Origin and the true meaning of “disruptive innovation”

Celebrating 30 years of disruptive innovation

“This is disruptive innovation!”, said the CEO of a global technology services company during a meeting with the AI team.

The team was presenting their latest AI innovation that transformed the image of a zebra into a horse and the image of a horse into a zebra.

This was in 2018 and I was a part of this AI team.

The CEO’s exclamation triggered the academic in me. Is the zebra — horse example a true demonstration of “disruptive innovation”?

I did not speak up in the meeting. But this question and the CEO’s exclamation continued to ring in my head.

Origin of disruptive innovation

Disruptive Innovation is a popular theory in business and technology. The year 2022 marked 30 years of disruptive innovation. Let’s look at where this theory came from.

In 1992, the late Clayton Christensen defended his PhD thesis: “The Innovator’s Challenge: Understanding the Influence of Market Environment on Processes of Technology Development in the Rigid Disk Drive Industry”.

This thesis articulated the theory of disruptive innovation by studying the rigid disk drive industry during the period 1970–1990.

Various disk drive architectures were introduced during this period: 14 inch, 8 inch, 5.25 inch, 3.5 inch, 2.5 inch, 1.8 inch, and so on.

100+ companies entered the rigid disk drive industry from 1970 to 1990. 75% of these 100+ companies exited.

Small entrant companies rose to the top of the industry. Large established companies lagged behind. These entrant companies were able to develop new disk drive architectures.

The entrant companies who were successful in one product architecture could not replicate their success in the following product architectures.

Disruptive Innovation is a PROCESS in which a small entrant company with fewer resources is able to effectively compete against large established companies. — What is Disruptive Innovation? Harvard Business Review.

How did Clay study this? What was the methodology?

Aside from creativity/imagination and standing on the shoulders of other scholars, Clay developed this theory using three methods:

• Understanding the business history of disk drive industry from archival trade magazines.
• Interviews with 40+ business professionals (managers, engineers, marketers) from the five companies that accounted for 70% of cumulative disk drive production.
• Simple regression analysis on disk drive data collected from secondary sources.

This business theory became popular when it appeared in the Harvard Business Review and the influential book “The Innovator’s Dilemma”, a few years later.

The true meaning of disruptive innovation

The context is the battle between large established companies called incumbents and a small entrant company.

Disruptive Innovation is a 𝐩𝐫𝐨𝐜𝐞𝐬𝐬 in which a small entrant firm with fewer resources is able to effectively compete against established incumbent firms.

Disruptor is the small entrant company. Disruptee is the established incumbent company. This has played out across multiple contexts. A classic example is that of Nucor (disruptor) and U.S. Steel (disruptee) in the steel making context.

Incumbents keep focusing on developing higher-performance products for their high-end (most profitable) customers, while overshooting the needs of low-end (least profitable) and many mainstream customers.

The small entrant starts by effectively targeting these 𝐨𝐯𝐞𝐫𝐬𝐞𝐫𝐯𝐞𝐝 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫𝐬, gaining a foothold by providing only the most necessary features (typically lower performance) at a cheaper price.

Incumbents, who are seeking larger profits in more profitable markets, are less likely to respond aggressively.

The entrant then slowly 𝐜𝐥𝐢𝐦𝐛𝐬 𝐮𝐩, giving improved performance that incumbents’ mainstream and high-end customers need.

Disruption occurs when these mainstream and high-end customers begin to accept the entrant’s offerings in large numbers; entrant 𝐜𝐡𝐚𝐥𝐥𝐞𝐧𝐠𝐞𝐬 𝐭𝐡𝐞 𝐝𝐨𝐦𝐢𝐧𝐚𝐧𝐜𝐞 of incumbents.

Back to the CEO’s remark on the horse-zebra demo

The horse-zebra example is a breakthrough technology. Theoretically, it is not disruptive innovation. That’s how I reconciled my thoughts and came to a consensus.

Disruptive Innovations are 𝐍𝐎𝐓 breakthrough technologies that shake up existing ways of doing things. Very often, CxOs toss this term in favor of anything they want to achieve during executive presentations.

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PS: One year ago, I posted the 30-year celebration of disruptive innovation on LinkedIn. I received a response from a business school faculty who was also my colleague during the PhD days.

Her response: Shouldn’t it be ‘underserved’ customers? I refer to this as ‘underserved’ arguing that low-end customers cannot afford high-end products and hence their needs are not met and are ‘not served’.

Or, may be, underserved or overserved can be called unmet needs.

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Happy to hear your thoughts!