Rethinking Disruption

There are very few business theories that have received more attention than Clay Christensen’s theory of disruptive innovation. This theory has been gaining increasingly more attention given the shift to an innovation centric economy. Albeit with fame comes (criticism) and there have been several critics including Jill Lepore and her article on the “Disruption Machine.” Lepore laments the emerge of an era where anyone and everyone talks about disruption. In his words,

There are disruption consultants, disruption conferences, and disruption seminars. This fall, the University of Southern California is opening a new program: “The degree is in disruption,” the university announced.

I have been as much guilty of this crime as I teach a course entitled “Managing Disruptive Technology” at Carnegie Mellon. Although my course focuses more on technology strategy, I did spend a lot of time talking about Christensen’s theory of disruptive innovation in the past few years. In my opinion, the theory offers an interesting way to analyze markets but my students and I repeatedly felt that the theory was quite limited in three ways:

  • It was almost always retrospective, offering a template to understand past occurrences, but rarely offering meaningful patterns to predict the future.
  • We struggled to fit several innovations into the two broad categories offered by Christensen, low-end and new market disruptions.
  • There were several other reasons apart from innovation why incumbent firms might get disrupted.

In short, everyone “sort of knew” when disruption took place, but it was difficult to find a good definition of disruption, or when it can take place. At the same time, we felt that the rate at which industries and companies are getting “disrupted” called for a meaningful discussion on these issues.

Several assignments and discussion later, I think we have come up with a definition of disruption that we liked.

Disruption is a change in the existing market structure due to changes in regulations, consumer behavior, technology or information endowment.

The first part of this definition focuses on a change in the existing market structure. I take the economic view of markets, where change occurs in two distinct manners:

  • A change in the number of firms in the market, e.g. a monopolistic market becomes perfectly competitive (perhaps due to the reduction in entry costs), or a dramatic change in the market share of firms.
  • A change in the geometry of the markets, i.e. there is an alteration in the interactions between different participants in a value chain (e.g. manufacturers selling direct on e-commerce marketplaces rather than going through retailers).

The second part of this definition focuses on why does the change in the market structure take place. Although Christensen’s definition of disruption focuses almost entirely on market change due to innovation (technology), we believe that disruption can occur also because of deregulation, changes in consumer preferences or the change in the amount of information available to different participants in the market. In that sense, this definition of disruption is more general and more complete. Of course, any combination of these factors might collectively cause disruption in markets. Let me give you examples of how disruption can occur because of the three new factors:

Deregulation: The Airline Deregulation Act of 1978 not only lead to the entry of low-cost airlines like Southwest but airlines used their ability to decide fares to hasten the demise of travel agents by making consumers move to online ticketing, (almost) killing the travel agent industry.

Consumer behavior: The British first introduced tea to Indians sometime in the early 1910s before which coffee used to be the most popular beverage. Over time, consumers tastes changed and today India is not only of the the biggest producers of tea but is also one of the biggest consumers, making coffee a distant second beverage. This change in consumer preference led to substantial reorganization of the beverage industry in India.

Information endowment: As an information economist and I believe that all interesting problems are problems of information asymmetry and information changes everything. Think of the impact that rating websites like Yelp have had on the restaurant industry. Yelp has not only made it possible for people to search for restaurants they might like, it has transformed the restaurant industry a superstar market where people flock to the most popular diggs.

This definition of disruption not only encompases the earlier theory proposed by Christensen, but I believe fills in several gaps in the way his theory has been interpreted and used. For example, according to Clay Christensen’s theory, Uber is not disruptive. However, all of us know how Uber is already disrupting the taxi-cab industry and has the potential to disrupt food delivery etc., primarily by reorganizing the supply in the market. This new way of thinking about disruption addresses this limitation, and can gives us a more structured way to think about innovations like sharing economy (Uber), SSD, crowdsourcing (Wikipedia) and electric cars (Tesla).

This brings us to the second question: “When is a market ripe for disruption?” That in my opinion requires another post…