Disruptive Innovation: A true story of disruption
What do you think you know about the Kodak story?
It’s a commonly told tale that Kodak was disrupted BECAUSE it failed to spot the rise of digital camera technology, failed to invest and, the rest is history…
Expect that story, that myth is wrong.
Kodak engineers were early investors in light-sensitive imagining chip technology. The company invested over $3 billion trying to make the digital camera good enough that it could compete in the established market.
One mistake was not using digital technology to make it so affordable and simple that a whole new population can now own and use cameras.
Kodak’s board realised its error.
And after a major course correction, they almost succeeded.
They set up a separate business unit and made it truly separate to the core exposing it to the cold winds of the consumer products market.
This resulted in a camera called an Easy-Share, and the business in America went from 8 per cent to 28 per cent of the market.
Kodak became the largest digital camera vendor in America with $2 billion of profitable revenue.
But then chairman Dan Carp, who navigated this and found a response to the disruptive threat, retired and a new CEO Antonio Perez was installed.
He failed to understand the requirements of running these ventures forcing them back into the same core business to save costs.
The core and the new competed and undermined each other.
So the failure was in fact,
ONE: A failure of strategy allowing digital cameras to compete head-on with film based on quality of image making the new tech very expensive.
TWO: A failure to scale up their new digital business and set up the right governance, leadership and culture and therefore, of top leadership.
The story of Kodak is told in many business schools through the case study.
And it is a true story of disruption.
What is Disruptive Innovation Theory?
The history of disruptive innovation dates back to Joseph Schumpeter an Austrian political economist who also served briefly as Finance Minister of Austria in the 1930s.
His work on creative destruction is a famous concept in economics that describes a process in which innovations replace and make obsolete older innovations.
In 1978 Abernathy and Utterback came up with patterns of technology disruption.
Disruptive innovation theory, its roots trace back to the groundbreaking work of Joseph Bower and Clayton Christiansen in 1995 with their paper Disruptive Technologies: Catching the Wave and later the book, The Innovator’s Dilemma.
Disruptive innovation theory has been a very important way in which innovation managers can think about powerful new technologies that challenge the very existence of a company.
It’s important that we have a good understanding of what disruptive innovation theory is and is not.
That’s because the term disruptive innovation is used and abused in popular culture and corporate jargon. Likely, misunderstanding has inadvertently led to the dilution of its meaning or wrong paths taken.
How many times have we heard? “Disrupt ourselves before somebody else does.” Or “don’t bother me if it isn’t a big disruptive innovation”.
Ultimately we need to understand disruption innovation theory (DIT) and then develop situation-dependent responses.
A Recap about Disruptive Innovation Theory
“A disruptive innovation is an innovation that makes it so much simpler and so much more affordable to own and use a product that a whole new population of people can now have one.”
And it works like this.
Disruption is a process whereby a smaller company with fewer resources can successfully challenge established incumbent businesses. As incumbents focus on improving their products and services for their most demanding and profitable customers, they exceed the needs of some segments and ignore the needs of others. New entrants begin by successfully targeting those overlooked segments, gaining a foothold by delivering more suitable functionality frequently at a lower price. Incumbents, chasing higher profitability in more demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.”
So Christensen introduces the concept of disruptive innovation.
It’s in contrast to Sustaining Innovation which involves improving existing products or services to better serve existing customers’ needs, often followed by incumbent firms to maintain their competitive position.
Disruptive innovation, on the other hand, initially offers lower performance along traditional metrics but introduces other advantages such as affordability, accessibility, or simplicity, appealing to a different set of customers.
It’s the Leaps and Shuffles that do it
This idea of disruption as an ongoing process rather than an event is an important one.
It is the combination of radical breakthrough leaps in innovation followed by a rapid series of shuffles in sustaining improvement that drives a steep performance improvement curve. Eventually, it allows the entrant to overtake the incumbent. The graphic below visualised this idea.
From HBR, 2015
How does disruption innovation happen?
Disruptive innovations are made possible because they get started in two types of markets that incumbents overlook. Low-end footholds exist because incumbents typically try to provide their most profitable and demanding customers with ever-improving products and services, and they pay less attention to less-demanding customers. Incumbents’ offerings often overshoot the performance requirements of the latter. This opens the door to a disrupter focused (at first) on providing those low-end customers with a “good enough” product.
In the case of new-market footholds, disrupters create a market where none existed. Put simply, they find a way to turn nonconsumers into consumers.
Understanding the nuances of disruptive innovation theory can help differentiate between innovations that merely improve existing products or services and those that fundamentally reshape entire industries by providing simpler, more accessible solutions.
The Innovator’s Dilemma
Christensen argues that established companies often face an “innovator’s dilemma.” They excel at sustaining innovations to meet the demands of their most profitable customers, but they struggle to pursue disruptive innovations that could disrupt their existing business models.
In other words, they stay too close to their customers.
This dilemma arises because disruptive innovations typically offer lower profit margins and may cannibalize existing products or services, making them unattractive to established firms focused on maximizing short-term profits and serving existing customer needs.
So the dilemma is a strategic one.
Should you go Upmarket with existing technology or downmarket?
To remain at the top of their industries, managers must first be able to spot the technologies that fall into this category. To pursue these technologies, managers must protect them from the processes and incentives that are geared to serving mainstream customers.
It’s a story of the DNA of the incumbent business which is made differently to that required to win in making of The New.
Christensen concludes that the only way to do that is to create organizations that are completely independent of the mainstream business.
And that’s not a bad answer. But it needs a partial decoupling of the very top team from the Core to allow space for the New to emerge. Indeed, it might need a new top team (think Alphabet and Google).
The downside is this can lead to disconnection between the core and the new.
It’s why ideas of integrative innovation or dual innovation emerged to deal with this.
Main lessons and watchpoints
Be keen to the challenge that staying too close to your customers. It’s both necessary for sustaining innovation but it doesn’t help when facing radical shifts. Most customers are as blind as you are at spotting opportunities.
The idea put forward by von Hipple of the Leading Edge User and understanding the real Job to be Done for customers has emerged since the publication of the Dilemma. Ask the right people the right questions, not your best customers since they demand Sustaining. Practically you can set up Incubators, Accelerators, corporate venture building, and an arms-length expert Strategic Advisory group.
The New and the Core are like the evil twin. They need different approaches and a top team that can balance the competing demands of the overall enterprise.
Companies need to set up routines to scan for and assess disruption. Christensen says to watch to see if Marketing and Technical are bickering. I think it needs a more systematic approach. You need to build and manage a meta competency described by Teece’s Dynamic Capability. Senior leaders need to spot new technologies and understand the JTBD.
Quiz time! Is it Disruptive?
Let’s look at some examples of where disruptive innovation theory holds, where it doesn’t and where it might be.
Truly Disruptive Innovations:
- Personal Computers: The introduction of personal computers in the 1970s and 1980s, like the Apple II and IBM PC, disrupted the mainframe computer industry. These smaller, more affordable computers enabled individuals and small businesses to perform tasks previously only possible with larger, expensive mainframe computers.
- Digital Photography: The shift from film to digital photography revolutionized the photography industry. Digital cameras offered lower costs per photo, instant image previews, and easy sharing options, disrupting traditional film photography companies like Kodak.
- Online Streaming Services: Services like Netflix disrupted the traditional television and movie rental industry by offering a convenient and cost-effective way to access a vast library of content without the need for physical media or rigid scheduling.
Mistakenly Believed to be Disruptive:
- Uber and Lyft: While often cited as disruptive, ride-hailing services like Uber and Lyft are more accurately classified as sustaining innovations rather than disruptive. They offer improvements to the existing taxi industry but haven’t fundamentally changed the transportation market’s structure or economics.
- Smartphones: Although smartphones have transformed many aspects of daily life, they are not inherently disruptive according to Christensen’s theory. Smartphones can be seen as sustaining innovations that have enhanced the capabilities of mobile phones rather than disrupting an existing market with a simpler, more affordable alternative.
- Amazon: While Amazon has certainly transformed retail and disrupted many traditional brick-and-mortar stores, it’s more accurately characterized as a sustaining innovation in e-commerce rather than a truly disruptive force. It built upon existing online retail models rather than creating a new, simpler solution that initially served less demanding customers.
Maybe Disruptive Innovations
- Electric Vehicles (EVs): The emergence of electric vehicles, led by companies like Tesla, has disrupted the automotive industry. EVs offer a cleaner and more sustainable alternative to traditional internal combustion engine vehicles and are challenging the dominance of fossil fuel-powered cars. True, but while the technology is disruptive the footholds are not in the low-end underserved and are not creating new markets.
- Mobile Payment Systems: Technologies like Apple Pay and Google Pay are disrupting the traditional payment industry by offering convenient, secure, and contactless payment options, reducing the reliance on physical credit cards and cash. Same point; the technology is disruptive but the same market is being served.
How to assess disruption
Helpfully, Christensen provides a procedure for assessing disruption. It’s quite high-level, but you’ll get the gist.
- Determine if the new technology is Disruptive or Sustaining
- Define the strategic significance of the disruptive technology ie is it business threatening? The question you have to ask is, is there a population out there who can’t do something because the solution is just too expensive and too inconvenient? Or are there people who can do something, but they can’t do it in a convenient context?
- Locate the initial market for the disruptive technology (where are the Leading Edge Users?). Here you are into identifying startups.
- If you are facing disruption and you have a response, and IF the margin is lower and the customers are very different and upsetting the Core business model then set up an independent organisation and corporate new venture, reporting to the Top Team.
- Keep the disruptive response organisation largely independent for the core. There is a qualification to this and it comes from the Lean Scaleup school. The core provides resources at just the right size and scale.
Are the criticisms of DIT meaningful?
Christensen’s work has had a significant impact on how businesses understand and respond to disruptive forces in their industries, emphasizing the importance of innovation and adaptability in maintaining long-term competitiveness.
I spotted a recent paper by Stephen Lile, Shaz Ansari & Florian Urmetzer that takes a new academics-eye view of DIT.
It’s rather critical some of which Christensen has already addressed in his later rebuttal paper of 2015.
But they do make some valid points, worth considering.
They say the simplistic classification of innovation as sustaining or disruptive is unhelpful rather than graded such as adjacencies, incremental and radical.
The original work gives insufficient consideration to strategic responses in the face of disruption. It isn’t necessarily so that an incumbent WILL be disrupted. DIT fails to recognise the complexity of firm-level responses. Think about the potential for autonomous cars still playing out with the potential to disrupt or not disrupt.
Neglect of high-end disruption – DIT’s failure to account for the phenomenon of high-end disruption, where a new product or service is introduced at a high price point and initially targets the upper market before cascading downward. EG iPhone and mobile phone examples are instances where innovations targeted premium markets before trickling down to other market segments.
An overemphasis on individual firms – the theory should pay more attention to the role of innovation ecosystems, comprising multiple interdependent actors, in enabling or constraining disruption. Adopting an ecosystem perspective in DIT expands the theoretical framework by acknowledging the roles of various stakeholders in shaping the innovation process, and it offers practitioners insights into collaborative strategies and the importance of aligning with ecosystem dynamics.
Pro disruptive bias, or “disruption is always good” bias – the predictive, prescriptive, and performance potential of DIT. More profound than critiques, these controversies address the fundamental disagreements at the core of DIT.
While technology has immense potential to enhance the human condition, it can also wreak societal havoc. EG The proliferation of fake news is facilitated by technological advancements. Eg Facebook. IN OTHER WORDS, innovation should be perceived not as an improvement but as a technological discontinuity (Tushman & Anderson)
These are the more reasonable critiques, but I don’t see them as threatening the fundamentals of DIT. We should keep them in mind and use them to improve our response to disruption.
ADVICE FOR STRATEGIC INNOVATION MANAGERS
DIT is a useful tool in the strategic armoury of innovation managers. We should get to understand more deeply what is and what isn’t disruption and set up ways to right or use the forces of creative destruction to our ends.
One thought is to run a war game by stepping into a future.
I call it “What is the disruption that killed us?”
Image by Aaron Chavez Unsplash
REFERENCES
- History of Disruptive technologies of Utterback, S curves Abernathy, W.J. and Utterback, J.M. – Patterns of Innovation in Technology, Technology Review, 1978
- Disruptive Technologies: Catching the Wave, Joseph Bower and Clayton Christensen, Harvard Business Review, 1995, 43
- Managing Disruption: An Interview with Clayton Christensen, Research Technology Management, 2011
- What is disruptive innovation? Clayton M. Christensen, Michael Raynor, and Rory McDonald, Harvard Business Review, 2015
- Rethinking disruptive innovation: unravelling theoretical controversies and charting new research frontiers, Stephen Lile, Shahzad (Shaz) Ansari & Florian Urmetzer, Innovation: Organization & Management (2024)