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Summary.   

Disruptive Innovation

What Is Disruptive Innovation?
by Clayton M. Christensen, Michael E. Raynor, and Rory McDonald

From the Magazine (December 2015)

For the past 20 years, the theory of disruptive innovation has been

enormously influential in business circles and a powerful tool for predicting which

industry entrants will succeed. Unfortunately, the theory has also been widely

misunderstood, and the “disruptive” label has been applied too carelessly anytime

a market newcomer shakes up well-established incumbents.

In this article, the architect of disruption theory, Clayton M. Christensen, and his

coauthors correct some of the misinformation, describe how the thinking on the

subject has evolved, and discuss the utility of the theory.

They start by clarifying what classic disruption entails—a small enterprise targeting

overlooked customers with a novel but modest offering and gradually moving

upmarket to challenge the industry leaders. They point out that Uber, commonly

hailed as a disrupter, doesn’t actually fit the mold, and they explain that if

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managers don’t understand the nuances of disruption theory or apply its tenets

correctly, they may not make the right strategic choices. Common mistakes, the

authors say, include failing to view disruption as a gradual process (which may lead

incumbents to ignore significant threats) and blindly accepting the “Disrupt or be

disrupted” mantra (which may lead incumbents to jeopardize their core business as

they try to defend against disruptive competitors).

The authors acknowledge that disruption theory has certain limitations. But they

are confident that as research continues, the theory’s explanatory and predictive

powers will only improve.

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The theory of disruptive innovation, introduced in these pages in

1995, has proved to be a powerful way of thinking about innovation-

driven growth. Many leaders of small, entrepreneurial companies

praise it as their guiding star; so do many executives at large, well-

established organizations, including Intel, Southern New Hampshire

University, and Salesforce.com.

Unfortunately, disruption theory is in danger of becoming a victim of

its own success. Despite broad dissemination, the theory’s core

concepts have been widely misunderstood and its basic tenets

frequently misapplied. Furthermore, essential refinements in the

theory over the past 20 years appear to have been overshadowed by

the popularity of the initial formulation. As a result, the theory is

sometimes criticized for shortcomings that have already been

addressed.

There’s another troubling concern: In our experience, too many

people who speak of “disruption” have not read a serious book or

article on the subject. Too frequently, they use the term loosely to

invoke the concept of innovation in support of whatever it is they

wish to do. Many researchers, writers, and consultants use

“disruptive innovation” to describe any situation in which an industry

is shaken up and previously successful incumbents stumble. But that’s

much too broad a usage.

close

The Ubiquitous “Disruptive
Innovation”

Visual by Clayton M. Christensen ,
Michael E. Raynor , and Rory McDonald

The problem with conflating a

disruptive innovation with any

breakthrough that changes an

industry’s competitive patterns is

that different types of innovation

require different strategic

approaches. To put it another way,

the lessons we’ve learned about

succeeding as a disruptive

innovator (or defending against a

disruptive challenger) will not apply to every company in a shifting

market. If we get sloppy with our labels or fail to integrate insights

from subsequent research and experience into the original theory,

then managers may end up using the wrong tools for their context,

reducing their chances of success. Over time, the theory’s usefulness

will be undermined.

This article is part of an effort to capture the state of the art. We begin

by exploring the basic tenets of disruptive innovation and examining

whether they apply to Uber. Then we point out some common pitfalls

in the theory’s application, how these arise, and why correctly using

the theory matters. We go on to trace major turning points in the

evolution of our thinking and make the case that what we have

learned allows us to more accurately predict which businesses will

grow.

 PLAY 2:08

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First, a quick recap of the idea: “Disruption” describes a process

whereby a smaller company with fewer resources is able to

successfully challenge established incumbent businesses. Specifically,

as incumbents focus on improving their products and services for

their most demanding (and usually most profitable) customers, they

exceed the needs of some segments and ignore the needs of others.

Entrants that prove disruptive 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.

Is Uber a Disruptive Innovation?

Let’s consider Uber, the much-feted transportation company whose

mobile application connects consumers who need rides with drivers

who are willing to provide them. Founded in 2009, the company has

enjoyed fantastic growth (it operates in hundreds of cities in 60

countries and is still expanding). It has reported tremendous financial

success (the most recent funding round implies an enterprise value in

the vicinity of $50 billion). And it has spawned a slew of imitators

(other start-ups are trying to emulate its “market-making” business

model). Uber is clearly transforming the taxi business in the United

States. But is it disrupting the taxi business?

According to the theory, the answer is no. Uber’s financial and

strategic achievements do not qualify the company as genuinely

disruptive—although the company is almost always described that

way. Here are two reasons why the label doesn’t fit.

Disruptive innovations originate in low-end or new-market

footholds.

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. In

fact, 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. For example, in the early days of photocopying

technology, Xerox targeted large corporations and charged high

prices in order to provide the performance that those customers

required. School librarians, bowling-league operators, and other

small customers, priced out of the market, made do with carbon

paper or mimeograph machines. Then in the late 1970s, new

challengers introduced personal copiers, offering an affordable

solution to individuals and small organizations—and a new market

was created. From this relatively modest beginning, personal

photocopier makers gradually built a major position in the

mainstream photocopier market that Xerox valued.

A disruptive innovation, by definition, starts from one of those two

footholds. But Uber did not originate in either one. It is difficult to

claim that the company found a low-end opportunity: That would

have meant taxi service providers had overshot the needs of a

material number of customers by making cabs too plentiful, too easy

to use, and too clean. Neither did Uber primarily target

nonconsumers—people who found the existing alternatives so

expensive or inconvenient that they took public transit or drove

themselves instead: Uber was launched in San Francisco (a well-

served taxi market), and Uber’s customers were generally people

already in the habit of hiring rides.

Uber has quite arguably been increasing total demand—that’s what

happens when you develop a better, less-expensive solution to a

widespread customer need. But disrupters start by appealing to low-

end or unserved consumers and then migrate to the mainstream

market. Uber has gone in exactly the opposite direction: building a

position in the mainstream market first and subsequently appealing

to historically overlooked segments.

Disruptive innovations don’t catch on with mainstream

customers until quality catches up to their standards.

Disruption theory differentiates disruptive innovations from what are

called “sustaining innovations.” The latter make good products better

in the eyes of an incumbent’s existing customers: the fifth blade in a

razor, the clearer TV picture, better mobile phone reception. These

improvements can be incremental advances or major breakthroughs,

but they all enable firms to sell more products to their most profitable

customers.

Disruptive innovations, on the other hand, are initially considered

inferior by most of an incumbent’s customers. Typically, customers

are not willing to switch to the new offering merely because it is less

expensive. Instead, they wait until its quality rises enough to satisfy

them. Once that’s happened, they adopt the new product and happily

accept its lower price. (This is how disruption drives prices down in a

market.)

Most of the elements of Uber’s strategy seem to be sustaining

innovations. Uber’s service has rarely been described as inferior to

existing taxis; in fact, many would say it is better. Booking a ride

requires just a few taps on a smartphone; payment is cashless and

convenient; and passengers can rate their rides afterward, which

helps ensure high standards. Furthermore, Uber delivers service

reliably and punctually, and its pricing is usually competitive with (or

lower than) that of established taxi services. And as is typical when

incumbents face threats from sustaining innovations, many of the taxi

companies are motivated to respond. They are deploying competitive

technologies, such as hailing apps, and contesting the legality of some

of Uber’s services.

Why Getting It Right Matters

Readers may still be wondering, Why does it matter what words we

use to describe Uber? The company has certainly thrown the taxi

industry into disarray: Isn’t that “disruptive” enough? No. Applying

the theory correctly is essential to realizing its benefits. For example,

small competitors that nibble away at the periphery of your business

very likely should be ignored—unless they are on a disruptive

trajectory, in which case they are a potentially mortal threat. And

both of these challenges are fundamentally different from efforts by

competitors to woo your bread-and-butter customers.

As the example of Uber shows, identifying true disruptive innovation

is tricky. Yet even executives with a good understanding of disruption

theory tend to forget some of its subtler aspects when making

strategic decisions. We’ve observed four important points that get

overlooked or misunderstood:

1. Disruption is a process.

The term “disruptive innovation” is misleading when it is used to

refer to a product or service at one fixed point, rather than to the

evolution of that product or service over time. The first

minicomputers were disruptive not merely because they were low-

end upstarts when they appeared on the scene, nor because they were

later heralded as superior to mainframes in many markets; they were

disruptive by virtue of the path they followed from the fringe to the

mainstream.

Most every innovation—disruptive or not—begins life as a small-scale

experiment. Disrupters tend to focus on getting the business model,

rather than merely the product, just right. When they succeed, their

movement from the fringe (the low end of the market or a new

market) to the mainstream erodes first the incumbents’ market share

and then their profitability. This process can take time, and

incumbents can get quite creative in the defense of their established

franchises. For example, more than 50 years after the first discount

department store was opened, mainstream retail companies still

operate their traditional department-store formats. Complete

substitution, if it comes at all, may take decades, because the

incremental profit from staying with the old model for one more year

trumps proposals to write off the assets in one stroke.

The fact that disruption can take time helps to explain why

incumbents frequently overlook disrupters. For example, when

Netflix launched, in 1997, its initial service wasn’t appealing to most

of Blockbuster’s customers, who rented movies (typically new

releases) on impulse. Netflix had an exclusively online interface and a

large inventory of movies, but delivery through the U.S. mail meant

selections took several days to arrive. The service appealed to only a

few customer groups—movie buffs who didn’t care about new

releases, early adopters of DVD players, and online shoppers. If

Netflix had not eventually begun to serve a broader segment of the

market, Blockbuster’s decision to ignore this competitor would not

have been a strategic blunder: The two companies filled very different

needs for their (different) customers.

Because disruption can take time,

incumbents frequently overlook

disrupters.

However, as new technologies allowed Netflix to shift to streaming

video over the internet, the company did eventually become

appealing to Blockbuster’s core customers, offering a wider selection

of content with an all-you-can-watch, on-demand, low-price, high-

quality, highly convenient approach. And it got there via a classically

disruptive path. If Netflix (like Uber) had begun by launching a

service targeted at a larger competitor’s core market, Blockbuster’s

response would very likely have been a vigorous and perhaps

successful counterattack. But failing to respond effectively to the

trajectory that Netflix was on led Blockbuster to collapse.

2. Disrupters often build business models that are very different

from those of incumbents.

Consider the health care industry. General practitioners operating out

of their offices often rely on their years of experience and on test

results to interpret patients’ symptoms, make diagnoses, and

prescribe treatment. We call this a “solution shop” business model. In

contrast, a number of convenient care clinics are taking a disruptive

path by using what we call a “process” business model: They follow

standardized protocols to diagnose and treat a small but increasing

number of disorders.

One high-profile example of using an innovative business model to

effect a disruption is Apple’s iPhone. The product that Apple debuted

in 2007 was a sustaining innovation in the smartphone market: It

targeted the same customers coveted by incumbents, and its initial

success is likely explained by product superiority. The iPhone’s

subsequent growth is better explained by disruption—not of other

smartphones but of the laptop as the primary access point to the

internet. This was achieved not merely through product

improvements but also through the introduction of a new business

model. By building a facilitated network connecting application

developers with phone users, Apple changed the game. The iPhone

created a new market for internet access and eventually was able to

challenge laptops as mainstream users’ device of choice for going

online.

3. Some disruptive innovations succeed; some don’t.

A third common mistake is to focus on the results achieved—to claim

that a company is disruptive by virtue of its success. But success is

not built into the definition of disruption: Not every disruptive path

leads to a triumph, and not every triumphant newcomer follows a

disruptive path.

For example, any number of internet-based retailers pursued

disruptive paths in the late 1990s, but only a small number prospered.

The failures are not evidence of the deficiencies of disruption theory;

they are simply boundary markers for the theory’s application. The

theory says very little about how to win in the foothold market, other

than to play the odds and avoid head-on competition with better-

resourced incumbents.

If we call every business success a “disruption,” then companies that

rise to the top in very different ways will be seen as sources of insight

into a common strategy for succeeding. This creates a danger:

Managers may mix and match behaviors that are very likely

inconsistent with one another and thus unlikely to yield the hoped-

for result. For example, both Uber and Apple’s iPhone owe their

success to a platform-based model: Uber digitally connects riders

with drivers; the iPhone connects app developers with phone users.

But Uber, true to its nature as a sustaining innovation, has focused on

expanding its network and functionality in ways that make it better

than traditional taxis. Apple, on the other hand, has followed a

disruptive path by building its ecosystem of app developers so as to

make the iPhone more like a personal computer.

4. The mantra “Disrupt or be disrupted” can misguide us.

Incumbent companies do need to respond to disruption if it’s

occurring, but they should not overreact by dismantling a still-

profitable business. Instead, they should continue to strengthen

relationships with core customers by investing in sustaining

innovations. In addition, they can create a new division focused solely

on the growth opportunities that arise from the disruption. Our

research suggests that the success of this new enterprise depends in

large part on keeping it separate from the core business. That means

that for some time, incumbents will find themselves managing two

very different operations.

Of course, as the disruptive stand-alone business grows, it may

eventually steal customers from the core. But corporate leaders

should not try to solve this problem before it is a problem.

What a Disruptive Innovation Lens Can Reveal

It is rare that a technology or product is inherently sustaining or

disruptive. And when new technology is developed, disruption theory

does not dictate what managers should do. Instead it helps them

make a strategic choice between taking a sustaining path and taking a

disruptive one.

The theory of disruption predicts that when an entrant tackles

incumbent competitors head-on, offering better products or services,

the incumbents will accelerate their innovations to defend their

business. Either they will beat back the entrant by offering even better

services or products at comparable prices, or one of them will acquire

the entrant. The data supports the theory’s prediction that entrants

pursuing a sustaining strategy for a stand-alone business will face

steep odds: In Christensen’s seminal study of the disk drive industry,

only 6% of sustaining entrants managed to succeed.

When new technology arises, disruption

theory can guide strategic choices.

Uber’s strong performance therefore warrants explanation. According

to disruption theory, Uber is an outlier, and we do not have a

universal way to account for such atypical outcomes. In Uber’s case,

we believe that the regulated nature of the taxi business is a large part

of the answer. Market entry and prices are closely controlled in many

jurisdictions. Consequently, taxi companies have rarely innovated.

Individual drivers have few ways to innovate, except to defect to

Uber. So Uber is in a unique situation relative to taxis: It can offer

better quality and the competition will find it hard to respond, at least

in the short term.

To this point, we’ve addressed only whether or not Uber is disruptive

to the taxi business. The limousine or “black car” business is a

different story, and here Uber is far more likely to be on a disruptive

path. The company’s UberSELECT option provides more-luxurious

cars and is typically more expensive than its standard service—but

typically less expensive than hiring a traditional limousine. This lower

price imposes some compromises, as UberSELECT currently does not

include one defining feature of the leading incumbents in this market:

acceptance of advance reservations. Consequently, this offering from

Uber appeals to the low end of the limousine service market:

customers willing to sacrifice a measure of convenience for monetary

savings. Should Uber find ways to match or exceed incumbents’

performance levels without compromising its cost and price

advantage, the company appears to be well positioned to move into

the mainstream of the limo business—and it will have done so in

classically disruptive fashion.

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How Our Thinking About Disruption Has Developed

Initially, the theory of disruptive innovation was simply a statement

about correlation. Empirical findings showed that incumbents

outperformed entrants in a sustaining innovation context but

underperformed in a disruptive innovation context. The reason for

this correlation was not immediately evident, but one by one, the

elements of the theory fell into place.

Smart disrupters improve their products

and drive upmarket.

First, researchers realized that a company’s propensity for strategic

change is profoundly affected by the interests of customers who

provide the resources the firm needs to survive. In other words,

incumbents (sensibly) listen to their existing customers and

concentrate on sustaining innovations as a result. Researchers then

arrived at a second insight: Incumbents’ focus on their existing

customers becomes institutionalized in internal processes that make

it difficult for even senior managers to shift investment to disruptive

innovations. For example, interviews with managers of established

companies in the disk drive industry revealed that resource allocation

processes prioritized sustaining innovations (which had high margins

and targeted large markets with well-known customers) while

inadvertently starving disruptive innovations (meant for smaller

markets with poorly defined customers).

Those two insights helped explain why incumbents rarely responded

effectively (if at all) to disruptive innovations, but not why entrants

eventually moved upmarket to challenge incumbents, over and over

again. It turns out, however, that the same forces leading incumbents

to ignore early-stage disruptions also compel disrupters ultimately to

disrupt.

What we’ve realized is that, very

often, low-end and new-market

footholds are populated not by a

lone would-be disrupter, but by

several comparable entrant firms

whose products are simpler, more

convenient, or less costly than

those sold by incumbents. The

incumbents provide a de facto price umbrella, allowing many of the

entrants to enjoy profitable growth within the foothold market. But

that lasts only for a time: As incumbents (rationally, but mistakenly)

cede the foothold market, they effectively remove the price umbrella,

and price-based competition among the entrants reigns. Some

entrants will founder, but the smart ones—the true disrupters—will

improve their products and drive upmarket, where, once again, they

can compete at the margin against higher-cost established

competitors. The disruptive effect drives every competitor—

incumbent and entrant—upmarket.

With those explanations in hand, the theory of disruptive innovation

went beyond simple correlation to a theory of causation as well. The

key elements of that theory have been tested and validated through

studies of many industries, including retail, computers, printing,

motorcycles, cars, semiconductors, cardiovascular surgery,

management education, financial services, management consulting,

cameras, communications, and computer-aided design software.

Making sense of anomalies.

Additional refinements to the theory have been made to address

certain anomalies, or unexpected scenarios, that the theory could not

explain. For example, we originally assumed that any disruptive

innovation took root in the lowest tiers of an established market—yet

sometimes new entrants seemed to be competing in entirely new

markets. This led to the distinction we discussed earlier between low-

end and new-market footholds.

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Low-end disrupters (think steel

minimills and discount retailers)

come in at the bottom of the

market and take hold within an

existing value network before

moving upmarket and attacking

that stratum (think integrated

steel mills and traditional

retailers). By contrast, new-market

disruptions take hold in a completely new value network and appeal

to customers who have previously gone without the product.

Consider the transistor pocket radio and the PC: They were largely

ignored by manufacturers of tabletop radios and minicomputers,

respectively, because they were aimed at nonconsumers of those

goods. By postulating that there are two flavors of foothold markets in

which disruptive innovation can begin, the theory has become more

powerful and practicable.

Another intriguing

anomaly was the

identification of

industries that have

resisted the forces of

disruption, at least

until very recently.

Higher education in

the United States is

one of these. Over the

years—indeed, over

more than 100 years

—new kinds of

institutions with

different initial

charters have been

created to address the

needs of various

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population segments,

including

nonconsumers. Land-

grant universities, teachers’ colleges, two-year colleges, and so on

were initially launched to serve those for whom a traditional four-

year liberal arts education was out of reach or unnecessary.

Many of these new entrants strived to improve over time, compelled

by analogues of the pursuit of profitability: a desire for growth,

prestige, and the capacity to do greater good. Thus they made costly

investments in research, dormitories, athletic facilities, faculty, and so

on, seeking to emulate more-elite institutions. Doing so has increased

their level of performance in some ways—they can provide richer

learning and living environments for students, for example. Yet the

relative standing of higher-education institutions remains largely

unchanged: With few exceptions, the top 20 are still the top 20, and

the next 50 are still in that second tier, decade after decade.

Because both incumbents and newcomers are seemingly following the

same game plan, it is perhaps no surprise that incumbents are able to

maintain their positions. What has been missing—until recently—is

experimentation with new models that successfully appeal to today’s

nonconsumers of higher education.

The question now is whether there is a novel technology or business

model that allows new entrants to move upmarket without emulating

the incumbents’ high costs—that is, to follow a disruptive path. The

answer seems to be yes, and the enabling innovation is online

learning, which is becoming broadly available. Real tuition for online

courses is falling, and accessibility and quality are improving.

Innovators are making inroads into the mainstream market at a

stunning pace.

Will online education disrupt the incumbents’ model? And if so,

when? In other words, will online education’s trajectory of

improvement intersect with the needs of the mainstream market?

We’ve come to realize that the steepness of any disruptive trajectory

is a function of how quickly the enabling technology improves. In the

steel industry, continuous-casting technology improved quite slowly,

and it took more than 40 years before the minimill Nucor matched

the revenue of the largest integrated steelmakers. In contrast, the

digital technologies that allowed personal computers to …