Disruptive Innovation

The leading authority on disruptive innovation is Professor Clayton Christensen of Harvard University. This article is an extract from various articles about his ideas.

As companies innovate, sometimes faster than their customers’ needs evolve, they eventually end up producing products or services that are actually too sophisticated, too expensive, and too complicated for many customers in their market. Remember the mainframe computer that cost millions of dollars and was so complex only a few select organizations could use it?

Companies pursue these “sustaining innovations” at the higher tiers of their markets because this is what has historically helped them succeed: by charging the highest prices to their most demanding and sophisticated customers at the top of the market, companies will achieve the greatest profitability.

However, by doing so, companies unwittingly open the door to “disruptive innovations” at the bottom of the market. An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.

Characteristics of disruptive businesses, at least in their initial stages, can include products that attract low profits, smaller markets and simple products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. Because of this, two things happen: first, big firms that are focused on going upwards in the market to complex, high-value solutions are not interested in this space and second, all of this escapes attention of the big players until it is too late. This is what creates space at the bottom of the market for new disruptive competitors to emerge.

Remember what happened to the mini-computer? Digital Equipment Corporation or DEC had dominated the mini-computer market and had seized the bottom of the market from big mainframe players like IBM. IBM did not know what hit it. But then the same happened to DEC. Instead of making the mini-computer cater to the bottom of the market, DEC started to focus on the high-margin corporate organizations more and more. This opened up the space for the low-cost, easy to use personal or desktop computer.

At the time, DEC’s chairman Ken Olsen, a very smart and savvy business manager, misread the situation. He claimed the desktop computer was a toy and good just for video games! But it was not just Olsen and DEC that were wrong. The entire mini-computer industry imploded. Famous brands like Wang and Honeywell disappeared into oblivion.

The disruptive innovation theory propagated by Prof. Christensen and elaborated in his famous book “The Innovator’s Dilemma” has influenced business strategy in many companies including the likes of INTEL. It was because of this theory that INTEL decided to cover its bases at the lower end of the market with the Celeron family.

An excellent explanation of Disruptive Innovation by the extremely impressive Prof. Christensen himself is available in a video here