What are resources for disruptive strategies

Probably the most influential management theory of the past 20 years is often misunderstood. What it explains - and what it doesn't.

By Clayton M. Christensen, Michael Raynor, Rory McDonald

In 1995 this magazine first described the theory of disruptive innovation (in the article "How to use the opportunities of disruptive technologies", see service box on page 75). Since then, the concept has proven that it can aptly explain innovation-driven growth in many cases. The founders of small startups describe the theory as a guiding star, as do many executives in large, established organizations such as Intel, Southern New Hampshire University and Salesforce.com.

Unfortunately, she threatens to fall victim to her own success. Despite its great popularity, the core concept is often misunderstood; many managers draw the wrong conclusions. Not only that: in the past 20 years we have fundamentally developed the theory further. But the popularity of the original version outshines the new findings. So critics sometimes refer to deficiencies that we have long since fixed.

Another thing that worries us is that, in our experience, many people who talk about "disruption" have not read a single serious book or significant article on the subject. All too often they apply the term to all kinds of innovations - mostly as an argument to justify a planned project. Researchers, book authors and consultants use "disruptive innovation" to describe almost all situations in which an industry changes and the previously successful top dogs find themselves in distress. But the theory cannot be used as comprehensively by far.

Disruptive innovations cannot be lumped together with every breakthrough that changes the competitive structures of an industry, otherwise a problem arises: Because different types of innovation also require different strategic approaches. Or to put it another way: We have acquired some knowledge about how disruptive innovators can be successful and how established companies can defend themselves against disruptive attackers. But in a changing market, these cannot be applied to every company. If we use our terms inaccurately or fail to incorporate new research knowledge and experience into the original theory, then managers will ultimately use the wrong tools for their respective environment, which reduces their chances of success. Over time, this will undermine the usefulness of the theory.

In this article, we present the current status. First, we deal with the principles of disruptive innovation and examine whether they can be transferred to the Uber rideshare service. Then we point out some pitfalls in the application. We explain how these arise and why the correct use of our theory is important. Then we follow the most important turning points in the history of its creation. And we support our thesis that with the knowledge we have gathered so far, we can predict more precisely which companies will be successful.

At the beginning a short summary: "Disruption" describes a process in which a small company manages with limited resources to challenge long-established, established market participants. The specific process is as follows: The top dogs focus on improving their products and services for their most demanding - and usually most profitable - customers. In doing so, they attach too much importance to some segments while ignoring the demand in others. New providers who later turn out to be disruptive initially concentrate successfully on the neglected segments. They gain a foothold by tailoring their offerings to this group of customers in terms of practicality and functionality - and often bringing them to market at a low price.

The established ones are meanwhile trying to increase their margins in the more demanding segments; their reaction to the newcomers is usually rather cautious. The attackers then target the higher market segments. They adapt their offerings to the needs of the mass of customers, building on the innovations to which they owe their initial successes. If the mainstream customers accept this offer in large numbers, it will lead to disruption.

Is Uber a Disruptive Innovation?

Uber is changing the taxi business significantly. But is this a disruption?
The answer is no.

Let's look at Uber, the much-lauded transportation company. Its app for mobile devices connects consumers who need a ride with drivers who want to make it available to them. Uber, which was founded in 2009, has seen incredible growth. It operates in hundreds of cities in more than 60 countries, and expansion continues. Its financial success is enormous: In the latest round of financing, investors valued the company at around 50 billion dollars. A number of imitators have long been on the market - start-ups that are trying to copy this business model of bringing suppliers and buyers together for a fee. Uber is dramatically changing the taxi business in the United States. But is this a disruption?

If we follow the theory, the answer is no. Uber's financial and strategic achievements don't qualify the company as disruptive - though it's almost always described that way. Here are two reasons why the term doesn't fit.

Disruptive innovations arise in new markets or lower market segments

The revolutionary innovations that our theory describes can prevail because the incumbents overlook two types of markets. First, the lower price segment, where newbies can gain a foothold because the top dogs typically try to sell better and better products and services to the most profitable and demanding customers; they neglect the rest of the clientele. In fact, the requirements for the products and services in the lower segment are mostly below what the established companies have on offer. This opens the door for a newcomer who initially concentrates on less demanding customers and offers them a product that is "just good enough".

Second, this type of innovation originates in new markets created by the disruptive companies themselves. Put simply, they find a way to turn non-consumers into consumers. For example, when the photocopier came along, Xerox was targeting large corporations. The provider charged high prices in order to be able to build devices that met the performance requirements of these customers. School librarians, bowling league organizers, and other small customers couldn't pay the prices. They had to make do with carbon paper or mimeographs. In the late 1970s, competitors brought small copiers onto the market that private households and small organizations could also afford - a new market had emerged. From those relatively humble beginnings, manufacturers gradually built a strong position in the mainstream copier market that Xerox had claimed.

By definition, disruptive innovations begin their triumphal march from one of these two areas. Uber originated elsewhere. It's hard to argue that the company took an opportunity at the lower end of the market. That would have meant that taxi service providers would have over-met the needs of a large number of customers by making their cars too rich, too clean, or too easy to use. Nor was Uber primarily targeting people who otherwise never drove taxis. In that case, the start-up would have targeted people for whom the existing alternatives were too expensive or too inconvenient and who therefore used public transport or took their own car. Uber launched in San Francisco, a location where there was no shortage of taxis and most customers had been regular taxi drivers before.

It's hard to deny that Uber has increased demand. That is what happens when you find a better, cheaper solution to a widespread customer need. But disruptive companies always start by targeting the lower customer segment or unserved consumers, and only then do they target the mainstream market. Uber took exactly the opposite approach: first, the company built a strong position in the mass market, and only then did it target previously neglected segments.

Influential theory

The term "disruptive innovation" has entered the everyday language of many managers. With the model behind it, it is easy to predict which emerging companies will be successful when entering a new market or a new market segment and which will not. However, the theory loses its usefulness if it is applied to any type of innovation - and this is exactly what can be seen in many companies.

The current status

The leading researchers in the field explain the principles of the theory and describe how it has evolved over the past 20 years. They also make it clear where it has reached its limits. Does it make a difference whether Uber ridesharing is a disruptive innovation or some other type of innovation? Yes. Managers cannot respond effectively to new entrants' innovations if they put them in the wrong category. The same goes for the attackers: they can only develop effective strategies if they can predict how the incumbents will react to their advance.

Disruptive innovations only reach the mass market when their quality has increased

The theory makes a distinction between disruptive and so-called "sustaining" innovations. From the point of view of the existing customers, the latter further improve the already good products of the established companies - the fifth blade of a razor, the sharper image of a television, the better reception of a cell phone. Such improvements can be small advances or quantum leaps, but they have one thing in common: They all help companies sell more to their most profitable customers.

Disruptive innovations, on the other hand, are considered inferior by most of the established companies' customers. Therefore, they are usually not interested in them, even if they represent a cheap alternative. Instead, they wait until the quality has improved so much that it meets their requirements. As soon as that is done, they switch to the new products and are happy about the lower price. In this way, disruptions also lower prices in a market.

Most of the elements in Uber's strategy appear to be sustaining innovations. Hardly anyone sees the service as inferior compared to the previous taxis. Many would even say that it is superior to them. If you want to order a car, you only have to tap your smartphone a few times; cashless payment is uncomplicated; and customers can evaluate their journeys afterwards, which guarantees a high quality standard. Last but not least, Uber offers a reliable and punctual service that is not more expensive, but much cheaper than that of the regular taxi trade. As is typical of sustained innovations that threaten the business of established providers, Uber also triggers a backlash. Taxi companies use new technologies that increase their competitiveness - such as apps that make it easier for customers to order a taxi. They are also challenging the legality of some Uber offers.

Why the terms are important

Readers may be wondering why it makes a difference how we use words to describe Uber. The company has undoubtedly thrown the taxi industry off course - isn't that "disruptive" enough? No. Only those who apply the theory correctly can use it to their advantage.

For example, if small competitors are gnawing at the fringes of your business, you should probably ignore them - unless they are on a disruptive path. If so, they could pose an existential threat to your company. And these challenges are both fundamentally different from your competitors' efforts to steal your bread-and-butter customers.

Uber's example shows how difficult it is to spot a truly disruptive innovation. Even managers with a good understanding of theory sometimes forget some of its more subtle aspects when making strategic decisions. In our experience, four key points are often misunderstood or overlooked.

1. Disruption does not describe a momentary event, but a process

The term "disruptive innovation" is misleading when it refers to a product or service at a specific point in time and not its development over a certain period of time. The first minicomputers were not only disruptive because they initially appeared in the lower price segment, nor because they were later considered to be superior to mainframes in many markets. Rather, they were disruptive because they walked the path from the edge to the middle of the market.

Almost every innovation, whether disruptive or not, begins as an experiment on a small scale. Disruptive companies usually attach great importance to developing a functioning business model in addition to a good product. If successful, they will chase the incumbents from the edge (the lower end of the market or a new market) to the mainstream, first market share and then profits. This process can drag on. The top dogs often turn out to be very creative when defending their ancestral territories. The first discounter opened more than 50 years ago. But mainstream retailers still operate their stores in a classic department store format. It could be decades before they disappear completely from the market - if that ever happens. The reason: The incremental profit that comes from following the old model for another year is more attractive than what you can expect if you write it all off in one fell swoop.

The fact that disruption can take a long time helps explain why incumbents regularly overlook such challengers. For example, when Netflix launched in 1997, its first offers were unattractive to most of the customers of the Blockbuster video rental chain. When they rented films (mostly new releases) they were acting on an impulse. Netflix offered a wide selection through its website. But sending them by post meant that the selected films would be on the road for several days before they finally reached the customers. Only a few customer groups could do anything with this service - film lovers who did not care about new releases, buyers of the first DVD players and online shoppers. If Netflix hadn't started addressing a broader segment of the market at some point, Blockbuster's decision to ignore this competitor would not have been a strategic mistake: the two companies served very different needs of their (different) customers.

However, thanks to new technology, Netflix has been able to shift its business to streaming movies over the Internet. This ultimately made the offer attractive to Blockbuster's core customers as well. Netflix offers a wider choice, a flat rate, low prices, high quality and very convenient access. The company took a classically disruptive path. Had it started with a service like Uber that targeted a larger competitor's core market, Blockbuster's response would most likely have been a violent and perhaps successful counterattack. Blockbuster failed to effectively halt Netflix's rise, however - a failure that ultimately led to its bankruptcy.

2. Disruptive companies often have different business models than the established companies

Let's take a look at the healthcare industry. General practitioners who have their own practices rely on their many years of experience and the results of tests to classify patients' symptoms, make diagnoses and recommend therapies. We call this a "solution shop" business model. Some health centers, on the other hand, are taking a disruptive path, using a "process" business model: they have standardized procedures in place to make diagnoses and treat a small but growing number of diseases.

A well-known example of an innovative business model that has triggered a disruption is Apple's iPhone.The device was a sustaining innovation in the smartphone market when it was launched in 2007: Apple was targeting the same audience as its established competitors, and the initial success is likely due to the superiority of the product. The later growth can be better explained by disruption - not of the other smartphones, but of the laptop as the primary access point to the Internet. Apple achieved this not only through improvements to the product, but also through a new business model. The company set up its own network that connected app developers with iPhone users and thus fundamentally changed the competition. The iPhone created a new market for internet access and eventually replaced the laptop as the device that mainstream consumers preferred to use to go online.

3. Not all disruptive innovations will be a success

A third common mistake is to focus on the results you have achieved - claiming that a company is disruptive because it has succeeded. But success is not part of the definition of disruption: not every disruptive path ends in triumph, and not every triumphant newcomer follows a disruptive path.

For example, in the late 1990s, a lot of online retailers embarked on disruptive paths, but few of them were successful. Those who have failed do not testify to the shortcomings of our theory; rather, they show where the limits of their application lie. The theory says very little about how to ensure success when a newbie enters a new market - except perhaps that they can maximize their chances by avoiding direct competition with the better-resourced incumbents.

If we call every business success a "disruption", then we are comparing companies that have made it to the top in different ways. We would derive an overarching success strategy from your approach. This is dangerous. Managers would mix up and combine approaches that are highly unlikely to match and will therefore not deliver the expected results.

Netflix took a classically disruptive route when it first started streaming movies over the internet.

Uber and Apple's iPhone owe their success, for example, to a business model based on an Internet platform: Uber connects drivers and passengers, the iPhone connects app developers with smartphone users. But Uber - in the essence of a sustainable innovation - has focused on building network and functionality in order to be better than traditional taxis. Apple, on the other hand, has followed a disruptive path: The company has built an ecosystem for app developers to make the iPhone more like a PC.

4. The mantra "Disrupt or be disrupted" can be misleading

Established businesses need to respond to disruption when it happens. But don't overreact and shut down a business that is still profitable. On the contrary: You should further strengthen the ties to your core customers by investing in sustainable innovations. Additionally, they can start a new division that will only focus on growth opportunities that arise from the disruption. Our research indicates that the success of this new business area depends to a large extent on the strict separation from the core business. That means: Established companies will have to manage two very different units for a while.

When the disruptive business reaches a certain size, it may begin to draw customers away from its core business - that is out of the question. But business leaders shouldn't try to solve this problem before it becomes a problem at all.

Findings for practice

A technology or product is seldom self-sustaining or disruptive. And when a new technology is developed, disruption theory does not dictate how managers should act. Rather, it helps them to make the strategic decision as to whether they should take a sustainable or a disruptive path.

The theory predicts that if a newcomer directly attacks the established companies with better products or services, they will step up their innovation efforts to defend their business. Either they will fight back by bringing better products or services to the market at similar prices, or one of them will buy out the newcomer. The data supports our theory that entrants who pursue a self-sustaining strategy to run their own business are taking high risks: In Clayton Christensen's groundbreaking study of computer drive manufacturers, only 6 percent of newcomers were successful with this strategy.

Then why did Uber do it? According to the disruption theory, the company is a special case, and we have no general explanation for such atypical phenomena. In this particular case, the success is based in large part on the regulation of the taxi industry. Market access and prices are strictly controlled in many jurisdictions. As a result, taxi companies have hardly pushed ahead with innovations. There is little opportunity for a single driver to do anything differently unless they switch to Uber. The company is therefore in a strong position compared to taxis: it can offer higher quality and the competition can hardly react to it - at least in the short term.

So far we've only looked at the question of whether or not Uber is disruptive to the taxi industry. In the limousine or "black car" business, the situation is different. In these areas, Uber is far more likely to be on a disruptive path. With the Uber Select offer, customers get luxury cars at a usually higher price than with the standard service. Still, it is usually not as expensive as a conventional limousine service. There are some compromises with the comparatively low price. Uber Select does not currently offer advance reservations - a feature that allows the leading competitors to stand out clearly. This is why Uber's offering is aimed at the lower segment of the limousine service market - customers who accept a loss of comfort for a lower price. Should Uber find a way to catch up with the services offered by the established companies or even to surpass them without losing its price advantage, then the company would be in a good position to attack the mainstream market. That would then be a typically disruptive approach.

The development of the theory

In the beginning, the theory of disruptive innovation was simply a statement about a correlation. Empirical studies have shown that established companies are superior to market entrants in a sustainable innovation environment, but inferior in a disruptive innovation environment. The reason for this correlation was not immediately apparent, but gradually the elements of the theory came together to form an overall picture.

The first thing the researchers recognized was that a company's propensity for strategic change depends very much on the interests of customers, which the organization needs to survive. In other words: the established companies pay very close attention to what their existing customers are asking for. As a result, they focus on sustainable innovations. The scientists thus came to a second finding: the focus of the established on their existing customers becomes entrenched in their internal processes, so much so that it becomes difficult even for top executives to free up investment funds for disruptive innovations. Interviews with managers of established manufacturers of computer drives showed, for example, that the processes involved in resource allocation favored innovations that preserve them - that is, those that promise high returns and are aimed at well-known customers. At the same time, they inadvertently dug the waters off disruptive innovations that were aimed at smaller markets and whose customers were largely unknown.

These two insights explained why incumbents rarely, if at all, responded effectively to disruptive innovations. It remained unclear why market entrants were targeting the higher price segments and competing with long-established companies, over and over again. It turned out, however, that the same factors that lead incumbents to ignore disruptions at an early stage are what lead disruptors to take over mass business later.



We have found that you are not alone in the market segments in which the later disruptors will initially gain a foothold. There they compete with several comparable providers whose products are simpler, more convenient or simply cheaper than those of the top dogs. The established companies de facto set up a price umbrella that allows many newcomers to make profits and grow in the selected segment. But that only applies for a certain time, because the established companies are withdrawing from this area. Your reasons are understandable, but the consequences of your actions are fatal. In doing so, they remove the price umbrella and spark a price war among market entrants. Some of the newbies die. But those who understand the principle - the real disruptors - improve their products and attack the next higher market segment, at the edges of which they again compete against the more expensive offers of the established companies. This effect drives all competitors, both the established and the new, into the higher price ranges.

With these explanations, the disruption theory evolved from a simple correlation to a theory of causality. The key elements have been reviewed and verified through research across many industries including retail, computing, printing, motorcycles, automobiles, semiconductors, cardiovascular surgery, management education, financial services, management consulting, cameras, communications, and CAD software.

Deviations from the original model

The theory has seen some improvements to address certain discrepancies or unexpected scenarios that it was unable to explain in its original version. For example, we initially assumed that disruptive innovations would start in the lowest segment of an existing market. But then it turned out that the newcomers sometimes competed in completely new markets. This led to the distinction we have already made between disruptors that either establish a base at the lower end of a market or in a new market.

The representatives of the first category included minimills in the steel industry and discounters in retail. They started in the lower price segment, where they gained a foothold within an existing value chain. Only later did they target the higher market segments - and entered into direct competition with the integrated steel mills and traditional retailers. Disruptions in new markets, on the other hand, build a pillar in a completely new value-added network. They are aimed at consumers who have not previously bought the product. Examples are the portable transistor radio and the PC. The manufacturers of stationary radios and mini-computers largely ignored these innovations because they turned to a different group of consumers. Finding that disruptive innovations take hold in two different types of markets has made the theory more powerful and practical.

Universities have long resisted disruptive forces. But now online providers are attacking.

Another exciting irregularity was industries that resisted the disruptive forces, at least until recently. One of them was the American universities. Over the years - for over a century in fact - new educational institutions emerged which, when they were founded, pursued the aim of meeting the needs of different social classes, for example for people who otherwise would not have been able to afford a higher education. These organizations include, for example, the so-called land-grant universities, which received land from the state so that they could finance themselves, and educational colleges and practice-oriented colleges that offer two-year training. What all these institutions had in common was that they were originally intended to provide for those for whom the traditional four-year humanities education was out of the question for financial or other reasons.

Many of these start-ups tried to improve their quality in the following years - for motives that also underlie the pursuit of profit: the desire for growth, recognition and the desire to do more for the common good. So they put a lot of money into research, student dormitories, sports facilities, faculty, and other areas. In this way they tried to imitate the elite educational institutions. In this way they were able to increase their productivity - for example through better learning opportunities and a higher standard of living for their students. Their position relative to higher education institutions, however, hardly changed. With a few exceptions, the top 20 universities remained the same from decade to decade; the same applies to the next 50 institutions at the second highest level.

With both the established organizations and the newbies pursuing the same plan, it may come as no surprise that the long-time residents have been able to hold their position. Until recently, there was a lack of experiments with new models that could successfully convince previous non-consumers of higher education.

The question is: is there a new technology or a new business model with which market entrants can attack the higher price segments without having to bear the high costs of the established organizations - with which they can embark on a disruptive path? The answer seems to be yes, and the innovation that makes this possible is e-learning. Learning opportunities on the Internet are spreading extremely quickly. The cost of online courses is falling, while access options and quality improve. Innovative providers are gaining shares in the mass market at a surprisingly rapid pace.

Will educational offers on the Internet prove to be disruptive for the established institutions model? And if so, when? In other words, will the improvement path taken by the new providers overlap with the needs of the mainstream market? We found that the success of disruptive innovations depends on the speed at which the underlying technology improves. In the steel industry, the continuous casting process improved rather slowly. It took Nucor, a mini-mill operator, more than 40 years of sales to match those of the largest integrated steel companies. Digital technologies, on the other hand, thanks to which PCs could replace mini-computers, improved much faster. The manufacturer Compaq was able to increase its income more than tenfold in just twelve years and thus overtake the industry leader DEC.

By better understanding what affects the rate of disruption, we can more accurately predict outcomes. But it doesn't change the way managers should deal with such developments. Fast disruptions are not fundamentally different from slow ones. They are not based on other causal mechanisms, and they do not call for conceptually different answers.

It would also be a mistake to assume that the strategies of some oft-cited climbers represent a special kind of disruption. Often times they are simply put in the wrong category. Tesla Motors is a recent, prominent example. One could be tempted to classify the electric car manufacturer as disruptive. But the company has gained a foothold in the upper market segment. Its customers are willing to pay more than $ 70,000 for a car. This segment is anything but uninteresting for the established manufacturers. It is therefore hardly surprising that they not only closely followed Tesla's entry, but also reacted to it with their own investments. If the theory is correct, then in the future Tesla will either face a takeover by a much larger auto company or the company will have to fight hard for years for significant market share.

Conclusion

We still have a lot to learn. That is why we will continue to develop and improve the disruption theory. We have a lot of work to do. It has not yet been possible to find a universal answer to disruptive threats. We currently believe that companies should build an independent entity to explore and develop a new disruptive model under the protection of top management. Sometimes this approach works - but not always. In some cases, a failed response to a disruptive threat can be traced back to a lack of understanding, insufficient care from management, or a lack of financial resources.We still need to specify the challenges that both incumbents and new companies face; and it is still unclear how they can best survive them.


If the theory is correct, then Tesla could face a takeover by a much larger corporation.

The theory of disruption can neither today nor in the future explain everything that has to do with innovation in particular or with business administration in general. Too many other influencing factors play a role, each of which would have to be examined separately. Putting all of this together in one comprehensive business theory is an ambitious goal, and we are unlikely to achieve it in the near future.

But there is cause for hope. Empirical studies show: The use of the disruption theory means that we can predict, measurably and much more precisely, which young companies will be successful. The steadily growing community of researchers and practitioners is refining the model more and more and linking it with other approaches. This will give us an even better understanding of what helps companies to successfully drive innovations.

Clayton M. Christensen is Professor of Business Administration at Harvard Business School (HBS). He is considered to be the inventor of the disruption theory. Michael Raynor is Research Director at the accounting and consulting firm Deloitte and one of the leading experts in strategy and innovation. Rory McDonald is Assistant Professor of Business Administration in Technology and Operations Management at HBS.

Source: Factiva, analysis of a wide range of English-language publications
Literature Clayton M. Christensen et al .: The Innovator's Dilemma: Why Established Companies Lose the Competition for Breakthrough Innovations, Vahlen 2015. Clayton M. Christensen et al .: The Innovator's DNA: Mastering the Five Skills of Disruptive Innovators, Harvard Business Review Press 2011. Clayton M. Christensen et al .: Seeing What's Next: Using the Theories of Innovation to Predict Industry Change, Harvard Business Review Press 2004. HBM Online Joseph L. Bower, Clayton M. Christensen: How to Use the Opportunities of Disruptive Technologies, in: Harvard Business Manager, April 2008, page 126, reprint number 200804126 (first publication HBM edition 3/1995). Maxwell Wessel, Clayton M. Christensen: How to Survive Disruptive Innovations, in: Harvard Business Manager, Feb 2013, page 20, reprint number 201302020.

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Harvard Business Manager
The Harvard Business Manager is the expanded German edition of the US magazine "Harvard Business Review" (HBR), the most renowned management magazine in the world. The editorial team supplements the best articles from the HBR with important research results from professors from European universities and business schools as well as texts from German-speaking experts from consulting and company management. Our authors are among the best and best known experts in their field and have acquired their knowledge through many years of studies and professional experience.