Deeper Insight Into Disruptive Innovation
This essay was first published on Cristian Mitreanu's blog in June 2008.
Disruptive innovation. Disruption. Whatever you call it, this concept/phenomenon championed by Professor Clayton M. Christensen of Harvard Business School remains almost as popular as it was more than a decade ago when it was first articulated. Simply put, it explains how upstarts can defeat well-entrenched companies. Some background is available at Wikipedia, but for convenience, I copied here a brief description from Professor Christensen's book "The Innovator's Solution" (chapter 2, page 32):
"Our ongoing study of innovation suggests another way to understand when incumbents will win, and when the entrants are likely to beat them. The Innovator's Dilemma identified two distinct categories--sustaining and disruptive--based on the circumstances of innovation. In sustaining circumstances--when the race entails making better products that can be sold for more money to attractive customers--we found that incumbents almost always prevail. In disruptive circumstances--when the challenge is to commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customer set--the entrants are likely to beat the incumbents. This is the phenomenon that so frequently defeats successful companies. It implies, of course, that the best way for upstarts to attack established competitors is to disrupt them.
Few technologies or business ideas are intrinsically sustaining or disruptive in character. Rather, their disruptive impact must be molded into strategy as managers shape the idea into a plan and then implement it. Successful new-growth builders know--either intuitively or explicitly--that disruptive strategies greatly increase the odds of competitive success."
Great! Nonetheless, using the fundamental theory of business that I introduced in the presentation "A Fundamental Theory of Business" (at BizBigPic), and recently detailed in the article "A Business-Relevant View of Human Nature," it is now possible to dig even deeper into this interesting concept/phenomenon.
In short, the new perspective shows that disruption occurs when an entrant introduces a simpler and cheaper offering (O2), relative to the incumbent's existent offering (O1), and then increases its commoditization rate to reach a critical mass of customers before the incumbent can retaliate. Beyond this critical point, the incumbent will not only have difficulties introducing its own new offering (O2) to compete directly (head-to-head) with the entrant, who by now has developed a dominant presence, but it will see its old offering (O1) become increasingly irrelevant to its typical customers, who now begin to adopt the new offering (O2) instead. In other words, the incumbent's business associated with the old offering (O1) will begin to shrink -- it will be disrupted.
Clarifications, conditions, and other details:
a) The new offering (O2) is a downward breakthrough innovation based on the existing offering (O1). Slightly different than Prof. Christensen's categorization, I distinguish between two basic types of offering innovation. The first basic type of innovation is breakthrough innovation, which is a new offering based on (or derived from) an existent offering. If the resulting offering is simpler and cheaper, then I refer to it as a downward breakthrough innovation. If the resulting offering is more complex and more expensive, then we are dealing with an upward breakthrough innovation.
The second basic type of offering innovation is sustaining innovation, which refers to the incremental improvements of an offering over time. In this case, however, the result is perceived as the same offering. Thus, sustaining innovation generates the force/pressure that opposes the force of Commoditization (see slides 3 and 4 in the presentation mentioned above, and page 15 in the article).
b) The combined action of (Sustaining) Innovation and Commoditization generates the commoditization trajectory (see more on the slides and pages mentioned in the previous point). However, an offering's commoditization does not happen in vacuum; it takes place relative to a group of customers. Specifically, it takes place relative to a homogenous group of customers that have the same behavior relative to the offering. That is why the same offering can (and usually does) have multiple commoditization trajectories and velocities, each associated with a group of customers as mentioned above -- each virtual business space defined by the offering and such a group of customers is termed tofmos, and each "slice" of a tofmos associated with a vendor is termed ofmos (see more on slide 5 in the presentation).
This is important, as it reveals an essential condition for disruption: the customers for the old offering (O1) and the customers for the new offering (O2) must, in fact, be part of the same broad, homogenous set of customers that have the same behavior relative to the new offering (O2). Remember, the whole point of disruption is for the entrant to "beat" the incumbent. But if the customers that are supposed to switch from the old offering (O1) to the new offering (O2) have a different relative behavior than the customers that already employ the new offering, then they enter/create a new tofmos that is different from the one in which the entrant vendor has supposedly built a dominant position. In this case, the incumbent could "escape" the effects of disruption by entering the new tofmos relatively early.
In light of this finding, the distinction between low-end disruption and new-market disruption becomes more of a detail. Whether the entrant's initial customers are some of the incumbent's customers that employ the old offering (O1), or a completely new set of customers, in the end, all customers involved should be part of the same homogeneous group characterized by a unique behavior relative to the new offering (O2).
c) According to Prof. Christensen, an offering's "disruptive impact must be molded into strategy." Well, the new perspective shows that this "strategy" is to speed up the offering's commoditization in order to reach a critical point before the incumbent gets to retaliate. Assuming that the entrant has eliminated the "escape" alternative mentioned above, beyond this point, neither of the two options available -- speeding up the commoditization of the old offering (O1), nor introducing its own new offering (O2) -- will be enough to save the incumbent.
Why? Every offering, as the defining component of a tofmos, has a limited life span -- the length of its commoditization path. Also, by nature, more complex offerings not only commoditize slower, but they have shorter life spans. So, even if the incumbent attempts to speed up the commoditization of its old offering (O1) in order to increase its customer base, the inherent complexity and associated costs for the customers will stop this expansion short, while the entrant continues to expand the market for its new offering (O2). In other words, even if the old offering (O1) is offered free, the costs associated with its use will prevent additional customers from adopting it.
The incumbent's second option is to develop its own new offering (O2) and compete head-to-head with the entrant. While the incumbent's action in this direction is typically delayed by the legitimate fear that the new offering (O2) will cannibalize the old offering (O1), the entrant is supposed to speed up the commoditization of its new offering (O2). So, by the time the incumbent has readied its new offering (O2), the entrant's position in the tofmos it created is so dominant that the incumbent will find it difficult to gain much traction.
In closing this post, I would like to emphasize that speed is very important when it comes to disruption -- and the new perspective does a great job at showing it.