Disruptive technology

Types of Innovation[1]

Sustaining An innovation that does not affect existing markets. Evolutionary An innovation that improves a product in an existing market in ways that customers are expecting. (E.g., fuel injection) Revolutionary (discontinuous, radical) An innovation that is unexpected, but nevertheless does not affect existing markets. (E.g., the automobile) Disruptive An innovation that creates a new market by applying a different set of values, which ultimately (and unexpectedly) overtakes an existing market. (E.g., the lower priced Ford Model T)

A disruptive technology or disruptive innovation is an innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology there. The term is used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in the new market and later by lowering prices in the existing market.

In contrast to disruptive innovation, a sustaining innovation does not create new markets or value networks but rather only evolves existing ones with better value, allowing the firms within to compete against each other's sustaining improvements. Sustaining innovations may be either "discontinuous"^[1] (i.e. "transformational" or "revolutionary") or "continuous" (i.e. "evolutionary").

Sustaining innovations are typically innovations in technology, whereas disruptive innovations are typically innovations in marketing. For example, the automobile was a revolutionary technological innovation, but it was not a disruptive innovation, because early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. The market for transportation essentially remained intact until the debut of the lower priced Ford Model T in 1908.^[2] The mass-produced automobile was a disruptive innovation, because it changed the transportation market. The automobile, by itself, was not.

The current theoretical understanding of disruptive innovation is different from what might be expected by default, an idea that Clayton M. Christensen called the "technology mudslide hypothesis". This is the simplistic idea that an established firm fails because it doesn't "keep up technologically" with other firms. In this hypothesis, firms are like climbers scrambling upward on crumbling footing, where it takes constant upward-climbing effort just to stay still, and any break from the effort (such as complacency born of profitability) causes a rapid downhill slide. Christensen and colleagues have shown that this simplistic hypothesis is wrong; it doesn't model reality. What they have shown is that good firms are usually aware of the innovations, but their business environment does not allow them to pursue them when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from that of sustaining innovations (which are needed to compete against current competition). In Christensen's terms, a firm's existing value networks place insufficient value on the disruptive innovation to allow its pursuit by that firm. Meanwhile, upstart firms inhabit different value networks, at least until the day that their disruptive innovation is able to invade the older value network. At that time, the established firm in that network can at best only fend off the market share attack with a me-too entry, for which survival (not thriving) is the only reward.^[3]

The work of Christensen and others during the 2000s has addressed the question of what firms can do to avoid oblivion brought on by technological disruption.

History and usage of the term

The term disruptive technologies was coined by Clayton M. Christensen and introduced in his 1995 article Disruptive Technologies: Catching the Wave,^[4] which he co-wrote with Joseph Bower. The article is aimed at managing executives who make the funding/purchasing decisions in companies rather than the research community. He describes the term further in his book The Innovator's Dilemma.^[5] Innovator's Dilemma explored the cases of the disk drive industry (which, with its rapid generational change, is to the study of business what fruit flies are to the study of genetics, as Christensen was advised in the 1990s^[6]) and the excavating equipment industry (where hydraulic actuation slowly displaced cable-actuated movement). In his sequel, The Innovator's Solution^[7] Christensen replaced the term disruptive technology with disruptive innovation because he recognized that few technologies are intrinsically disruptive or sustaining in character; rather, it is the business model that the technology enables that creates the disruptive impact. The concept of disruptive technology continues a long tradition of the identification of radical technical change in the study of innovation by economists, and the development of tools for its management at a firm or policy level. However, Christensen's evolution from a technological focus to a business modelling focus is central to understanding the evolution of business at the market or industry level. For example, Christensen's contemporary emphasis on the applied business model rather than the technology itself was developed by Henry Chesbrough's pioneering notion of Open Innovation.

In keeping with the insight that what matters economically is the business model, not the technological sophistication itself, Christensen's theory explains why many disruptive innovations are not "advanced technologies", which the technology mudslide hypothesis would lead one to expect. Rather, they are often novel combinations of existing off-the-shelf components, applied cleverly to a small, fledgling value network.

The theory

Christensen defines a disruptive innovation as a product or service designed for a new set of customers.

"Generally, disruptive innovations were technologically straightforward, consisting of off-the-shelf components put together in a product architecture that was often simpler than prior approaches. They offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from, and unimportant to, the mainstream."^[8]

Christensen argues that disruptive innovations can hurt successful, well managed companies that are responsive to their customers and have excellent research and development. These companies tend to ignore the markets most susceptible to disruptive innovations, because the markets have very tight profit margins and are too small to provide a good growth rate to an established (sizable) firm.^[9] Thus disruptive technology provides an example of when the common business-world advice to "focus on the customer" ("stay close to the customer", "listen to the customer") can sometimes be strategically counterproductive.

How low-end disruption occurs over time.

Christensen distinguishes between "low-end disruption" which targets customers who do not need the full performance valued by customers at the high end of the market and "new-market disruption" which targets customers who have needs that were previously unserved by existing incumbents.^[10]

"Low-end disruption" occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the performance of the product overshoots the needs of certain customer segments. At this point, a disruptive technology may enter the market and provide a product which has lower performance than the incumbent but which exceeds the requirements of certain segments, thereby gaining a foothold in the market.

In low-end disruption, the disruptor is focused initially on serving the least profitable customer, who is happy with a good enough product. This type of customer is not willing to pay premium for enhancements in product functionality. Once the disruptor has gained foot hold in this customer segment, it seeks to improve its profit margin. To get higher profit margins, the disruptor needs to enter the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disruptor needs to innovate. The incumbent will not do much to retain its share in a not so profitable segment, and will move up-market and focus on its more attractive customers. After a number of such encounters, the incumbent is squeezed into smaller markets than it was previously serving. And then finally the disruptive technology meets the demands of the most profitable segment and drives the established company out of the market.

"New market disruption" occurs when a product fits a new or emerging market segment that is not being served by existing incumbents in the industry.

Examples of disruptive innovations

Innovation	Disrupted market	Notes
8 inch floppy disk drive	14 inch floppy disk drive	The floppy disk drive market has had unusually large changes in market share over the past fifty years. According to Clayton M. Christensen's research, the cause of this instability was a repeating pattern of disruptive innovations.[11] For example, in 1981, the old 8 inch drives (used in mini computers) were "vastly superior" to the new 5.25 inch drives (used in desktop computers).[8] However, 8 inch drives were not affordable for the new desktop machines. The simple 5.25 inch drive, assembled from technologically inferior "off-the-shelf" components,[8] was an "innovation" only in the sense that it was new. However, as this market grew and the drives improved, the companies that manufactured them eventually triumphed while many of the existing manufacturers of eight inch drives fell behind.[11]
5.25 inch floppy disk drive	8 inch floppy disk drive
3.5 inch floppy disk drive	5.25 inch floppy disk drive
CDs and USB flash drives	3.5 inch floppy disk drive
Downloadable Digital Media	CDs, DVDs	In the 1990s, the music industry phased out the single. This left consumers with no means to purchase individual songs. This market was filled by peer-to-peer file sharing technologies, which were initially free, and then by online retailers such as the iTunes music store and Amazon.com. This low end disruption eventually undermined the sales of physical, high-cost CDs.[12]
Hydraulic excavators	Cable-operated excavators	Hydraulic excavators were clearly innovative at the time of introduction but they gain widespread use only decades after. However, cable-operated excavators are still used in some cases, mainly for large excavations.[13]
Mini steel mills	Vertically integrated steel mills	By using mostly locally available scrap and power sources these mills can be cost effective even though not large.[14]
Minicomputers	Mainframes	Minicomputers were originally presented as an inexpensive alternative to mainframes and mainframe manufacturers did not consider them a serious threat in their market. Eventually, the market for minicomputers became much larger than the market for mainframes. Similarly, the market for main frames and mini-computers was seriously disrupted by personal computers. Although they were not at all competitive at the time of their introduction in the 1970s, by the mid 1980s they had improved exponentially and could compete directly with the more expensive machines.[citation needed]
Personal computers	Minicomputers, Workstations. Word processors, Lisp machines
Desktop publishing	Traditional publishing	Early desktop-publishing systems could not match high-end professional systems in either features or quality. Nevertheless, they lowered the cost of entry to the publishing business, and economies of scale eventually enabled them to match, and then surpass, the functionality of the older dedicated publishing systems.[citation needed]
Computer printers	Offset printing	Offset printing has a high overhead cost, but very low unit cost compared to computer printers, and superior quality. But as printers, especially laser printers, have improved in speed and quality, they have become increasingly useful for creating documents in limited issues.[citation needed]
Digital photography	Chemical photography	Early digital cameras suffered from low picture quality and resolution and long shutter lag. Quality and resolution are no longer major issues and shutter lag is much less than it used to be. The convenience of small memory cards and portable hard drives that hold hundreds or thousands of pictures, as well as the lack of the need to develop these pictures, also helped. Digital cameras have a high power consumption (but several lightweight battery packs can provide enough power for thousands of pictures). Cameras for classic photography are stand-alone devices. In the same manner, high-resolution digital video recording has replaced film stock, except for high-budget motion pictures.[citation needed]
High speed CMOS video sensors	Photographic film	When first introduced, high speed CMOS sensors were less sensitive, had lower resolution, and cameras based on them had less duration (record time). The advantage of rapid setup time, editing in the camera, and nearly-instantaneous review quickly eliminated 16 mm high speed film systems. CMOS-based cameras also require less power (single phase 110 V AC and a few amps for CMOS, vs. 240 V single- or three-phase at 20-50 A for film cameras). Continuing advances have overtaken 35 mm film and are challenging 70 mm film applications.[citation needed]
Steamships	Sailing ships	The first steamships were deployed on inland waters where sailing ships were less effective, instead of on the higher profit margin seagoing routes. Hence steamships originally only competed in traditional shipping lines' "worst" markets.[citation needed]
Telephones	Telegraphy	When Western Union infamously declined to purchase Alexander Graham Bell's telephone patents for $100,000, their highest-profit market was long-distance telegraphy. Telephones were only useful for very local calls. Short-distance telegraphy barely existed as a market segment, which explains Western Union's decision.[citation needed]
Automobiles	Rail transport	At the beginning of the 20th century, rail (including streetcars) was the fastest and most cost-efficient means of land transportation for goods and passengers in industrialized countries. The first cars, buses and trucks were used for local transportation in suburban areas, where they often replaced streetcars and industrial tracks. As highways expanded, medium- and later long-distance transports were relocated to road traffic, and some railways closed down. As rail traffic has a lower ton-kilometer cost, but a higher investment and operating cost than road traffic, rail is still preferred for large-scale bulk cargo (such as minerals). Since rail has always been faster than contemporary road vehicles[citation needed], it is viable for passengers in populated regions like Western Europe, south and east Asia and the Northeast Corridor. When urban density increases, rail systems often become more attractive and make a comeback.[citation needed]
Private jet	Supersonic transport	The Concorde aircraft has so far been the only supersonic airliner in extensive commercial traffic. However, it catered to a small customer segment, which could later afford small private sub-sonic jets. The loss of speed was compensated by flexibility and a more direct routing (i.e. no need to go through a hub). Supersonic flight is also banned above inhabited land, due to sonic booms. The Concorde service was withdrawn in 2003.[citation needed]
Plastic	Metal, wood, glass etc.	Bakelite and other early plastics had very limited use - their main advantages were electric insulation and low cost. New forms had advantages such as transparency, elasticity and combustibility. In the early 21st century, plastics can be used for nearly all household items previously made of metal, wood and glass.[citation needed]
Light-emitting diodes	Light bulbs	A LED is significantly smaller and less power-consuming than a light bulb. The first optical LEDs were weak, and only useful as indicator lights. Later models could be used for indoor lighting, and future ones will probably be strong enough to serve as street lights. Classical light bulbs for lower light indoor use remain, possible mainly[dubious – discuss] because of sentimental and aesthetic value, although some lamps using other technologies have designs resembling light bulbs. Incandescent light bulbs are being phased out in many countries.[citation needed]
Digital synthesizer	Electronic organ and piano	Synthesizers were initially low-cost, low-weight alternatives to electronic organs and acoustic pianos. Today's synthesizers feature many automated functions and have replaced them for home and hobby users.[citation needed]
Mobile Telephony	Mobile Discount Operators	Mobile Discount / No Frills Operators (MDOs aka. MVNOs) first focused on a low-distribution-cost-through-internet sales model. In later times, innovations like low-priced mobile-internet tariffs were brought to market. This tripped the development of a new discount category in the market which was later entered by the large discount retail chains with own branded offerings leveraging their distribution power in the lower tier of the market.[citation needed]
LCD	CRT	The first liquid crystal displays (LCD) were monochromatic and had low resolution. They were used in watches and other handheld devices, but during the early 2000s these (and other planar technologies) largely replaced the dominant cathode ray tube (CRT) technology for computer displays and television sets, although CRT technologies have improved with advances like true-flat panels and digital controls only recently.[citation needed]
Digital calculator	Mechanical calculator	Facit AB used to dominate the European market for calculators, but did not adapt digital technology, and failed to compete with digital competitors.[15]
GPS navigation device	navigational Map	The old navigational system using maps, needed knowledge of the use and posession of a sextant, a clock and an astronomical almanac known as "Ephemeris". A clear sky was paramount for the calculating of an exact position. GPS can show the exact position, either on a projected map or in degrees N/S/E/W (low end models), in any weather.
Ultrasound	Radiography (X-ray imaging)	Ultrasound technology is disruptive relative to X-ray imaging. Ultrasound was a new-market disruption. None of the X-ray companies participated in ultrasound until they acquired major ultrasound equipment companies. [16]
Wikipedia	Encyclopedias	The paper version of encyclopedias have been outcompeted by Wikipedia. Although one can argue about the validity of all the information on Wikipedia, the sales numbers of encyclopedias confim that Wikipedia has taken over the encyclopedias market.[citation needed]

Business implications

Disruptive technologies are not always disruptive to customers, and often take a long time before they are significantly disruptive to established companies. They are often difficult to recognize. Indeed, as Christensen points out and studies have shown, it is often entirely rational for incumbent companies to ignore disruptive innovations, since they compare so badly with existing technologies or products, and the deceptively small market available for a disruptive innovation is often very small compared to the market for the established technology.

Even if a disruptive innovation is recognized, existing businesses are often reluctant to take advantage of it, since it would involve competing with their existing (and more profitable) technological approach. Christensen recommends that existing firms watch for these innovations, invest in small firms that might adopt these innovations, and continue to push technological demands in their core market so that performance stays above what disruptive technologies can achieve.

Disruptive technologies, too, can be subtly disruptive, rather than prominently so. Examples include digital photography (the sharp decline in consumer demand for common 35 mm print film has had a deleterious effect on free-riders such as slide and infrared film stocks, which are now more expensive to produce) and IP/Internet telephony, where the replacement technology does not, and sometimes cannot practically replace all of the non-obvious attributes of the older system (sustained operation through municipal power outages, national security priority access, the higher degree of obviousness that the service may be life-safety critical or deserving of higher restoration priority in catastrophes, etc.).

Disruptive technologies rarely wipe older technologies off the face of the earth, or out of the business world altogether. But they do often wipe out particular firms. Often established firms will flee upmarket trying to make up the revenues and margins lost to the disruption rising from below. They often eventually fail. Many decades later, their original technologies may still find suitable applications in human life and commerce. But they will no longer be manufactured by those original firms of the earliest generations, and the value networks around them will be substantially different from the original ones. For example, bias-ply tires for passenger-car use still exist, and they are still manufactured and bought and sold. However, today they occupy smaller, hobbyist-oriented automotive restoration value networks, whereas 40 years ago they were what most average car-tire buyers were buying, occupying a larger, lower-margin, more utilitarian value network. Today radial tires occupy that larger network. Bias-ply tires' commercial existence has shrunk to a small upmarket niche, and in the eyes of a wholesale discount mass-market tire dealer, they have very little value.

See also

• Creative destruction
• Innovation saturation
• Leapfrogging
• List of emerging technologies
• Obsolescence
• Paradigm shift
• Technology strategy
• Killer application

Notes

1. ^ ^{a b} Christensen 1997, p. xviii. Christensen describes as "revolutionary" innovations as "discontinuous" "sustaining innovations".
2. ^ Christensen 2003, p. 49.
3. ^ Christensen 1997, p. 47.
4. ^ Bower, Joseph L. & Christensen, Clayton M. (1995). "Disruptive Technologies: Catching the Wave" Harvard Business Review, January–February 1995
5. ^ Christensen 1997.
6. ^ Christensen 1997, p. 3.
7. ^ Christensen 2003.
8. ^ ^{a b c} Christensen 1997, p. 15.
9. ^ Christensen 1997, p. i-iii.
10. ^ Christensen 2003, p. 23-45.
11. ^ ^{a b} Christensen 1997, p. 3-28.
12. ^ Knopper, Steve (2009). Appetite for self-destruction : the spectacular crash of the record industry in the digital age. New York: Free Press. ISBN 1416552154. 
13. ^ Christensen 1997, pp. 61–76.
14. ^ Christensen 2003, pp. 37–39.
15. ^ Sandström, Christian G. (2010). "A revised perspective on Disruptive Innovation – Exploring Value, Networks and Business models (Theisis submitted to Chalmers University of Technology, Göteborg, Sweden)". http://www.christiansandstrom.org/content/PhDchristiansandstrom.pdf. Retrieved 2010-11-22. 
16. ^ Christensen 2003, p. 64.

References

• Anthony, Scott D.; Johnson, Mark W.; Sinfield, Joseph V.; Altman, Elizabeth J. (2008). Innovator's Guide to Growth - Putting Disruptive Innovation to Work. Harvard Business School Press. ISBN 9781591398462. 
• How to Identify and Build Disruptive New Businesses, MIT Sloan Management Review Spring 2002
• Christensen, Clayton M. (1997), The innovator's dilemma: when new technologies cause great firms to fail, Boston, Massachusetts, USA: Harvard Business School Press, ISBN 978-0-87584-585-2, http://books.google.com/books/about/?id=SIexi_qgq2gC. 
• Christensen, Clayton M. & Overdorf, Michael. (2000). "Meeting the Challenge of Disruptive Change" Harvard Business Review, March–April 2000.
• Christensen, Clayton M., Bohmer, Richard, & Kenagy, John. (2000). "Will Disruptive Innovations Cure Health Care?" Harvard Business Review, September 2000.
• Christensen, Clayton M. (2003). The innovator's solution : creating and sustaining successful growth. Harvard Business Press. ISBN 9781578518524. 
• Christensen, Clayton M.; Anthony, Scott D.; Roth, Erik A. (2004). Seeing What's Next. Harvard Business School Press. ISBN 9781591391852. 
• Christensen, Clayton M., Baumann, Heiner, Ruggles, Rudy, & Sadtler, Thomas M. (2006). "Disruptive Innovation for Social Change" Harvard Business Review, December 2006.
• Mountain, Darryl R., Could New Technologies Cause Great Law Firms to Fail?
• Mountain, Darryl R. (2006). Disrupting conventional law firm business models using document assembly, International Journal of Law and Information Technology 2006; doi: 10.1093/ijlit/eal019
• Tushman, M.L. & Anderson, P. (1986). Technological Discontinuities and Organizational Environments. Administrative Science Quarterly 31: 439-465.
• Eric Chaniot (2007). "The Red Pill of Technology Innovation" Red Pill, October 2007.

Additional reading

• Danneels, Erwin (2006), “From the Guest Editor: Dialogue on The Effects of Disruptive Technology on Firms and Industries,” Journal of Product Innovation Management, 23 (1): 2-4
• Danneels, Erwin (2004), “Disruptive Technology Reconsidered: A Critique and Research Agenda,” Journal of Product Innovation Management, 21 (4): 246-258

External links

• The Myth of Disruptive Technologies. Note that Dvorák's definition of disruptive technology describes the low cost disruption model, above. He reveals the overuse of the term and shows how many disruptive technologies are not truly disruptive.
• "The Disruptive Potential of Game Technologies: Lessons Learned from its Impact on the Military Simulation Industry", by Roger Smith in Research Technology Management (September/October 2006)
• Disruptive Innovation Theory
• Bibliography of Christensen’s "Theory of Disruptive Innovation" as it relates to higher education
• Disruptive Technology Portfolio by InformationWeek and Credit Suisse