Disruptive innovation model

Mature markets often concentrate around a few incumbents whose processes and margins are built for large, profitable customers. Smaller or non-consuming customers may be ignored because their needs appear uneconomic. A disruptive entrant starts with a business model suited to that overlooked demand, then improves until it can serve the mainstream.

The first automobiles did not disrupt horse-drawn transport while they remained expensive luxuries. Mass production and a simple design made Ford’s Model T accessible to a much broader market. The lesson is that novelty alone is insufficient; the economics and market path matter.

When to use it

• Use the model to search for an overlooked foothold and a distinctive way to compete.
• Use it when an incumbent’s most profitable customers and processes make a smaller emerging market difficult to pursue.

Origins

Joseph Bower and Clayton Christensen introduced the theory in their 1995 Harvard Business Review article “Disruptive Technologies: Catching the Wave.” The 1995 formulation focused on technology, but later work used “disruptive innovation” to emphasise that a business model, channel or production method can enable disruption. Christensen developed the argument in The Innovator’s Dilemma in 1997.

What it is

A low-end entrant offers performance that may be below the incumbent’s standard but sufficient for overserved customers, usually with lower cost, greater simplicity or convenience. Incumbents tolerate the foothold because it is small and less profitable. The entrant gains volume and capability, improves and moves into more demanding segments.

New-market disruption follows a related path by enabling people who could not previously consume. Low-cost airlines, for example, expanded air travel for some customers as well as competing with legacy carriers.

A better high-end product is not disruptive merely because it takes share. A premium importer offering superior cars competes through sustaining improvement unless it begins in an overlooked foothold and changes the basis of access or competition.

Developments of the model

Later discussion exposed how frequently “disruptive” is used as a synonym for successful innovation. Christensen argued that Uber improved the existing taxi market rather than beginning in a classic low-end or new-market foothold; Tesla likewise entered from the premium end. These companies may transform their industries without fitting the original causal theory.

For practical strategy, maintain the distinction. Broad industry transformation is worth studying, but labelling every transformation disruption makes the model impossible to test. Emerging methods such as additive manufacturing should be evaluated by the customer they first serve, the economics they enable and the trajectory they may follow.

How to use it

Use examples to understand the mechanism, then test rather than copy the label:

• Wikipedia displaced much demand for traditional encyclopaedias.

• Internet calling challenged traditional telephone services.

• Smartphones absorbed many personal-computer tasks.

• LEDs replaced older lighting technologies.

• Plastics substituted for metal, wood and glass in selected uses.

• Digital media displaced CDs.

• Digital photography displaced film.

• Word processors and computers displaced typewriters.

• High-speed rail substituted for some short flights.

The steel minimill is a classic illustration. Integrated mills relied on continuously operating blast furnaces and large scale. Minimills used scrap steel and flexible electric-arc furnaces, began with simple reinforcing bar and later improved into steel strip. Nucor rose from a small position in 1968 to become a leading producer because the new process supported a different cost structure and gradual movement upmarket.

An entrant can pursue the foothold without protecting a legacy margin. An incumbent may need a separate unit whose economics and priorities fit the emerging business. Acquiring a promising company is another route, but only if integration does not destroy the conditions that made it viable.

Some things to think about

• A low-cost foothold is strongest when it also solves a neglected job; Dollar Shave Club combined price with direct delivery.

• A standalone unit can protect the emerging model from core-business targets, as Dow Corning did with the online Xiameter proposition for silicones.

Top practical tip

Define the overlooked customer, the “good enough” performance level and the cost structure that makes the foothold profitable. Then monitor whether improvement is carrying the offer toward more demanding buyers.

Top pitfall

Do not protect an emerging unit in name while imposing the core business’s margins, channel rules and customer priorities. Nor assume a cheaper offer is disruptive if it has no viable path beyond a small niche.

Further reading

• Bower, J.L. and Christensen, C.M. (nineteen ninety-five). “Disruptive Technologies: Catching the Wave.” Harvard Business Review.
• Christensen, C.M. (nineteen ninety-seven). The Innovator’s Dilemma. Harvard Business School Press.