High-end products can’t be “disruptive.” Here’s why (Part 2)
The 4 types of product innovation
In Part 1 of this post, I explained that high-end products can’t be disruptive under the theory developed by Clay Christensen of Harvard Business School. This post will explain one potential source of confusion that leads people to declare high-end products disruptive.
The Four Kinds of Product Innovation
The problem that emerges among those aware of the theory stems from the fact that disruption evaluates the innovation approach of the business model when they’re evaluating the product. There’s a valuable framework for product innovation that should take the place of disruption when evaluating products without consideration for their business model. That framework was developed by Rebecca Henderson and Kim Clark in a groundbreaking 1990 paper called Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms.
In their paper, Henderson and Clark describe the four kinds of innovations that can change a product. They describe four types of technological change, which I’ll describe in more detail below: Incremental, Modular, Architectural and Radical Innovation. Their paper is groundbreaking because it introduced the idea that innovation occurs on two dimensions: the technology of the core components that make up the final products and the linkages and integration of the subcomponents to create coherent whole.
The typical point of confusion for technology observers, financial analysts and other pundits comes from conflating architectural and radical innovation with a “high-end disruption.”
Incremental Innovation strengthens the existing core concepts of the components while maintaining the traditional linkages between them. In the auto industry, an example of incremental innovation would be the development of a stronger driveshaft coupling to the rear-wheels of a pickup truck that allows it to handle more torque and tow more weight. The truck is still built the same way and the driveshaft coupling works the same but is now better.
Modular Innovation improves the technology of a core component but doesn’t change the way the system links together. An example of this is the development of the automatic transmission. It fundamentally changed the transmission but didn’t change the way the vehicle as a whole operated.
Architectural Innovation is a more significant change to the existing design. It doesn’t change the underlying components significantly but makes a dramatic change to the ways they link together. An example of this is the development of front-wheel drive platforms. They still use transmissions and drive shafts to power wheels, but they link together very differently than a rear-wheel drive platform.
Radical Innovation is the most extreme of the four types and it involves changing both the technology of the subcomponents and the ways they link together. EVs are an example of this. They replace internal combustion engines with electric motors, drive shafts with wires and fuel tanks with batteries. It’s not hard to see how radically different those components and their linkages are.
People conflate Architectural and Radical Innovation with Disruptive Innovation because all are hard for incumbents
Incumbents nearly always dominate when a market evolves with an incremental or modular innovation because it builds on their existing knowledge of how the product integrates. Radical and architectural innovations are hard for incumbents because they destroy the valuable knowledge the incumbent has built up over years of developing products with the existing architecture.
This requires the incumbent to re-learn the new linkages and ways to integrate the product. Developing that knowledge is hard for everyone, it’s even harder when you have to unlearn the old way. It’s more than teaching an old dog new tricks. It requires acknowledging that the way the incumbent has been doing things for years or possibly decades, and is the best in the world at, no longer matters. That’s a tough psychological pill to swallow before you even get into the complexities of actually developing the new knowledge.
Disruptive innovation is difficult for incumbents because their business model will not prioritize fighting the entrant until it’s too late. The way that disruptions begin at the low-end and work their way up the market plays perfectly into the way that the incumbent allocates their resources to greater profitability. It will always be more profitable to invest the incremental dollar into the incumbent’s best customers and highest-end products rather than fight the entrant for the least-desirable and lowest-end products. Until it isn’t.
The implications for these differences are massive for entrepreneurs. The first thing to note is that entrepreneurs targeting established markets with dominant incumbents should never attempt to enter with incremental or modular innovations; at best the incumbent buys you to save the effort of developing the innovation in-house. At worst, they leapfrog you more quickly and easily than you ever imagined. Developing architectural or radical innovations is a better starting point with a higher probability of success but if you aren’t disruptive, you need to remember that incumbents are highly motivated to beat you.
Incumbents may fail to make the leap when a high-end architectural or radical innovation emerges in their market but it won’t be for lack of trying. Entrepreneurs can rest assured that they will expend every ounce of effort to beat them and remain dominant in the market; if you win, it will only be after the company expels its dying breath in battle.
Implications for Entrepreneurs
So what should you do if you’re pursuing an architectural or radical innovation? First, build it into a disruptive business model. The two are not mutually exclusive and many have gone hand-in-hand to great success. Consider Netflix which changed both the components, DVDs in the mail powered by a digital library and the linkages, shipping versus stores to defeat Blockbuster.
If you’re already headed down the high-end road, can you do anything? The good news is yes. You have a few approaches. First, prepare for a fight with the incumbent; expect it to be longer and bloodier than you initial thought and assemble the resources to give it a strong fight. Second, target a niche that’s not big enough to excite the incumbents; if you can stay below their market size threshold, you can build a business that isn’t big enough to merit a fight. Finally, you can develop a product, change the paradigm and sell to an incumbent. This may not feel like a supreme victory at the time, but it’s likely the lowest-risk option if you’re offered it.
Understanding the distinctions between innovations as they apply to products and business models is a great start to developing a viable startup and surviving in a market with powerful incumbents.