Fresh Insights From Clayton Christensen On Disruptive Innovation15 December, 2015 / Articles
Following the publication in this month’s Harvard Business Review of the article “What Is Disruptive Innovation?” by Clayton Christensen, Michael Raynor and Rory McDonald, I talked with Clayton about the evolving thinking on disruptive innovation.
Steve Denning: I was inspired by your call at the Drucker Forum last year to find common language to talk about the management issues that we all care about. In that spirit, I was hoping that we could talk about how to describe the different kinds of disruptive innovation going on in the marketplace.
Clayton Christensen: I’m glad you’re asking those questions, because I’ve learned a lot in the last year. Let me describe my current thinking. Some of this came from discussion with Professor Joshua Gans at the Rotman School of Business in Toronto who is writing a book on disruption, The Disruption Dilemma, which is to be published in March 2016. He shared an early draft of the book with me. It raised some questions about the theory of disruption. I told him it was a great book, although there were some things we needed to talk about. And so we had a wonderful discussion.
I explained to him that over the years, people had come to us with things that they had identified that couldn’t be accounted for by the theory of disruption. And we agreed that the theory couldn’t account for those things. In some cases, we extended the theory so that it could account for those things. In other cases, we said that the theory was not applicable to those kinds of innovations. Over twenty years, the theory has evolved and improved in response to people who have used it.
A Web Presence For Disruption
Christensen: Then Joshua said something that surprised me. He said, “I’ve been teaching strategy for 25 years, and an important part of the course in strategy has been disruption. I realize now that I have been teaching disruption theory as it existed in about 2003. So where do I go to get the state of the art in disruption theory?”
Then I realized: “He’s right! We have made all these improvements to the theory, but they have existed in papers or notes here in Cambridge or in my mind.” So I decided that we need to establish a web presence for disruption where the most current thinking on the theory can be found.
I envision that the website will be for people who are continuing to study the theory of disruptive innovation. To start, we will post improvements to the theory that are constantly happening. Ultimately we’d like the site to become a place where people can come and add to the theory and make it better. Even people who are critical of the theory will be welcomed with open arms so that they can make their suggestions. How can the theory be improved if people aren’t describing what it can’t do?
I’m very excited about this. There aren’t many website like it in academia for business, where people can build upon the work that other people have done.
Denning: Can you give an example of a recent improvement to the theory that might be included on this site?
Christensen: We’ve recently had an important insight about how the trajectories of technological improvement are different in different industries. In some industries the trajectory of technological improvement is very steep, like the disk drive industry where every eight years some firm was getting eliminated. In others, the trajectory of improvement is gentler, like in discount retailing. And finally in others, the trajectory is flat, as it was historically in higher education prior to online learning.
This has important implications for disruption. When it’s flat, disruption doesn’t occur. New technology and business models can bring significant change to an industry where disruption hasn’t yet occurred, as Airbnb is bringing to the hotel industry. Airbnb is a classic case of disruptive innovation. They started out at the low-end—targeting customers who couldn’t afford a hotel (or who couldn’t book one in a crowded market). It was a pretty crummy alternative to hotels. But over time, they have moved upmarket—going after nicer and nicer homes in wealthier areas.
I think that the difference between sectors in terms of the trajectory of improvements is an important insight and is the type we would share on this website.
The Case Of Uber
Denning: In the current Harvard Business Review article you describe Uber as a sustaining innovation vis-à-vis taxis, not as a disruptive innovation, because Uber doesn’t operate at the low-end foothold or a new market foothold as specified by the theory of disruptive innovation. But when I talk to taxi drivers, most of whom don’t read Harvard Business Review, they tell me, “Uber is really disrupting my business.” They are using “disrupt” in the sense of the plain English word “disrupt”. What then should we call what is happening in the market being served by taxis and Uber? Is it wrong to call it disruption? Should we tell the taxi drivers that they are not being disrupted after all, and that the industry is actually being sustained, not disrupted? Is that plausible, just as a matter of English language?
Christensen: It’s a very important point and these are complicated issues. Uber is negatively impacting their business and has ‘disrupted’ their industry in the colloquial sense by throwing it into disarray. But as we point out in our article, it has not disrupted the industry in the technical sense of the word. It’s very important that we discipline the use of the word. If every person can define what the word “disruptive innovation” means for them, then the word loses its meaning for all.
We decided to use Uber to make this distinction, and also to illustrate some of the theory’s core tenets. For example, that disruption is a theory of competitive response. It tells you: if I innovate in this way, then this is what I can expect incumbent competitors to do. If I introduce a sustaining innovation, incumbents will generally try to mount a defense and try to eliminate me. If it’s disruptive innovation, they are likely to ignore me or flee rather than fight.
A Theory Of Growth
Christensen: So the concept of disruption is about competitive response; it is not a theory of growth. It’s adjacent to growth. But it’s not about growth. So when we were discussing growth, we discovered that there are three types of innovations, only two of which we had caught in the theory of disruption.
One type of innovation are market-creating innovations, which are disruptive in the sense. These are innovations which transform products that are complicated and expensive into things that are so much more affordable and accessible that many more people are able to buy and use the product. You have to hire more people to make it and distribute it, sell it and service it. This is where growth comes from.
The second type of innovation are sustaining innovations. Their role in the economy is to make good products better. They are very important in the economy, because sustaining innovations keep margins attractive and they keep the market competitive and vibrant. They can improve profitability, and create some top-line growth through price increases, but they typically don’t create growth from new consumption, nor do they generally create jobs.
This was a surprise to me. Just imagine if I am a sales guy and I convince you to buy the Toyota Prius, the hybrid car. If I succeed in selling you that, you won’t buy a Toyota Camry. If I sell you the new version of the product, you won’t buy the old version of the product. So by their very nature, sustaining innovations replace other products and so don’t create aggregate new growth.
The third type of innovation, which we missed in earlier versions of disruption theory, concerns efficiency innovations. The purpose of efficiency innovations is to do more with less. This includes some of the innovations that have followed disruptive pathways to mainstream dominance. From a competitive point of view, they have the same impact, and incumbents can be eliminated. But their purpose in the marketplace is to increase efficiency. For example Walmart, had the effect on department stores of disruption because those stores weren’t able to respond. But from a growth point of view, they made retail much more efficient and resulted in net fewer jobs. And in the steel industry, mini-mills don’t create new growth, because they are an efficiency innovation.
It turns out that from the point of view of disruption and “The Capitalist’s Dilemma”, disruption worked in the mini-mills just like it worked in the disruptive disk drives. But in the marketplace, minimills didn’t create new growth because they were efficiency innovations.
So there are three types of innovation from the point of view of creating economic growth. We need to keep looking and see what’s really going on.
More On The Case Of Uber
Denning: So how does Uber fit in these three categories of growth?
Christensen: There may be something about Uber that just doesn’t fit in any of three categories that I have just defined. There’s “Uber this” and “Uber that” and others on the way—UberBlack, UberX, UberHealth, UberEats, and so on.
Denning: So should we be calling Uber a case of disruption, even though it’s not disruptive innovation in the classic sense of innovations originating in low-end or new-market footholds?
Christensen: Relative to the taxi industry, Uber is a sustaining innovation; that is, it makes customers’ lives better. Uber targeted mainstream markets with a better service for existing customers, and it succeeded in serving them better than the incumbents. Not surprisingly, incumbent taxi companies are not happy about that and are motivated to respond, but so far haven’t been very successful.
That’s not to say Uber can never be a disruptive innovation. For example, some have argued that Uber might disrupt established automakers (starting as a “good enough” alternative to car ownership for some group of people), and Uber might choose to pursue this path. But currently, they represent a sustaining innovation relative to the taxi industry.
Denning: The taxis weren’t innovating or improving their service at all. They were caught flat-footed. They didn’t know how to respond.
Innovation From Above
Denning: Let’s look at some other cases. Some have suggested that luxury products at the high end can create havoc for cheap low-end products by raising customers’ expectations as to what is acceptable. Starbucks SBUX -3.39% and Apple AAPL -2.65%’s iPhone have been cited as examples. Arguably they have made cheap tasteless coffee and cheap clumsy mobile phones largely unmarketable. Is this disruption? If this havoc coming from above is not “disruption” in a classic sense, what should we call it? Is this yet another kind of disruption?
Christensen: Once again, here we have to discipline the technical use of the word “disruption” so it maintains its meaning. We have defined disruption as an innovation that begins on the fringes of established markets and eventually comes to dominate mainstream markets. And it turns out that innovations that enter at the high end of the market, like Tesla, simply don’t fit that definition. And if we try to force fit them then we lose what the concepts of disruptive innovation can explain. And therefore we need to have a different word that defines this phenomenon. We shouldn’t ignore the existence of this phenomenon—it is important and notable—but we also shouldn’t call it disruption.
There’s a theory from our research that better explains the success of these luxury products called Jobs-to-be-Done. The basic idea is that we hire products to fill needs that arise in our lives. Some of these needs—like the need to eat natural foods (in the case of Whole Foods) or to drive a futuristic car (in the case of Tesla)—were not being well-served by existing companies. In natural foods, for example, you had to go from one small “mom and pop shop” to another to cobble together the diet that you wanted. Whole Foods came in and nailed this job much better than these existing stores.
And while these companies did not enter their markets in a disruptive way, the forces of disruption have already begun to work on them. Now players underneath Whole Foods like Kroger’s are moving up-market in a dramatic way, competing with Whole Foods by offering more and more natural foods.
Denning: Would you see the iPhone in the same way?
Christensen: Yes, I would. I didn’t quite get the iPhone right, because I missed the trajectory that Apple was on. First, there was the iPod. It competed and disrupted the Sony Walkman. It was integrated with iTunes. It disrupted the traditional way of distributing music. Then Apple’s iPod was disrupted by Amazon, because the modularity made it very easy for customers to get any music they really wanted. So Apple went up-market to flee Amazon.
Then what happened was Apple said, “Right next to us, there’s the laptop. I bet that we could take this little device and disrupt the laptop. We could make it into something that is not just a phone. We could make it into a smart-phone that works like a laptop.” So it was intended to disrupt to the laptop. And that’s the way it happened.
What I hadn’t realized was that a firm could go in different directions, up-market or down-market, or to the left or right. Sometimes there’s a better way to grow than just staying in your part of the market.
The Case Of Google Maps
Denning: There’s another case that fascinates me: Google Maps. When Google Maps came out, it eliminated most of the market for navigation devices in one stroke. Within a year or two, it basically demolished the market for navigation devices. The incumbents had no chance. Google Maps is free. So the makers of navigation devices couldn’t defend themselves. Google Maps was global within a year.
Christensen: So true. Google Maps came in from the side. The incumbents didn’t see it coming.
Denning: It was like: “Boom! You’re dead.” So perhaps we need to find a place for those kinds of things in the theory of disruption?
Christensen: To my point earlier, the trajectory of technological improvement with Google Maps was extremely steep and so disruption was able to occur very quickly.
The Case Of Kodak
Denning: What about Kodak?
Christensen: It’s in the same realm, it’s hard for me to say that Kodak was disrupted. They really tried to save themselves. The CEO, George Fisher, had run Bell Labs. Then he became the CEO of Motorola. Kodak’s board asked him to take the helm at Kodak. Kodak was a chemical company. And then electronics hit them. Bam! Even when they could see it coming, there was something about it that prevented them from acting. They just couldn’t deal with it. We need to account for that.
Summary Of The Discussion
Denning: Let me try to summarize our discussion. There are different kinds of innovation. We have the classic pattern of disruptive innovation that originates in low-end or new-market footholds. That’s one pattern. But there are other patterns. We have the pattern with firms like Whole Foods, Tesla, and Apple’s iPhone coming in at a high level and then moving up-market even higher. In the case of Whole Foods, the “mom and pops” were acquired or marginalized, but some growth is created for incumbent grocery chains. And we have the case of competitors coming in from sideways, and coming in very rapidly, like Google Maps, demolishing the existing players because their trajectory of improvement is so steep that incumbents have no chance of defending themselves. Is that a fair summary?
Christensen: Yes, I think so. I might add that the theory of disruption is a theory of competitive response. Disruption is a process, not an event, and innovations can only be disruptive relative to something else.
Over the last twenty years, little by little, we have realized that we need additional theories to account for what’s going on. There are three types of innovations, which play very important roles in an economy. The role that market-creating innovation plays is growth. Sustaining innovations make good products better. Efficiency innovations eliminate jobs. That’s also an important implication.
And we need more opportunity to discuss on our evolving understanding of disruption. I am excited that in the coming year we will have a website on disruption where different views can be shared and evaluated.
Denning: Thanks, Clayton, for sharing these important thoughts.