer space. It can do it quickly because it doesn't have to worry about existing product lines or large product roll-outs. It has the space to quickly innovate.
How to Become a Disruptor
Companies that become disruptive innovators all have two things in common: They think outside of the box and are highly attuned to consumer needs. In order to set up your business to be a disruptive innovator, your startup needs to adopt this type of mindset. This could mean a couple of different things.
Disruptive innovators look outside of the box when it comes to technology — they don’t just create new technology. Sometimes, revolutionary technology already exists in a different industry and is used in a different application but can be applied to an unrelated market with great success. This is the ice-cream-cone model. When an ice-cream vendor at the 1904 World’s Fair ran out of dishes to serve his treats, he resorted to using the rolled-up, crispy waffles sold by the vendor next to him as a substitute.
Disruptive innovators also need to closely examine their potential customers and the customers of their competitors. Do market research, look at consumer complaints and try to figure out a way to solve problems that are being ignored. This is the Spotify model; the company recognized that a large portion of the music industry’s consumers were abandoning record stores and iTunes in favor of illegally downloading digital MP3s. They capitalized on it by offering legal, on-demand music streaming at monthly prices cheaper than the cost of a single album.
To remain a disruptive innovator, you sometimes also need to self-disruption. Be open to the opportunity of blowing up an old business model or product line for a brand-new one. Apple is the leader in this concept, sacrificing iPod sales in favor of developing better smartphone technology. This gave Apple a larger and more competitive share of the smartphone market but essentially made the iPod obsolete.
How to Protect Your Business From Disruptors
Even if your business follows the theory of disruptive innovation, it is not immune to its own disruptors once it finds success. In the world of tech, where innovations and technological breakthroughs happen quickly and often, businesses need to be hyper-vigilant. The best way to avoid being disrupted by a newcomer isn’t to dismantle a still-profitable business and focus all your efforts on new technology or a new market. Instead, the main focus should be on strengthening your relationship with your core customers.
To stay competitive, companies need to do two things. First, they need to invest in sustaining innovations, which essentially means continuously developing new features, products or technology that will better serve existing customers. Apple continuously releases newer, better models of the iPhone every year. Second, companies can also focus on expanding to new markets with new products or enterprises, but they’ll statistically have the best chance of success if those new things remain completely separated from the core business.
- PC Magazine: A Visual History of the Motorola Razr
- The Guardian: Netflix Co-founder: 'Blockbuster Laughed at Us … Now There's One Left'
- CNN Business: Netflix Adds 9 Million Paying Subscribers, but Stock Falls
- CNN Business: Why 2.7 Million Americans Still Get Netflix DVDs in the Mail
- BestLife: 30 Life-Changing Inventions That Were Totally Accidental
- Forbes: 4 Ways to Create a Disruptive Business Strategy
- Harvard Business Review: What Is Disruptive Innovation?
- Harvard Business Review: Disruptive Technologies: Catching the Wave
- Fortune: What Apple Can Teach Business About Disruption