In a world where the likes of Uber, Amazon and Airbnb are leveraging technology to turn their respective industries on their heads, it’s increasingly common to refer to these digital-native firms as “disruptors.”
According to the Harvard Business School (HBS) professor credited with coining “disruptive innovation”, in the 1990s however, this concept has been watered down and misused—prompting him to write a refresher piece in Harvard Business Review in 2015.
For those within the throes of Silicon Valley’s technology revolution, HBS professor Clayton Christensen’s rebuke of anointing nascent firms as disruptive innovators may be head-scratching, if not disheartening.
However, just because a company’s process does not fit Christensen’s mold may not actually be a bad thing. For that, look no further than Uber, the aforementioned ride-hailing service now serving hundreds of cities worldwide. (Hint: There will be more on this later, but suffice to say, Uber does not fit within the parameters he brought to the fore two decades ago.)
Let’s explore the world of disruptive innovation by investigating its roots.
DISRUPTIVE INNOVATION, EXPLAINED
Christensen's 1997 book “The Innovator’s Dilemma" went on to become a best-seller and influenced CEOs across all industries. It has since become known as one of the most important books about innovation in modern times, and is where the disruptive innovation theory was first popularized. And as The New York Times wrote years later: “'The Innovator’s Dilemma' has a strong claim as the best business book of the 90s.”
According to Christensen’s namesake think-tank: “The theory explains the phenomenon by which an innovation transforms an existing market or sector by introducing simplicity, convenience, accessibility, and affordability where complication and high cost are the status quo.
"Initially, a disruptive innovation is formed in a niche market that may appear unattractive or inconsequential to industry incumbents, but eventually the new product or idea completely redefines the industry.”
Let’s unpack that a bit.
In essence, true disruptive innovation occurs when a smaller company challenges a preexisting, but much larger firm, and eventually overtakes it. This hypothetical company would pinpoint a sliver of the market that the more experienced business has largely ignored, and provide them with a new product or service that is more affordable.
In essence, true disruptive innovation occurs when a smaller company challenges a preexisting, but much larger firm, and eventually overtakes it.
That the dominant company has chosen to disregard a certain portion of the market is likely driven by a desire to remain profitable by serving its already loyal client base, he claims. One way to achieve that is through incremental improvements to its current offerings—also referred to as “sustaining innovation.”
While they’re focusing their efforts on the customers they’ve already won over, the smaller firm swoops in and takes a much larger prize, specifically the portion of the market that’s been ignored. The potential deathblow for the bigger competitor is when its new rival becomes competitive in the market it once dominated.
NETFLIX VS. UBER
How has this played out in the real world? Well, Christensen, in 2015, offered Netflix and Blockbuster as a prime example. If you recall, Netflix wasn’t the industry behemoth and Emmy-winning service it now is. Initially, the company allowed people to rent physical DVDs through the mail. At the time, Netflix wasn’t targeting Blockbuster’s core customers because it wasn’t offering on-demand videos, according to the professor.
Netflix, Christensen writes, “appealed to only a few customer groups—movie buffs who didn’t care about new releases, early adopters of DVD players, and online shoppers.”
In effect, Netflix’s early business model did not present an immediate existential threat to Blockbuster, because they were each vying for different customers. Years later, however, Netflix was able to widen its film and TV selections and use new technologies to stream content over the internet—the proverbial game-changer.
If Netflix had targeted Blockbuster’s core market, Christensen notes, “Blockbuster’s response would very likely have been a vigorous and perhaps successful counterattack. But failing to respond effectively to the trajectory that Netflix was on led Blockbuster to collapse.”
On the other side of the coin is Uber, which in 2016 said it was averaging 5.5 million rides per day and is estimated to be valued at $120 billion. As seemingly meteoric as its rise has been, only 36 percent of Americans reported using a ride-hailing service, but greater than 60 percent said they’ve heard of such companies.
Christensen argues that unlike Netflix, the popular ride-hailing app didn’t find a new market but instead competed in the same one as traditional taxis.
As the professor writes: “Neither did Uber primarily target nonconsumers—people who found the existing alternatives so expensive or inconvenient that they took public transit or drove themselves instead: Uber was launched in San Francisco (a well-served taxi market), and Uber’s customers were generally people already in the habit of hiring rides.”
the UBER debateFor Christensen, the distinction matters because when Uber started in 2009 it chose not to explore a new market but to compete directly with taxis, perhaps at similar or lower prices. It then made hailing a taxi that much easier through its app.
The professor’s 2015 piece in which he talked about how the term “disruptive innovation” is “misleading” when used in the wrong context also sparked a debate.
In a piece for TechCrunch three years ago, the writers argued that Uber did indeed “[take] off from a low-market foothold.” Specifically it mentioned its “down-market” approach with UberX, its most popular ride-hailing service, by essentially allowing anyone with a car to join its fleet without having to obtain a taxi medallion, or by avoiding regulations.
“Uber’s network grew in each city, ride costs fell, wait times declined and its rating system helped keep driver quality relatively consistent,” the authors contended. “With this improvement in service quality, Uber was able to move upstream to attack taxis directly with UberX—a classic disruptive move.”
The concept Christensen first explored in his 1997 book remains especially relevant today, and provides context for how we view companies that are radically changing the industries they operate in. And if you’re still unclear about which companies fall under the “disruptive innovation” label, consider Apple’s first real success story: personal computers.
Minicomputers, at the low end, reportedly cost more than $10,000. Apple arrived with the personal computer at a much lower cost, enabling these machines to enter the mainstream. Under Christensen’s theory, that is true disruption innovation.
If you’re looking for an innovation consultant to get your company where it needs to go, Pivot Factory is an advisory services firm that focuses on the trends of disruption, and how companies can react through innovation. Contact Pivot Factory today.