RP 83: What is disruption theory?

And what most people get wrong about Clayton Christensen's disruption theory

Last week’s newsletter had a 40% open rate. The top link you clicked on was “Meet the People Who Decide What Design Trends Will Dominate Each Year” from Dwell magazine.

Hey friend!

If you've been in the tech industry for a while, then you've probably heard of the word "disruption" getting thrown around. Unfortunately, while many people like the idea of disrupting a new industry—after all, that's what gets VCs excited— many misunderstand the concepts of disruption. Folks who use it in pitch desks and Twitter threads use the idea of disruption in support of whatever venture or idea they're trying to persuade people of. They often haven't read the original books and papers on the subject.

You see, disruptive innovation by nature, is unpredictable. Misunderstanding the lessons of disruption leads to sloppy application, undermining the usefulness of disruption theory in the first place.

Disruption is also counterintuitive. Would-be disruptors who don’t have a deep grasp of the theory’s concepts will likely make the same mistakes that the theory seeks to help companies avoid.

So in today's newsletter, I’m synthesizing 3 key pieces of literature that I think are essential to comprehending what disruption theory really means.

  1. "Disruptive Technologies: Catching the Wave" by Joseph L. Bower and Clayton M. Christensen. The original 1997 paper on the topic that defines disruptive and its antithesis, sustaining innovation.

  2. "What Clayton Christensen Got Wrong" by Ben Thompson. A 2010 critique of Christensen's initial paper, by one of the foremost technology analysts and writers of our time.

  3. "What Is Disruptive Innovation?" by Clayton M. Christensen, Michael E. Raynor, Rory McDonald. Christensen publishes a refinement of the theory, tackling Thompson's critiques head on.

Together, these will give you a profound understanding of what’s called the Innovator's Dilemma.

1. What is the theory of disruptive innovation?

"Disruptive Technologies: Catching the Wave" by Joseph L. Bower and Clayton M. Christensen

“Disruptive Technologies: Catching the Wave” is the paper Clayton Christensen published that introduced "disruptive technology" to the business world. Christensen is the business professor who developed the theory of disruptive innovation, which has been called "the most influential business idea [since its conception in 1997". He defines disruption as the process of how a smaller, less-resourced company can challenge established businesses—and win.

But what does that mean? First let's get into what it's not.

The opposite of disruptive innovation is sustaining technology or sustaining innovation. Sustaining innovation is about delivering better products and services to an existing customer base. Incumbent firms focus on existing customers who will almost always ask for better solutions to what they currently have, thus ignoring or intentionally overlooking other potential customer segments.

Disruptive innovations, on the other hand, begin be serving these overlooked customer segments or as Christensen says, “They seek to turn nonconsumers into customers." These disruptors then develop technologies and a business model that has the potential to meet customer needs faster than the incumbents.

While both types of innovation are important for firms to grow and thrive, many people confuse the two all the time.

Disruption theory describes how established firms can lose market share and leadership to new competitors, even after listening and delivering the right products to their best customers.

Disruption theory is important to understand because it is counterintuitive.

First, market leaders can lose to new, disruptive competitors not in spite of listening to their customers, but because they listen to their best customers.

Disruptive innovations create new consumers out of non-consumers. Sustaining innovations improve the current offering for existing customers.

Disruption requires that both technology teams and marketing teams work together to build innovation, that either

  1. Brings it to an underserved niche, or

  2. Offers it to an entirely unserved customer segment

The disrupting company might even need to hatch entirely new business models. On the other hand, sustaining technology is about meeting customer needs better, whether through incremental fixes or major breakthroughs.

To be clear, a piece of technology could be a major innovation, but if it is aimed to serve an existing market better, then under disruption theory, it is still a sustaining technology. Listening to one’s best customers causes a company to deliver sustaining, not disruptive, technologies.

One of the signs of a truly disruptive technology is having a lack of features (at least in the beginning).

An inferior starting point with a steep growth trajectory is a leading indicator of a truly disruptive technology.

According to Christensen, an innovation's trajectory is more important than its starting point. In other words, it's okay for potential disruptors to have less features than their competitors, as long as...

  1. The features they have solve their target market's problems

  2. Their product is on a steep trajectory to catch up1 to their target customers' needs

Because disruptive innovations tend to offer lower hardware specifications, slower performance, or a more limited feature set at the outset, market leaders and existing customers often dismiss them until it's too late.

This said...

Disruption is not a recipe for success.

Disruption theory identifies the symptoms of a truly disruptive technology and lays out countermeasures for incumbent firms to avoid being disrupted, but it's not a secret formula to business success. Nor is bringing a disruptive innovation to the market a surefire roadmap to market leadership.

In a follow up article to his original 1997 paper, Christensen uses the example of internet retailers in the Dotcom Crash of the early 2000s to illustrate this points.

“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.”

We’ll get into this follow up article in the third part of this newsletter, but first…

2. How does disruption theory hold up in history?

Now that we understand what disruptive innovation is about, how has the theory held up in the real world of business and technology?

One interesting take is from Stratechery's Ben Thompson. In this article, Thompson observes that the theory of disruption is based on examples drawn from business buying decisions, not consumer buying decisions. As a result, the theory has failed to hold up under the weight of one of the most successful consumer electronics companies of all time: Apple.

In the definition of disruptive innovations above, I mentioned that disruptors focus on overlooked or underserved customer segments. There's two ways a potential disruptor could do this:

  1. Start with new markets — this is the original starting point that Christensen introduced in the article above, and in his first book The Innovator's Dilemma.Instead of serving an existing customer base better than the current players in the market, disrupters create new markets, turning non-consumers into consumers. Disrupters don't give people better horse-drawn carriages; they give them the Model T. Or as Steve Jobs would say, disrupters give consumers what they didn't know they wanted.

  1. Start with low-end markets — the second part to the original theory, published 5 years after the first one, and expanded on in his next book, The Innovator's Solution.Most large firms try to target high-end, demanding customers with progressively better products and services. This leaves room for disruptors to undertake the low-end markets strategy and look to serve the cheaper, lower end of the market.

Paired with Thompson’s observation that Christen’s theory revolves mostly around business buying decisions, there are 3 reasons why disruption theory failed to account for Apple and the iPhone’s runaway success:

  1. Consumers are irrational decision makers, unlike businesses who are highly rational and results-driven.

  2. Consumers care a lot about ease of use and less about what's under the hood, unlike businesses buyers who care less about the user experience and more about performance.

  3. Consumers who all want better experiences, are best served with Apple’s deep hardware-software integration, vs the vertical integration strategy2 the rest of the electronics industry adopts.

3. On what technological disruption really means —

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

First a quick timeline so far:

In this final article, Christensen doesn't address Thompson's idea that disruption theory best addresses business markets, vs consumer markets, but he answers the rest of Thompson's challenge:

Why did the iPhone become a disruptive success, even if it was a sustaining technology — a better smartphone — much like how Uber is merely a better taxi service? 

According to Christensen, the disruption was not the iPhone itself, but what it came with. Apple offered a better smartphone, yes, but it also gave its customers the systems to make it more than just for calling and texting. They gave customers access to the iTunes Store to listen to the music they'd bought for their iPod. They gave customers an App Store that allowed them to download a compass, a ruler, a photo editor, and an ereader, on to a single device in their pocket.

Christensen shares that while the iPhone was a sustaining technology in the obvious market it entered — smartphones — it was a disruptor in the broader, non-obvious market of devices that access the internet. Christensen writes:

"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."

The disruption wasn't in the phone. It was in the overall Apple user experience.

That's it for this week!

Stay strong, stay kind, stay human.

Till next week,

roxine

P.S. For further reading, I recommend Thompson's longer paper on the topic of Apple and disruption theory.