Disruptive Innovation:
Making Markets by Cheapening and Simplifying Products
You may have observed that today the savviest way to describe a new business idea or market entrant is that it is “disruptive”. It may sound too shiny and elusive to comprehend or define, but what does “disruptive” really mean? The term was coined in 1995 by Harvard Business School’s Dr. Clayton Christensen to describe businesses that revolutionize a product, service, or business practice and displace big, incumbent businesses in the process. Disruptive businesses often do this by either simplifying and cheapening a high-capability, high-price product to sell to a larger market, or by creating a brand new revolutionary product. One of the most compelling and demonstrative cases of disruptive innovation was the unanimous failure of mainframe computer companies after the widespread introduction of personal computers to the market in the 1980’s. This is the very same case that vexed Dr. Christensen and drove him to define his concept of disruptive innovation. Mainframe computers were, before the personal computer, the main machine people used to do complex calculations – and they were very expensive and very sophisticated to operate. Companies would make money off of mainframe computers chiefly by charging people to run calculations on their mainframe computer. When the personal computer was introduced its capabilities were much more rudimentary than the mainframe’s, but the PC was also much cheaper, more convenient, and most people didn’t need the sophisticated calculations that only mainframe computers could run at the time. Mainframe computer companies’ inflexible response to the disruptive entry of personal computers ultimately led to their unanimous failure. Mainframe businesses’ methods for innovation relied on incremental changes made to their existing products, taking historically reliable customer feedback and acting on it. Before the advent of personal computers, this method of sustained, gradual innovation would secure incumbent mainframe companies’ steady improvement and superiority over the rest of the mainframe market. However, this previously successful strategy failed terribly with the rise of PC’s because the market was shifting towards the mass production of PC’s with their simpler and cheaper performance, and away from a cutting edge, highly expensive mainframe computer. Mainframe companies’ perspectives and traditional strategies were completely disabled by the spreading of PC’s to more and more people with their low prices. The theory of disruptive innovation gives a reliable framework to characterize firms and products, as well as a dos and don’ts guide to established businesses in dealing with disruptive startups. But, for the time being, you can only judge these situations accurately in hindsight. In practice, making profitable predictions for potentially disruptive startups is extremely difficult and inescapably unreliable. Clayton Christensen himself has seen and admitted to the predictive shortcomings of his theory when he claimed that the early iPhone would end up a flop because it didn’t meet his criteria of disruptive innovation, among many other similar miscalculations. Importantly, Christensen sees these glitches as a chance to refine his idea to more accurately fit a wider range of scenarios The next step in the development of the concept of disruptive innovation is refining the theory enough to identify future disruptors so that one can act on it – through investment, startup, or other methods. These situations are only identifiable if enough research on market needs is done, and where incumbent businesses are visibly likely to fail in being oblivious to the successful methods used by disruptors. With disruptive innovators blazing trails, and others looking to identify their high potential, it is imperative that they both understand the ideas of Clayton Christensen so they can free themselves of the mistakes that so many incumbent companies and observers have made.

  • Richard

    I agree. A wise businessman in the Caribbean named Sir Kyffin Simpson always said that the key to success is progression and humility, and clearly he’s done very well for himself as a self made man!

  • John Andrews

    The Airgain IPO launches this week, and they’re a one-brand company.

    Some investors don’t think it’s a good stock though:

    http://seekingalpha.com/article/3997291-risky-signals-antenna-maker-airgain-launches-ipo

  • Cincinnati World Cinema

    Well said, Joe, and worth rereading on a regular basis! Another advantage of small-to-midsize city living is pace and competition. Living in NYC, LA and SF entailed a hectic pace, hallmarked by capital S striving, as one realized there were a ton of others doing what I do. Spending so much time in one’s car in SoCal meant much less time for quality pursuits and pleasures. A smaller pond with relaxed pace allows one to savor life and special moments.


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