tl;dr — Technology doesn’t disrupt markets, people disrupt markets.
Clayton Christensen was right all along, but we’ve been looking at his theory from the perspective of the firm instead of the perspective of the market. Changing that view has dramatic impact on the usefulness of his theory.
Note: The opinions stated here are my own, not those of Google
Christensen’s theory of disruptive innovation has provided useful insights for firms navigating new and changing markets for the past two decades with much discussion in that same period devoted to expanding upon it by explaining and accommodating for certain exemptions from the theory (Uber, big bang disruption, etc.). However, generalizing one specific tenet of the original theory explains many of these apparent exceptions and shows that sustaining and disruptive innovation are more descriptive when also defined in terms of the market’s prioritization of values rather than solely in terms of the incumbent’s competitive strategy. Generalizing disruption to include the market-centric view in addition to the predominant firm-centric view clarifies the competitive nature of disruption and provides new explanations as to why advantage is difficult to attain, even for firms that follow good practices for innovation.
There are three significant explanations provided by a market-centric view of disruption:
- The theory of disruptive innovation can now describe decentralized cases without considering any particular firm’s strategy
- New entrants often disrupt markets with lower prices, but disruption can be described from the top of the market without the need for any special cases.
- Competitive strategies involving self-disruption can be evaluated in terms of an organization’s ability to achieve heterogeneous control of the capabilities of technologies.
Disruption from the market’s perspective
There is an interdependency between the prioritization of values of customers and the strategies of competing firms in the market: customer values can be influenced by firms and firms, in turn, respond to customer values. Though the dynamic is the same, disruption presents itself as a strategic problem when viewed from the perspective of the firm and as a problem of shifting priorities of human values when viewed from the perspective of the customer. Instead of explaining disruption as the effect of firms on each other, the market-centric view describes disruption as the the shifting of customer values in the market and competitive innovation as the dynamic whereby firms compete to serve those values as they shift.
This view provides a clear distinction between classical competitive strategy and disruptive competitive strategy. The former describes dynamics for competitors in a market with relatively static customer values, considering the market to be conquered or fragmented with monopolistic or competitive results for firms whereas disruptive competitive strategy undoes the assumption underpinning this strategy, demanding the consideration of a market that shifts its values, either in response to firm behavior or independently of any firm activity.
Dr. Christensen’s theory provides an analysis of disruptive competitive strategy by defining sustaining and disruptive innovation in terms of investments made in the strategic direction of an incumbent firm. Viewing these same strategies with regard to the values of the markets in which they are successful provides more general insight, since the principle becomes independent of any single firm’s activities.This explains decentralized offerings, self-disruption, and general purpose technologies in addition to firm-specific market disruptions with the same theory.
This market-centric view provides clarity on the extrinsic factors of disruptive innovation and describes it as something which can be capitalized on rather than the effect of a particular firm strategy. Applying this market-centric view of disruption to the theory of disruptive innovation results in a new description of the phenomenon: Disruptive innovation is the market dynamic whereby a new offering supplants an incumbent offering by competing for the secondary values of the incumbent’s core customers, causing a reprioritization of values in the market.
The first consequence of this market-centered view is that the emphasis on customer values rather than pricing makes it possible to use the same model to explain disruption from either the top or the bottom of the market. The second is that the role of technology and the behavior of firms can be considered in either a centralized or a decentralized way, highlighting the importance of achieving heterogeneous control of the capabilities of technology in order for any particular firm to benefit from market disruptions.
Many cases where firms have engaged successfully in disruptive innovation have been identified; however, many firms that have attempted to adopt disruptive innovation strategies similar or identical to successful firms have tried and failed. This is because disruptive innovation is highly competitive, and just as with classic competition, only those firms with the correct organizational capabilities and strategic resources specific to disruptive innovation are able to compete. The capabilities and resources that are most advantageous to firms competing in such markets are clarified from a market-centered perspective.
Primary and secondary competitive innovation
When a customer chooses a smaller disk drive with less storage space, they are expressing a sudden prioritization of physical space over storage capacity — a significant tradeoff required by the core market in order to adopt the new offering. Even though pricing is a powerful motivator, it is the inversion of the value matrix of core customers that is the key distinction in the market dynamics of disruptive innovation.
Innovations must compete for either primary or secondary values of the market. Christensen’s description of disruptive innovation describes the latter, and his description of sustaining innovation describes the former. In order to reflect the market-centric perspective, these can be identified as “primary innovation” and “secondary innovation.” Sustaining and big bang innovations seek to serve the existing priorities of the market and are classified as primary innovation since they do not consider changes in market values. Firms compete with primary innovations through either incremental investment or sudden dominance — the latter the result of a new and significant source of competitive advantage (such as a new technology).
Christensen’s firm-centric view describes this phenomenon well with regard to specific firm strategies, however a market-based view can describe decentralized primary innovations. Consider the washing machine: before its advent, only households with servants were able to prioritize leisure over manual labour, but, given the chance to do so, the lower classes showed their priorities were identical. In other words, no one liked washing clothes. Since there was no reprioritization of values in the market, the washing machine was a revolutionary primary innovation that allowed a large, unserved market to express that prioritization for the first time. This type of innovation would be difficult to define from a firm-centered perspective, since there was no firm with a sustaining strategy being disrupted by the washing machine, and there was no single entrant disrupting the market.
Offerings that can be classified as secondary innovations find their place where the tradeoffs are significant but worthwhile for the unserved customers at the periphery. This distinction holds for decentralized offerings such as cryptocurrencies, where the incumbent offering (fiat currency) and the new entrant (Bitcoin) offer extremely different priorities to users regarding anonymity and volatility risk. This stark contrast creates a value-offering divide that buys the newcomer time to develop along the dimensions of the periphery value matrix. In this way, a market-centric definition of competitive disruption can easily assess offerings like currencies, even though they are not the product of any particular firm’s strategy.
The value-offering divide allows a heterogeneous market
The market-centric view of sustaining and disruptive innovation supports the firm-centric description of competitive disruption. If new entrants are able to split the market by their values, the resulting value-offering divide actually protects both the disruptor and the incumbent, since the competing offering cannot serve both the core and the periphery simultaneously. Thus, it is the heterogeneity of human values in the market that provides the opportunity for diverse offerings. Classic competition explains this scenario as market fragmentation when the priorities of the market are stable and new entrants can compete for a niche using an independent value proposition.
Some degree of fragmentation protects the incumbent as the incumbent is able to direct its energies towards the satisfaction of customers whose needs are more closely aligned with their offering, and they can do so without fear of competition. Once this dynamic has taken hold, customers are polarized at the boundary between the core and the periphery, forcing them to assess their priorities and choose either the incumbent’s solidified offering or the challenger’s new one.
A market-based view of disruption explains the departure from classic fragmentation by providing the mechanism by which the boundary between the core and periphery becomes unstable. If the value offerings of the incumbent and the new entrant overlap significantly, the new entrant may be able to cross the chasm and compete with the core market on secondary values (i.e., secondary innovation). The likelihood of destabilizing the market-value divide is dependent on a few factors such as the degree of overlap of secondary values, the degree to which the core is over-served on primary values, and the degree to which the asset specificity of the incumbent in the legacy value network leads to inhibitive switching costs. It is this dynamic of competing for secondary values that most distinguishes disruptive competitive strategy from classic competitive strategy.
Price is often lower, but not necessarily
A high willingness to pay reflects a strong alignment between the offering and the customer value matrix. As a result, disruption often occurs when the offering to the periphery is cheaper than the offering to the core. However, competitive disruption can also occur from the upmarket direction when the new entrant is able to reflect very strong alignment with the periphery, offering a high value alternative to underserved customers.
For example, CDs disrupted cassette tapes thanks to a tangible difference in sound quality. As priorities, portability and affordability lost out to superior sound quality. The cassette laggards were Walkman users, for whom portability was the primary concern. Even though the Discman never beat the Walkman for portability, the sound quality was so superior that even joggers were willing to make the sacrifice as soon as the minimum portability needs were met with features like shock protection.
Uber also started with higher prices than taxis, but found a foothold in the market with millennials who wanted responsiveness, smartphone integration, and digital payments. The disparity between what Uber and taxis were offering was so great that the surge in demand supported challenger prices higher even than incumbent ones.
Uber’s competitive strategy can be described generically by the market-centric view of disruption: they entered the market by prioritizing values of the periphery and then competed with the incumbent on secondary values. The primary value of the core taxi market was security and it was over-served by the antiquated medallion system which introduced many market distortions. Uber’s branding provided a minimum bar for the security and let core customers make their purchasing decision based on secondary values such as responsiveness.
Why “Moonshots” are a terrible idea
The market-oriented approach to describing disruptive innovation makes it possible to see disruption as something independent of any particular firm’s strategy. Firms may influence the values of the market either individually or collectively, but disruption does not require a single disruptor. And so, the ability to benefit from disruption depends on a firm’s ability to compete for and capture value by responding to changing tides of customer values.
General purpose technologies influence disruption by offering an opportunity for firms to achieve heterogeneous control of new capabilities for serving customer priorities. The internet has generated plenty of such relevant technologies and, as a result, the information technologies sector has, from its birth, been a veritable hotbed of disruption. In the hotel industry, though, no single firm has been able to disrupt the industry because, historically, the relevant technologies (buildings, service models, etc.) have very few capabilities that can be controlled. With the advent of AirBnB and other technologies that overlap with the offerings of hotels, this may change. If AirBnB is able to compete on the secondary values of core hotel-goers, there could be a sudden collapse in the demand for traditional hotels.
Because the capabilities of technologies are so important to disruption, firms often invest heavily in “moonshots” (i.e., big innovation attempts) in the hopes that developing new disruptive technologies will result in market dominance. However, the analogy of a moonshot overemphasizes the difficulty of the project and does not highlight the importance of capturing value.
Land rush is a better model than a moonshot
Since it is not the technology itself which causes disruption, but rather the control of its capabilities for the purpose of serving customer values, a land rush is a better analogy than a moonshot for describing the required firm activities for disruption. The development of a general purpose technology can be likened to the discovery of new land, and the heterogenous distribution of the control over its capabilities can be likened to the land rush that follows.
In 1889, 2,000,000 acres of unassigned land in Oklahoma was taken from the Cree and Seminole Indians and given to 50,000 homesteaders on a first-come-first-served basis. When Google implemented automated web search in 1998, it was like staking a claim the size of the entire state of Oklahoma. It was not anywhere near as difficult as sending a person to the moon, but the payoff was enormous. The internet was a great innovation, but it did not disrupt any markets until companies like Google were able to capitalize on its capabilities. The analogy of the land rush illustrates that an organization’s ability to disrupt a market does not stem from the ability to create or even predict gigantic technological developments; rather, it stems from the ability to achieve and maintain heterogeneous benefit from the relevant capabilities of technologies.
Is self-disruption possible?
Most firms focus on developing new technologies under the assumption that developing them will result in the effective integration of their capabilities. However, when the integration of technology is considered independently of its source, it is clear that developing new technologies results in the same challenges of integration that would be faced if a firm were to acquire them.
There are two major sources of internal transaction costs that are identified by investigating the costs of acquiring innovations that could also apply to integrating technologies intended for self-disruption:
- The firm’s inability to integrate and implement the new technology along with the new capabilities and business models.
- The incentivization of managers towards developing sustaining technologies and disincentivization for disruption.
The costs from the first source appear as diffusion lags¹ and incompatible business models, while the second source causes organizational hubris, over-exploitation of opportunities due to competency traps, and reduction in the willingness to cannibalize.
Competitive strategies for developing technology should consider these sources of internal transaction costs as they apply to sustaining and disruptive innovation. These costs are likely not the same for each firm, as they depend on the internal structure of each. As a result, there may be a unique balance of costs and benefits for sustaining and disruptive innovations, resulting in an idiosyncratic threshold at each firm, below which self-disruption can occur without inhibitive costs.
There are three potential internal cost structures for self-disruption within a firm:
- The organizational structure of the firm allows for some level of self-disruption at a cost low enough to be of benefit to the firm.
- The organizational structure of the firm does not allow for any level of self-disruption due to inhibitive internal transaction costs. But, the firm is able to implement additional cost-effective protections to enable profitable self-disruption.
- The firm is unable to self-disrupt and the cost of protections is too high to achieve any benefit from self-disruption.
The first case reflects an organization with strong appetite for self-disruption and capabilities that do not require expensive protections to achieve self-disruption (Corning, Sony at various periods in history, maybe Google). At the vast majority of firms, this cost-threshold is likely low or even zero, which forces them to develop protections for self-disruption initiatives, such as Christensen’s suggestion of in an insulated, autonomous incubator.
However, such protections may generate new internal transaction costs. For example, the unrestrained development of transformational technologies in an insulated entity could outpace the development of the necessary capacity for maintaining control of the capabilities they provide. The singular focus on the new technology by an insulated entity, without consideration of the parent, may shift the focus of innovation resources toward the product, reducing innovation emphasis on non-market forces, customer integration, and business model innovation which may be necessary to leverage the resources of the parent company for the disruption.
For example, self-driving cars are exceeding expectations as a technology; however, the difficulties ahead are more related to the societal acceptance of the technology than to the technology itself. According to the Boston Consulting Group, “Despite recent tests that demonstrate the superior safety of today’s autonomous cars, legal, product liability, and regulatory issues ultimately may keep the driverless car off the road in some jurisdictions.”⁴ The failure of Glass in the market and the impending difficulties of the Self-Driving Car are not related to the technology at all; instead, it seems that the barriers to the market are related to Google’s ability to leverage the complete capabilities of the parent company.
Another source of transaction costs resulting from the implementation of an insulated incubator and removing the moonshots from the parent is the effect on the socially complex resources of the firm. Corporate cultures that value disruption could be negatively affected by being separated from the moonshots, even if it is only symbolic. In this way, corporate restructurings like Google’s Alphabet may lead to negative reciprocity, whereby the willingness to self-cannibalize is regulated out of the culture due to a sentiment of separation from the development of big ideas. Google may see negative results if the separation of moonshots from the parent company were to generate a process of negative reciprocity within the socially complex organizational features of the firm until Googlers no longer identify with the other, more insulated Alphabet companies.
Each of the three options available to firms for self-disruption have their own source of internal transaction costs that may be higher or lower from firm to firm. These strategies are as follows:
- Attempt self-disruption in the parent company
- Ignore self-disruption and compete on sustaining innovation
- Invest in protections for self-disruption initiatives such as autonomous incubators
In 2001⁵ Christensen described a need to assess the degree of fit that a new offering has with an organization’s values and processes. This is well expanded on by investigating the transaction costs associated with each of the above three strategies. Ultimately, there is no single normative strategy for disruption; however, careful consideration of these costs with respect to organizational capabilities can lead to more effective strategies.
Variance in the organizational structure of each firm will mean that some firms may achieve lower costs from different strategies; however, none are assured protection from disruption in the market if the costs associated with any of these three strategies are not low enough. This explains why certain companies are incapable of self-disruption, even with heavy investments in autonomous incubators, and others are capable of self-disruption even within the parent company.
In other words, it may be true that some firms, unable to self-disrupt due to their internal organizational structure, may attempt an insulated incubator, but there are no guarantees that an insulated incubator will not also be too expensive for that firm or more expensive than self-disrupting in the parent. The results of each strategy depend on the idiosyncratic costs resulting from the internal structure of each organization.
If this is the case, companies like Lockheed Martin may enjoy an advantage over other firms because they possess the organizational capabilities that allow them to create an autonomous incubator like Skunk Works without generating inhibitive costs. However, if a firm were able to self-disrupt without an autonomous incubator, they would be able to generate the benefits of self-disruption without the internal transaction costs of a segregated organization. If these costs were lower, it would grant such firms an advantage over even firms like Lockheed Martin.
Since such a strategy would depend on the internal structure of the firm, it may be in the best interests of firms that can do so to develop the organizational capabilities required to increase the threshold under which self-disruption is profitable and lower the internal transaction costs of developing disruptive technologies. Such capabilities may be a source of competitive advantage should a company be able to develop them.
Strategies for self-disruption should carefully consider the internal organizational structure and culture before deciding how they should self-disrupt. A company that has a culture with a strong appetite for self-disruption and strong dynamic capabilities for adapting to new business models may be damaging important resources when it separates moonshots from the parent company. Furthermore, some companies may not be capable of self-disruption at all if they are unable to capitalize the capabilities of the new technologies they produce. Perhaps this is what happened with Google Glass, Google Plus, Google Buzz, etc.
In his 2003 book, Christensen stated that “the very skills that propel an organization to succeed in sustaining circumstances systematically bungle the best ideas for disruptive growth. An organization’s capabilities become its disabilities when disruption is afoot.”⁶ And in 2001, he stated that managers resist change since they have been trained to only succeed by maintaining the status quo as “internal schools of experience have offered precious few courses in which managers could have learned how to launch new disruptive businesses.”⁷
These statements have been proven true time and time again, however, even if this is the most common case (not to say ubiquitous), this does not mean that it must always be so. The recommendation that companies create a firewall between the parent company and the disruptive incubator when the fit with the organization’s values and processes is poor⁸ is likely a commonly applicable solution, but regardless of whether it has been observed or not so far, it is possible for a firm to create resources, values, and processes that support disruption in the parent company, and, if successful, such an endeavour would be worthwhile.
Footnotes / Bibliography
¹ Prado, Svante. 2014. “Yeast or Mushrooms? Productivity Patterns across Swedish Manufacturing Industries, 1869–1912.” EHR The Economic History Review 67 (2): 382–408.
² Ahuja, Gautam, and Riitta Katila. 2001. “Technological Acquisitions and the Innovation Performance of Acquiring Firms: A Longitudinal Study.” Strategic Management Journal 22 (3): 197–220. doi:10.1002/smj.157.
³ Chandy, Rajesh K., and Gerard J. Tellis. 1998. “Organizing for Radical Product Innovation: The Overlooked Role of Willingness to Cannibalize.” Journal of Marketing Research (JMR) 35 (4): 474–87.
⁴ “Accelerating Innovation: New Challenges for Automakers.” 2015. Www.bcgperspectives.com. Accessed April 26. https://www.bcgperspectives.com/content/articles/automotive_innovation_accelerating_innovation_new_challenges_automakers/.
⁵ Christensen. 2001. Assessing your organization’s innovation capabilities. Leader to leader 21.
⁶ Christensen, Clayton M., and Michael E. Raynor. 2003. The Innovator’s Solution: Creating and Sustaining Successful Growth. Harvard Business Press.
⁸ Christensen. 2001. Assessing your organization’s innovation capabilities. Leader to leader 21.