Disruptive Innovation Theory and Entrepreneurship
Disruptive Innovation Theory: Why Giants Fall
How did Netflix kill Blockbuster? Why did iPhones replace Nokia? The answer often lies in Disruptive Innovation Theory.
Developed by Harvard Business School professor Clayton Christensen in his famous book, The Innovator’s Dilemma (2003), this theory explains why seemingly successful, well-managed companies often fail when faced with new technologies.
The Two Types of Innovation
Christensen’s core argument is that innovation comes in two forms:
- Sustaining Innovations: These improve existing products along traditional dimensions of performance. They make good products better.
Example: A new smartphone with a faster processor and a better camera. These appeal to existing, high-end customers. - Disruptive Innovations: These are initially lower performing along traditional metrics, but compensate with increased simplicity, convenience, customizability, or affordability. They appeal to new, often overlooked, customers or create entirely new markets.
Example: Netflix offered a less convenient (mail-order DVDs) but cheaper and wider selection than Blockbuster, initially appealing to a niche.
The Innovator's Dilemma
New entrants (startups) often succeed with disruptive innovations because they come in at the **bottom of the market**. They offer "good enough" solutions for marginal customers, or even create new customer segments.
The Dilemma: Incumbents typically respond by moving *up-market*, focusing on higher-margin customers and improving their existing products (sustaining innovation). They ignore the disruptive threat because it looks inferior and unprofitable.
However, this is often a fatal mistake. The new entrants rapidly improve their disruptive innovations until they start to challenge the incumbents in mainstream markets. The DVD-by-mail became streaming, and suddenly, Blockbuster was obsolete.
Incumbent's Response: Self-Cannibalization
Christensen suggested that incumbents should create new, autonomous divisions to pursue disruptive innovations, even if it means cannibalizing their existing business. This is incredibly difficult due to organizational inertia and a focus on short-term profits.
Critique and Evolution
While immensely popular, the theory has faced mixed empirical support (Markides, 2006). Critics argue it's often applied too broadly and that the lines between sustaining and disruptive can be blurry.
However, the theory's impact is undeniable. Many incumbent firms are now actively seeking to be the disruptors themselves, even engaging in self-disruption. This might be a direct result of business school curricula incorporating Christensen's work, leading to a new generation of managers who understand how to harness disruption rather than be blindsided by it.
Video: What is Disruptive Innovation?
References
Christensen, C. M. (2003). The Innovator's Dilemma: The Revolutionary Book That Will Change the Way You Do Business. New York, NY: HarperBusiness Essentials.
Markides, C. (2006). Disruptive innovation: In need of better theory. Journal of Product Innovation Management, 23(1), 19-25.
