The Disruptive Innovation Theory: Concepts, Usefulness, and Tips

Disruptive innovation theory is considered the 21st century's leading business idea. Business remains competitive, and this theory explains how new entrants can overtake incumbents by serving neglected or underserved customers in existing markets.

What are the primary concepts of disruptive innovation theory, and how useful is the theory in your business strategy?

Is it worth your time to challenge every new entrant in your market for fear that they will successfully disrupt it, or is it a mistake to direct your resources in this way?

Here are the essential points you need to understand about disruptive innovation theory to help sustain and grow your organization.

What Is Disruptive Innovation Theory?

Clayton Christensen coined the term disruptive innovation in the 1990s. Disruptive innovation refers to innovation that either:

• Enters at the bottom of a market that already exists and displaces the leading products, firms, and alliances in the market over time; or
• Creates a new market and value network.

Even if an innovation is revolutionary, it isn't necessarily disruptive according to this concept.

For example, the invention of the automobile in the late 1800s wasn't disruptive because it was an expensive luxury that didn't replace everyday horse-drawn vehicles. What was a disruptive innovation, though, was the introduction of the mass-produced automobile in the form of the more affordable Ford Model T in 1908.

Who Are Disruptive Innovators?

Entrepreneurs and outsiders commonly develop disruptive innovations instead of executives in leading companies. Market leaders usually lack time or space to pursue disruptive ideas. They can face a competitive environment that resists new approaches and may view disruptive innovations as unprofitable from the start or as distractions from sustaining innovations needed to stay competitive.

Additionally, disruptive innovations often take longer to develop and come with higher risks than more sustained innovations. That said, when disruptive innovation is released into the market, it often has a much larger impact on existing markets and penetrates them much more quickly.

Are you looking to learn more about impactful theories in the business world? Learn about motivating your employees with Maslow's Hierarchy of Needs theory in this post.

What Are Its Key Concepts?

Now that we have a better understanding of the disruptive innovation theory and who disruptive innovators are, let's dive into some of the key concepts of this theory.

1. The Two Varieties of Disruption: New-Market and Low-End

When discussing disruptive innovation, it's essential to understand that there are two key types: new market disruption and low-end disruption.

New market disruption focuses on underserved customers. That is when a company creates a new segment in an already existing market and then claims it. They do this by appealing to a customer base they have identified as underserved and slowly improving the product's quality until they displace the dominant businesses in the market.

Low-end disruption focuses on overserved customers. These businesses slide to the bottom of a market and ultimately capture their competitors' customers by offering a lower-priced product that performs acceptably.

2. Innovation Isn't Inherently Disruptive

As mentioned in the above example of the invention of the automobile, it's essential to understand that not all innovation is disruptive.

Disruptive innovation occurs when incumbent businesses are so focused on the needs of their most profitable customers that they misjudge or neglect the needs of other segments of their customer base. At this point, a new company can move in and serve the customers that the existing companies had put on the back burner.

3. Disruptive Innovation Isn't a Product; It's a Process

When we think of innovations, we often think of physical inventions. The printing press, the telephone, the computer, and the iPhone are a few examples.

According to Christensen, the key to determining whether something will break through as a disruptive innovation is the process, not the product.

4. Not All New Entrants Are Worthy Adversaries

If you are a part of an incumbent business, the notion of disruptive innovation can be anxiety-inducing. You might constantly look over your shoulder at every small company that crops up with the fear that they will kick you out of your top spot in the market.

It is, of course, always essential to keep an eye on the market and never get too comfortable, even (or perhaps especially) when you're at the top of the ladder.

That said, it's important to remember that not every new company entering your market will be disruptive.

Trying to fight every new market entrant will likely waste vital, finite resources in your company. You'll instead want to pinpoint the new players that are a problem for you and focus your energies in that direction when necessary.

What Are the Requirements for Disruptive Innovation?

For companies looking to leverage the potential advantages of disruptive innovation, several requirements should be noted.

These include:

• Innovative business model: Incumbent companies typically don't adopt one because it offers low initial profit margins. New companies that use an innovative business model to target neglected customers can create economical, easy-to-use solutions to problems of the customer base.
• Enabling technology: Enabling technology in business is the innovations and technologies that create substantial improvements or changes in how people do things. In the context of disruptive innovation, enabling technologies are those that enable a broader market to access a more affordable product.
• Coherent value network: To successfully create a disruptive innovation in a market, a business needs business partners upstream and downstream who will benefit from it. These suppliers, vendors, and distributors might need to change their organizations or processes to adopt a new business model aligned with disruptive innovation. Without buy-in from a company's network, it is difficult, if not impossible, to succeed in creating a disruptive innovation.

Is Disruptive Innovation Theory Useful?

Christensen's theory of disruptive innovation has tremendously influenced the business world. There has been a lot of conversation surrounding the topic since it was first brought to the forefront, with some arguing that the theory is more valuable than others.

According to the MIT Sloan Management Review, the theory serves more as a warning for incumbent companies to monitor, rather than a guarantee for any industry. It hasn't been tested in academic literature, so its prevalence and validity remain unclear.

There have been countless examples of disruptive innovation, including Amazon, Xerox, Best Buy, and Wi-Fi. There is no question that companies have emerged to push out incumbents in drastic, revolutionary ways, and disruptive innovation theory can provide a helpful warning to companies of all sizes. That said, it's essential to realize that your resources might not be well spent trying to challenge every new market entrant.

Comparing Disruptive and Sustaining Innovation

83% of senior executives rank innovation among their organizations' top three priorities. Understanding the different kinds of innovation can be essential when creating a business strategy.

In addition to disruptive innovation, there is sustaining innovation. We'll examine each so you can recognize them and see why they matter.

Sustaining Innovation

When a company creates better-performing products, it sells them to its best customers for higher profits, and innovation is sustained. This strategy is usually used by companies that are already big players in their industry.

An example of sustained innovation in recent history is the introduction of laptops, which followed the desktop computer. While there weren't many new abilities or qualities in laptops compared to desktops, the portability laptops offered was novel and catered to customers willing to pay more for something with similar capabilities.

There is nothing wrong with sustaining innovation; relying on it can sometimes be a perfectly suitable strategy.

However, you have to watch out for new entrants into the market that could disrupt this strategy. Let's talk about disruptive innovation for a minute, in contrast to sustaining innovation.

Disruptive Innovation

Plenty of big companies have sustained innovation strategies for decades and maintained dominance in their markets. Generally, it is difficult for companies to sustain their success over time, even when they are comprised of intelligent, capable, engaged people.

One reason this happens is the second type of innovation: disruptive innovation. When a new market entrant challenges a more prominent company that currently dominates the industry, it can shake up both the business and consumer worlds.

What does it look like when disruptive innovation occurs?

When a new market entrant engages in low-end or new market disruption, the existing market giant almost always retreats upmarket rather than trying to fight the new entrant for lower-end clients or a new market segment. That is because, at least for a moment, the profit margins are on the lower end.

The incumbent company, therefore, will often withdraw from the segment being challenged because its innovation strategy is driven by higher profit margins.

Over time, the new entrant can improve what they offer to customers and move into higher-margin market segments. The incumbent company continues to move upmarket rather than challenge the new entrant in lower-margin market segments.

As the incumbent keeps moving up the market, the new entrant eventually pushes them out entirely. That is because they have continually improved their offering, gaining dominance across all market segments and rendering the incumbent's products entirely obsolete.

Cultivating Innovation in the Workplace

Disruptive innovation theory shook up the business world when it was first introduced, and it's been a major topic of conversation for decades now. One of the fascinating things about this theory is that it can be exhilarating or terrifying depending on where you find yourself in the market hierarchy. For new startups, it creates the promise of dominating a market, while for incumbent companies, it outlines the potential threat of being pushed out of the market entirely.

This theory is perhaps most useful as a warning to big companies and as a guide for new companies, but it's crucial to understand that it isn't a prescription for what will definitely happen in any given industry.

For example, a new company might try to follow the general timeline of the disruptive innovation strategy, only to find that a larger company picks up on its idea and focuses on the market segment the startup was aiming for. In this situation, the incumbent company dominates the segment because it already has brand awareness, distribution networks, and infrastructure to produce the new product or service.

Maybe the most valuable lesson from the disruptive innovation theory is to recognize that the business world is an ever-changing, ever-evolving landscape. No matter how large or dominant a company is, there is no guarantee that its success will be self-sustaining without maintaining an innovative mindset.

To help your business succeed in the changing business environment, cultivating creativity and innovative thinking among your managers and employees is one of the best things you can do. If you're looking to uncover creative talents in your workplace and encourage creativity, check out our Breakthrough Creativity Profile.

Do you or your company have any questions about the theory of disruptive innovation? If so, please feel free to drop them in the comments below, and we'll get back to you within a day or two! We always make it a point to reply to everyone's comments and questions, and we'll gladly assist you however we can!