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DISRUPTIVE INNOVATION
In a December 2015 article for the Harvard Business Review, Clayton Christensen with co-authors Michael Raynor and Rory McDonald set out to clear up confusion over the meaning of disruptive innovation. They explained that “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 to not 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.
Disruptive innovations are made possible because they get started in two types of markets that incumbents overlook: low-end footholds and new-market footholds. Low-end foot-holds 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. Simply put, 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, thus, 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. There are outliers: Uber, the much-feted transportation company whose mobile application connects consumers who need rides with drivers who are willing to provide them, did not originate in either one. Founded in 2009, Uber has enjoyed fantastic growth and 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.
While disrupters typically start by appealing to low-end or underserved 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. 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.
