Disruptive Technology and Corporate Karate

“Disruptive technology” — a term I dislike, coined by Harvard professor Clayton Christensen in 1995 — refers to an innovation that is generally meant to provide more financially accessible alternatives to well-established products, in order to gain market share. As Christensen and his colleagues explain, disruption “describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.” This post will describe not only what kinds of effects disruptive technology can have on incumbents, but how corporations may be able to demonstrate a bit of self-defence when such innovations threaten them.

As scholar Erwin Danneels put it in a 2004 piece, disruptive technology changes the way performance is measured in the market. Many companies (i.e. “entrants”) use disruptive technology to enter markets, which can have major impact on “incumbents” — already well-established companies in the market.

Incumbents have developed and managed their resources and processes in a way to facilitate sustaining technology (i.e. incremental innovations). They have geared everything towards making such incremental innovations (because that has led them to their success), not the radical innovations that entrants sometimes make with disruptive technology. For example, Apple doesn’t come out with a breakthrough item every year — instead they have a new iPhone every nine weeks (at least, that’s how it feels sometimes).

Many academics have noted that incumbents are also vulnerable to disruptive technology if they focus too much attention on their current customers and do not put enough energy into appealing to potential future customers. Other facts include national contexts (e.g. incumbents losing dominance in the hard-disk drive industry in the US, but not Japan) as well as managers’ beliefs (e.g. middle managers at Kodak not accepting the importance of emerging digital products).

Therefore, what can an incumbent do when threatened by disruptive technology?

When an incumbent must respond, it is clear that experience — including learning from mistakes — can make a big difference. For example, the experience Charles Schwab had, disrupting the brokerage market Merrill Lynch was doing well in, helped them protect against E*TRADE, an entrant which tried to introduce disruptive technology of their own.

Since incumbents do not always have necessary resources to respond to disruptive technology, joint ventures, alliances, acquisitions, and licensing may help increase their resources to adapt. It may also help for incumbents to create a separate organization (or sub-unit) to deal with the disruptive technology, so that there would be designated resources allocated to fighting back; especially if they can start developing new markets.

However, it should be noted that what is written about problems and solutions to disruptive technology for incumbents is actually not universally agreed upon. Danneels argues that the concept is not entirely clear, and Christensen’s theoretical framework’s predictive validity is questionable.

For example, Kodak laid off around 80% of its workforce since 1993 and a great deal of money and market share. This is despite creating a new organiz ational sub-unit to deal with the disruptive technology of digital cameras, which is what Christensen regarded as one of the major ways to deal with disruptive technology. Kodak’s sub-unit still had to fight for resources, and middle managers were not onboard, despite top management committing to digital technology.

There are many issues with the concept of disruptive technology, such as with its definition and its usefulness (e.g. digital cameras actually came out as more expensive than their analog counterparts, which is not what you would expect from what Christensen has written in the past). However, this concept will continue to evolve, as more and more disruptions occur in various industries.

Disruptive technologies are very hard to predict, but there are some lists which talk about trends that can allow us to make some informed predictions. If corporations want to defend themselves against disruptions, they should think about the ways in which their organizational structures are set up, and consider how their internal culture allows (or doesn’t allow) for flexible decision making to facilitate innovations. It also helps to know a thing or two (or even better, a lot more than two) about the very recent history of disruptive technology.