What is Disruptive Innovation?

THEBIGIDEAWHATIS44 HarvardBusinessReview December2015Twentyyearsaftertheintroductionofthetheory,werevisitwhatitdoes—anddoesn’t—explain.BYCLAYTONM.CHRISTENSEN,MICHAELRAYNOR,ANDRORYMCDONALDClaytonM.ChristensenistheKimB.ClarkProfessorofBusinessAdministrationatHarvardBusinessSchool.MichaelRaynorisadirectoratDeloitteConsultingLLP.RoryMcDonaldisanassistantprofessoratHarvardBusinessSchool.HBR.ORGDecember2015 HarvardBusinessReview 45Theproblemwithconflatingadisruptivein-novationwithanybreakthroughthatchangesanindustry’scompetitivepatternsisthatdifferenttypesofinnovationrequiredifferentstrategicap-proaches.Toputitanotherway,thelessonswe’velearnedaboutsucceedingasadisruptiveinnovator(ordefendingagainstadisruptivechallenger)willnotapplytoeverycompanyinashiftingmarket.Ifwegetsloppywithourlabelsorfailtointegrateinsightsfromsubsequentresearchandexperienceintotheoriginaltheory,thenmanagersmayendupusingthewrongtoolsfortheircontext,reduc-ingtheirchancesofsuccess.Overtime,thetheory’susefulnesswillbeundermined.Thisarticleispartofanefforttocapturethestateoftheart.WebeginbyexploringthebasictenetsofdisruptiveinnovationandexaminingwhethertheyapplytoUber.Thenwepointoutsomecommonpitfallsinthetheory’sapplication,howthesearise,andwhycorrectlyusingthetheorymatters.Wegoontotracemajorturningpointsintheevolutionofourthinkingandmakethecasethatwhatwehavelearnedallowsustomoreaccuratelypredictwhichbusinesseswillgrow.First,aquickrecapoftheidea:“Disruption”de-scribesaprocesswherebyasmallercompanywithfewerresourcesisabletosuccessfullychallengeestablishedincumbentbusinesses.Specifically,asincumbentsfocusonimprovingtheirproductsandservicesfortheirmostdemanding(andusuallymostprofitable)customers,theyexceedtheneedsofsomesegmentsandignoretheneedsofothers.Entrantsthatprovedisruptivebeginbysuccess-fullytargetingthoseoverlookedsegments,gainingafootholdbydeliveringmore-suitablefunctionality—frequentlyatalowerprice.Incumbents,chasinghigherprofitabilityinmore-demandingsegments,tendnottorespondvigorously.Entrantsthenmoveupmarket,deliveringtheperformancethatincum-bents’mainstreamcustomersrequire,whilepre-servingtheadvantagesthatdrovetheirearlysuccess.Whenmainstreamcustomersstartadoptingtheen-trants’offeringsinvolume,disruptionhasoccurred.(Seetheexhibit“TheDisruptiveInnovationModel.”)IsUberaDisruptiveInnovation?Let’sconsiderUber,themuch-fetedtransportationcompanywhosemobileapplicationconnectscon-sumerswhoneedrideswithdriverswhoarewillingtoprovidethem.Foundedin2009,thecompanyhasUnfortunately,disruptiontheoryisindangerofbecomingavictimofitsownsuccess.Despitebroaddissemination,thetheory’scoreconceptshavebeenwidelymisunderstoodanditsbasictenetsfre-quentlymisapplied.Furthermore,essentialrefine-mentsinthetheoryoverthepast20yearsappeartohavebeenovershadowedbythepopularityoftheinitialformulation.Asaresult,thetheoryissome-timescriticizedforshortcomingsthathavealreadybeenaddressed.There’sanothertroublingconcern:Inourexpe-rience,toomanypeoplewhospeakof“disruption”havenotreadaseriousbookorarticleonthesubject.Toofrequently,theyusethetermlooselytoinvoketheconceptofinnovationinsupportofwhateveritistheywishtodo.Manyresearchers,writers,andcon-sultantsuse“disruptiveinnovation”todescribeanysituationinwhichanindustryisshakenupandpre-viouslysuccessfulincumbentsstumble.Butthat’smuchtoobroadausage.hetheoryofdisruptiveinnovation,introducedinthesepagesin1995,hasprovedtobeapowerfulwayofthinkingaboutinnovation-drivengrowth.Manyleadersofsmall,entrepreneurialcompaniespraiseitastheirguidingstar;sodomanyexecutivesatlarge,well-establishedorganizations,includingIntel,SouthernNewHampshireUniversity,andSalesforce.com.THEBIGIDEA WHATISDISRUPTIVEINNOVATION?46 HarvardBusinessReview December201546 HarvardBusinessReview December2015enjoyedfantasticgrowth(itoperatesinhundredsofcitiesin60countriesandisstillexpanding).Ithasreportedtremendousfinancialsuccess(themostrecentfundingroundimpliesanenterprisevalueinthevicinityof$50billion).Andithasspawnedaslewofimitators(otherstart-upsaretryingtoemulateits“market-making”businessmodel).UberisclearlytransformingthetaxibusinessintheUnitedStates.Butisitdisruptingthetaxibusiness?Accordingtothetheory,theanswerisno.Uber’sfinancialandstrategicachievementsdonotqualifythecompanyasgenuinelydisruptive—althoughthecompanyisalmostalwaysdescribedthatway.Herearetworeasonswhythelabeldoesn’tfit.Disruptiveinnovationsoriginateinlow-endornew-marketfootholds.Disruptiveinnovationsaremadepossiblebecausetheygetstartedintwotypesofmarketsthatincumbentsoverlook.Low-endfootholdsexistbecauseincumbentstypicallytrytoprovidetheirmostprofitableanddemandingcustomerswithever-improvingproductsandser-vices,andtheypaylessattentiontoless-demandingcustomers.Infact,incumbents’offeringsoftenover-shoottheperformancerequirementsofthelatter.Thisopensthedoortoadisrupterfocused(atfirst)onprovidingthoselow-endcustomerswitha“goodenough”product.Inthecaseofnew-marketfootholds,disrupt-erscreateamarketwherenoneexisted.Putsimply,theyfindawaytoturnnonconsumersintoconsum-ers.Forexample,intheearlydaysofphotocopyingtechnology,Xeroxtargetedlargecorporationsandchargedhighpricesinordertoprovidetheperfor-mancethatthosecustomersrequired.Schoollibrar-ians,bowling-leagueoperators,andothersmallcustomers,pricedoutofthemarket,madedowithcarbonpaperormimeographmachines.Theninthelate1970s,newchallengersintroducedpersonalIdeainBriefTHEISSUETheideassummedupinthephrase“disruptiveinnovation”havebecomeapowerfulpartofbusinessthinking—butthey’reindangeroflosingtheirusefulnessbecausethey’vebeenmisunderstoodandmisapplied.THERESPONSETheleadingauthoritiesondisruptiveinnovationrevisitthecentraltenetsofdisruptiontheory,itsdevelopmentoverthepast20years,anditslimitations.THEBOTTOMLINEDoesitmatterwhetherUber,say,isadisruptiveinnovationorsomethingelseentirely?Itdoes:Wecan’tmanageinnovationeffectivelyifwedon’tgraspitstruenature.copiers,offeringanaffordablesolutiontoindividu-alsandsmallorganizations—andanewmarketwascreated.Fromthisrelativelymodestbeginning,per-sonalphotocopiermakersgraduallybuiltamajorpositioninthemainstreamphotocopiermarketthatXeroxvalued.Adisruptiveinnovation,bydefinition,startsfromoneofthosetwofootholds.ButUberdidnotoriginateineitherone.Itisdifficulttoclaimthatthecompanyfoundalow-endopportunity:Thatwouldhavemeanttaxiserviceprovidershadovershottheneedsofamaterialnumberofcustomersbymak-ingcabstooplentiful,tooeasytouse,andtooclean.NeitherdidUberprimarilytargetnonconsumers—peoplewhofoundtheexistingalternativessoexpen-siveorinconvenientthattheytookpublictransitordrovethemselvesinstead:UberwaslaunchedinSanFrancisco(awell-servedtaximarket),andUber’scustomersweregenerallypeoplealreadyinthehabitofhiringrides.Uberhasquitearguablybeenincreasingtotaldemand—that’swhathappenswhenyoudevelopabetter,less-expensivesolutiontoawidespreadcustomerneed.Butdisruptersstartbyappealingtolow-endorunservedconsumersandthenmigratetothemainstreammarket.Uberhasgoneinexactlytheoppositedirection:buildingapositioninthemain-streammarketfirstandsubsequentlyappealingtohistoricallyoverlookedsegments.Disruptiveinnovationsdon’tcatchonwithmainstreamcustomersuntilqualitycatchesuptotheirstandards.Disruptiontheorydiffer-entiatesdisruptiveinnovationsfromwhatarecalled“sustaininginnovations.”Thelattermakegoodprod-uctsbetterintheeyesofanincumbent’sexistingcustomers:thefifthbladeinarazor,theclearerTVpicture,bettermobilephonereception.Theseim-provementscanbeincrementaladvancesormajorHBR.ORGDecember2015 HarvardBusinessReview 47breakthroughs,buttheyallenablefirmstosellmoreproductstotheirmostprofitablecustomers.Disruptiveinnovations,ontheotherhand,areinitiallyconsideredinferiorbymostofanincum­bent’scustomers.Typically,customersarenotwill­ingtoswitchtothenewofferingmerelybecauseitislessexpensive.Instead,theywaituntilitsqualityrisesenoughtosatisfythem.Oncethat’shappened,theyadoptthenewproductandhappilyacceptitslowerprice.(Thisishowdisruptiondrivespricesdowninamarket.)MostoftheelementsofUber’sstrategyseemtobesustaininginnovations.Uber’sservicehasrarelybeendescribedasinferiortoexistingtaxis;infact,manywouldsayitisbetter.Bookingariderequiresjustafewtapsonasmartphone;paymentiscash­lessandconvenient;andpassengerscanratetheirridesafterward,whichhelpsensurehighstandards.Furthermore,Uberdeliversservicereliablyandpunctually,anditspricingisusuallycompetitivewith(orlowerthan)thatofestablishedtaxiservices.Andasistypicalwhenincumbentsfacethreatsfromsustaininginnovations,manyofthetaxicompa­niesaremotivatedtorespond.Theyaredeployingcompetitivetechnologies,suchashailingapps,andcontestingthelegalityofsomeofUber’sservices.WhyGettingItRightMattersReadersmaystillbewondering,WhydoesitmatterwhatwordsweusetodescribeUber?Thecompanyhascertainlythrownthetaxiindustryintodisarray:Isn’tthat“disruptive”enough?No.Applyingthetheorycorrectlyisessentialtorealizingitsbenefits.Forexample,smallcompetitorsthatnibbleawayattheperipheryofyourbusinessverylikelyshouldbeignored—unlesstheyareonadisruptivetrajectory,inwhichcasetheyareapotentiallymortalthreat.Andbothofthesechallengesarefundamentallydifferentfromeffortsbycompetitorstowooyourbread­and­buttercustomers.AstheexampleofUbershows,identifyingtruedisruptiveinnovationistricky.Yetevenexecutiveswithagoodunderstandingofdisruptiontheorytendtoforgetsomeofitssubtleraspectswhenmakingstrategicdecisions.We’veobservedfourimportantpointsthatgetoverlookedormisunderstood:1.Disruptionisaprocess.Theterm“disrup­tiveinnovation”ismisleadingwhenitisusedtorefertoaproductorserviceatonefixedpoint,ratherthantotheevolutionofthatproductorserviceovertime.Thefirstminicomputersweredisruptivenotmerelybecausetheywerelow­endupstartswhentheyap­pearedonthescene,norbecausetheywerelaterheraldedassuperiortomainframesinmanymar­kets;theyweredisruptivebyvirtueofthepaththeyfollowedfromthefringetothemainstream.Mosteveryinnovation—disruptiveornot—beginslifeasasmall­scaleexperiment.Disrupterstendtofocusongettingthebusinessmodel,ratherthanmerelytheproduct,justright.Whentheysuc­ceed,theirmovementfromthefringe(thelowendofthemarketoranewmarket)tothemainstreamerodesfirsttheincumbents’marketshareandthentheirprofitability.Thisprocesscantaketime,andincumbentscangetquitecreativeinthedefenseoftheirestablishedfranchises.Forexample,morethan50yearsafterthefirstdiscountdepartmentstorewasopened,mainstreamretailcompaniesstilloperatetheirtraditionaldepartment­storeformats.Completesubstitution,ifitcomesatall,maytakedecades,becausetheincrementalprofitfromstay­ingwiththeoldmodelforonemoreyeartrumpsproposalstowriteofftheassetsinonestroke.Thefactthatdisruptioncantaketimehelpstoexplainwhyincumbentsfrequentlyoverlookdis­rupters.Forexample,whenNetflixlaunched,in1997,itsinitialservicewasn’tappealingtomostofBlockbuster’scustomers,whorentedmovies(typicallynewreleases)onimpulse.Netflixhadanexclusivelyonlineinterfaceandalargeinventoryofisruptersfirstappealtolow-endorunservedcustomersandthenmigratetothemainstreammarket.Uberhasgoneintheoppositedirection:buildingapositioninthemainstreammarketfirstandthenappealingtohistoricallyoverlookedsegments.THEBIGIDEA WHATISDISRUPTIVEINNOVATION?48 HarvardBusinessReview December2015movies,butdeliverythroughtheU.S.mailmeantselectionstookseveraldaystoarrive.Theserviceap-pealedtoonlyafewcustomergroups—moviebuffswhodidn’tcareaboutnewreleases,earlyadoptersofDVDplayers,andonlineshoppers.IfNetflixhadnoteventuallybeguntoserveabroadersegmentofthemarket,Blockbuster’sdecisiontoignorethiscom-petitorwouldnothavebeenastrategicblunder:Thetwocompaniesfilledverydifferentneedsfortheir(different)customers.However,asnewtechnologiesallowedNetflixtoshifttostreamingvideoovertheinternet,thecompanydideventuallybecomeappealingtoBlockbuster’scorecustomers,offeringawiderse-lectionofcontentwithanall-you-can-watch,on-demand,low-price,high-quality,highlyconvenientapproach.Anditgotthereviaaclassicallydisruptivepath.IfNetflix(likeUber)hadbegunbylaunchingaservicetargetedatalargercompetitor’scoremarket,Blockbuster’sresponsewouldverylikelyhavebeenavigorousandperhapssuccessfulcounterattack.ButfailingtorespondeffectivelytothetrajectorythatNetflixwasonledBlockbustertocollapse.2.Disruptersoftenbuildbusinessmodelsthatareverydifferentfromthoseofincum-bents.Considerthehealthcareindustry.Generalpractitionersoperatingoutoftheirofficesoftenrelyontheiryearsofexperienceandontestresultstointerpretpatients’symptoms,makediagnoses,andprescribetreatment.Wecallthisa“solutionshop”businessmodel.Incontrast,anumberofconve-nientcareclinicsaretakingadisruptivepathbyus-ingwhatwecalla“process”businessmodel:Theyfollowstandardizedprotocolstodiagnoseandtreatasmallbutincreasingnumberofdisorders.Onehigh-profileexampleofusinganinnova-tivebusinessmodeltoeffectadisruptionisApple’siPhone.TheproductthatAppledebutedin2007wasasustaininginnovationinthesmartphonemarket:Ittargetedthesamecustomerscovetedbyincumbents,anditsinitialsuccessislikelyexplainedbyproductsuperiority.TheiPhone’ssubsequentgrowthisbet-terexplainedbydisruption—notofothersmart-phonesbutofthelaptopastheprimaryaccesspointtotheinternet.ThiswasachievednotmerelythroughproductimprovementsbutalsothroughtheTHEDISRUPTIVEINNOVATIONMODELThisdiagramcontrastsproductperformancetrajectories(theredlinesshowinghowproductsorservicesimproveovertime)withcustomerdemandtrajectories(thebluelinesshowingcustomers’willingnesstopayforperformance).Asincumbentcompaniesintroducehigher-qualityproductsorservices(upperredline)tosatisfythehighendofthemarket(whereprofitabilityishighest),theyovershoottheneedsoflow-endcustomersandmanymainstreamcustomers.Thisleavesanopeningforentrantstofindfootholdsintheless-profitablesegmentsthatincumbentsareneglecting.Entrantsonadisruptivetrajectory(lowerredline)improvetheperformanceoftheirofferingsandmoveupmarket(whereprofitabilityishighestforthem,too)andchallengethedominanceoftheincumbents.HIGHERLOWERPRODUCTPERFORMANCETIMEINCUMBENT’SSUSTAININGTRAJECTORYENTRANT’SDISRUPTIVETRAJECTORYMAINSTREAMLOWENDOFTHEMARKETLEASTPROFITABLEPERFORMANCECUSTOMERSWILLPAYFORHIGHENDOFTHEMARKETMOSTPROFITABLEHBR.ORGDecember2015 HarvardBusinessReview 49introductionofanewbusinessmodel.Bybuildingafacilitatednetworkconnectingapplicationdevelop-erswithphoneusers,Applechangedthegame.TheiPhonecreatedanewmarketforinternetaccessandeventuallywasabletochallengelaptopsasmain-streamusers’deviceofchoiceforgoingonline.3.Somedisruptiveinnovationssucceed;somedon’t.Athirdcommonmistakeistofocusontheresultsachieved—toclaimthatacompanyisdisruptivebyvirtueofitssuccess.Butsuccessisnotbuiltintothedefinitionofdisruption:Noteverydisruptivepathleadstoatriumph,andnoteverytri-umphantnewcomerfollowsadisruptivepath.Forexample,anynumberofinternet-basedre-tailerspursueddisruptivepathsinthelate1990s,butonlyasmallnumberprospered.Thefailuresarenotevidenceofthedeficienciesofdisruptiontheory;theyaresimplyboundarymarkersforthetheory’sapplication.Thetheorysaysverylittleabouthowtowininthefootholdmarket,otherthantoplaytheoddsandavoidhead-oncompetitionwithbetter-resourcedincumbents.Ifwecalleverybusinesssuccessa“disruption,”thencompaniesthatrisetothetopinverydiffer-entwayswillbeseenassourcesofinsightintoacommonstrategyforsucceeding.Thiscreatesadan-ger:Managersmaymixandmatchbehaviorsthatareverylikelyinconsistentwithoneanotherandthusunlikelytoyieldthehoped-forresult.Forexample,bothUberandApple’siPhoneowetheirsuccesstoaplatform-basedmodel:Uberdigitallyconnectsriderswithdrivers;theiPhoneconnectsappdevel-operswithphoneusers.ButUber,truetoitsnatureasasustaininginnovation,hasfocusedonexpand-ingitsnetworkandfunctionalityinwaysthatmakeitbetterthantraditionaltaxis.Apple,ontheotherhand,hasfollowedadisruptivepathbybuildingitsecosystemofappdeveloperssoastomaketheiPhonemorelikeapersonalcomputer.4.Themantra“Disruptorbedisrupted”canmisguideus.Incumbentcompaniesdoneedtorespondtodisruptionifit’soccurring,buttheyshouldnotoverreactbydismantlingastill-profitablebusiness.Instead,theyshouldcontinuetostrengthenrelationshipswithcorecustomersbyinvestinginsustaininginnovations.Inaddition,theycancreateanewdivisionfocusedsolelyonthegrowthopportunitiesthatarisefromthedisrup-tion.OurresearchsuggeststhatthesuccessofthisnewenterprisedependsinlargepartonkeepingTHEUBIQUITOUS“DISRUPTIVEINNOVATION”“Disruptiveinnovation”and“disruptivetechnology”arenowpartofthepopularbusinesslexicon,assuggestedbythedramaticgrowthinthenumberofarticlesusingthosephrasesinrecentyears.SOURCE FACTIVAANALYSISOFAWIDEVARIETYOFENGLISH-LANGUAGEPUBLICATIONS2,5002,0001,5001,0005000199820002002200420062008201020122014ARTICLESTHEBIGIDEA WHATISDISRUPTIVEINNOVATION?50 HarvardBusinessReview December2015itseparatefromthecorebusiness.Thatmeansthatforsometime,incumbentswillfindthemselvesmanagingtwoverydifferentoperations.Ofcourse,asthedisruptivestand-alonebusinessgrows,itmayeventuallystealcustomersfromthecore.Butcorporateleadersshouldnottrytosolvethisproblembeforeitisaproblem.WhataDisruptiveInnovationLensCanRevealItisrarethatatechnologyorproductisinherentlysustainingordisruptive.Andwhennewtechnol-ogyisdeveloped,disruptiontheorydoesnotdictatewhatmanagersshoulddo.Insteadithelpsthemmakeastrategicchoicebetweentakingasustainingpathandtakingadisruptiveone.Thetheoryofdisruptionpredictsthatwhenanentranttacklesincumbentcompetitorshead-on,of-feringbetterproductsorservices,theincumbentswillacceleratetheirinnovationstodefendtheirbusiness.Eithertheywillbeatbacktheentrantbyofferingevenbetterservicesorproductsatcompa-rableprices,oroneofthemwillacquiretheentrant.Thedatasupportsthetheory’spredictionthaten-trantspursuingasustainingstrategyforastand-alonebusinesswillfacesteepodds:InChristensen’sseminalstudyofthediskdriveindustry,only6%ofsustainingentrantsmanagedtosucceed.Uber’sstrongperformancethereforewarrantsex-planation.Accordingtodisruptiontheory,Uberisanoutlier,andwedonothaveauniversalwaytoaccountforsuchatypicaloutcomes.InUber’scase,webelievethattheregulatednatureofthetaxibusinessisalargepartoftheanswer.Marketentryandpricesarecloselycontrolledinmanyjurisdictions.Consequently,taxicompanieshaverarelyinnovated.Individualdrivershavefewwaystoinnovate,excepttodefecttoUber.SoUberisinauniquesituationrelativetotaxis:Itcanofferbetterqualityandthecompetitionwillfindithardtorespond,atleastintheshortterm.Tothispoint,we’veaddressedonlywhetherornotUberisdisruptivetothetaxibusiness.Thelim-ousineor“blackcar”businessisadifferentstory,andhereUberisfarmorelikelytobeonadisruptivepath.Thecompany’sUberSELECToptionprovidesmore-luxuriouscarsandistypicallymoreexpensivethanitsstandardservice—buttypicallylessexpen-sivethanhiringatraditionallimousine.Thislowerpriceimposessomecompromises,asUberSELECTcurrentlydoesnotincludeonedefiningfeatureoftheleadingincumbentsinthismarket:acceptanceofadvancereservations.Consequently,thisofferingfromUberappealstothelowendofthelimousineservicemarket:customerswillingtosacrificeamea-sureofconvenienceformonetarysavings.ShouldUberfindwaystomatchorexceedincumbents’performancelevelswithoutcompromisingitscostandpriceadvantage,thecompanyappearstobewellpositionedtomoveintothemainstreamofthelimobusiness—anditwillhavedonesoinclassicallydisruptivefashion.HowOurThinkingAboutDisruptionHasDevelopedInitially,thetheoryofdisruptiveinnovationwassimplyastatementaboutcorrelation.Empiricalfindingsshowedthatincumbentsoutperformedentrantsinasustaininginnovationcontextbutun-derperformedinadisruptiveinnovationcontext.Thereasonforthiscorrelationwasnotimmediatelyevident,butonebyone,theelementsofthetheoryfellintoplace.Firs