Before reading the next paragraph, think of the most overused buzzwords in Silicon Valley-esque startup speak. Chances are, “disruptive innovation” comes to mind.
If product marketing is to be believed, just about every pencil eraser, chip clip, and outlet cover to enter the market is disruptive, innovative, or both.
However, the phrase disruptive innovation has a highly specific meaning. Three decades ago, a seminal Harvard Business Review article coined the term “disruptive innovation” to describe a particular process by which smaller companies can steal market share from larger ones and succeed.
The term’s creators admit the concept has been widely misunderstood, but it remains essential for both would-be disruptors and industry leaders to understand. This article explains what disruptive innovation really means, how it works, and how it differs from other innovative practices, so you can decide where to focus your innovation efforts.
What is disruptive innovation?
Disruptive innovation is when a smaller company, often with fewer resources, enters the market at the low end or creates a new market, and then gradually moves upmarket to challenge established businesses.
The term was first defined by Clayton M. Christensen and Joseph L. Bower in a widely cited 1995 article. According to the Clayton Christensen Institute, “Disruptive Innovations are not breakthrough technologies that make good products better; rather, they are innovations that make products and services more accessible and affordable, thereby making them available to a larger population.”
The advent of the personal computer is an example of disruptive innovation. Mainframe computers were expensive, complex machines used primarily by large corporations. Technological advancements allowed companies to create cheaper, simpler versions and sell them to a mass market of previous nonconsumers who had never owned a computer. Toyota’s ongoing improvements on the hybrid battery, while innovative, do not count as disruptive innovation—which means that if your strategy focuses on making an existing product incrementally better for current customers, you’re pursuing sustaining innovation, not disruption.
For ecommerce entrepreneurs, the concept matters because the same dynamics play out in online retail. A direct-to-consumer brand that offers a stripped-down version of a premium product at a lower price, reaching customers that established retailers ignore, is following the disruptive playbook.
How disruptive innovation works
The disruptive innovation process usually unfolds in several steps, as Harvard Business Reviewexplains:
Over time, incumbent companies tend to focus on their most consistent and profitable customers. New entrants recognize an opportunity to capture these customers that established businesses ignore. They do this in one of two ways.
Low-end vs. new-market disruption
The first is low-end disruption, where entrants appeal to the bottom of the existing market with a low-cost product that may be simpler or have fewer features. The second is new-market disruption, where entrants create a new market segment by offering products that target an unserved or underserved customer base.
Many incumbents don’t bother fighting newcomers for these parts of the market because they are either the least profitable areas or not targeting their current users. Although this is a rational response, it creates an opportunity for entrants to gain a foothold.
Eventually, the new entrants begin to move upmarket and create additional products or services that target the incumbent’s mainstream customers, too. Disruption occurs if the entrant captures a meaningful share of the incumbent’s existing customers and if their products or services become widely adopted.
3 components of disruptive innovation
Disruptive innovations also share three components:
1. A technology that makes it possible. This could be the internet, mobile devices, or a manufacturing breakthrough that lowers costs enough to reach new buyers.
2. An innovative business model that targets new customers or people who don’t need all the features of the existing products and would prefer a low-cost alternative.
3. A “coherent value network” of suppliers, vendors, and distributors that supports the new disruptive business model. Netflix couldn’t have disrupted Blockbuster without the US Postal Service and later internet infrastructure supporting its distribution.
Disruptive innovation is not merely a product or service, nor does it describe every situation in which an incumbent loses market share to a new entrant. Not every disruption is innovative, and not every innovation is disruptive.
Instead, disruptive innovation is a nuanced process that matters for both smaller companies and entrenched leaders. Understanding how it works can help entrants identify viable paths to growth and help incumbents think strategically about how to maintain competitive advantage and remain relevant.
Sustaining innovation vs. disruptive innovation
The Christensen Institute defines innovation as “a change in the process by which inputs of lower value are transformed into outputs of higher value.” Because this definition is broad, innovation can take many forms. Two of the major categories are:
Sustaining innovation
Sustaining innovations make existing products better. These innovations are often incremental (though sometimes more significant), improving performance and quality to help companies maintain their competitive edge. The new products or services often cost more money and yield a higher profit margin. Sustaining innovation targets customers willing to pay higher prices for premium features.
A common example is Apple’s annual updates to the iPhone, which build on an existing product by improving performance and features over time.
Disruptive innovation
Where sustaining innovation improves what exists, disruptive innovations change how a market works by offering simpler, more affordable products and services than other businesses. Disruptive strategies thus typically begin with lower-cost, lower-profit models, which are less likely to attract direct competition from incumbents. They deliver “good enough” products for underserved or new markets. These products may also appeal to overserved customers—those paying for features or performance they don’t need—who prefer lower-cost, more basic options.
These products serve lower-end customers or open up the market to a broader population of people who previously couldn’t access this product category at all. Netflix’s early DVD-by-mail model, which targeted customers underserved by traditional video rental stores, is one example.
When to use sustaining vs. disruptive innovation
Companies often focus on sustaining innovation when the chief goal is profit. The driving factor is to improve products for the brand’s best customers so the business can generate higher profit margins and strengthen existing relationships. Because sustaining innovation centers on retaining and improving the experience for current customers, it is typically used by companies with an established presence in the market.
Engaging the sustaining innovation method requires answering questions like: How can we stay relevant and keep our customers excited? How has the market for this product evolved? Where can we continue to innovate so we don’t lose our established presence?
Disruptive innovation is about reshaping the market by creating new opportunities or targeting unserved or underserved customers. The goal is to challenge incumbents and capture market share. This approach is often a good choice for startups that want to leverage new, disruptive technology to create simpler, cheaper, or more targeted offerings for certain segments of customers.
A classic example of disruptive innovation: Netflix vs. Blockbuster
The Christensen Institute highlights Netflix’s disruption of the movie rental business as a “classic illustration of how an under-resourced new entrant can take on and beat an industry leader.”
In 2000, Netflix was struggling, and company leaders attempted to sell the business to Blockbuster for $50 million. Blockbuster, then valued at $5 billion, declined. Ten years later, fortunes had reversed. Blockbuster filed for bankruptcy, while Netflix recorded $2.16 billion in revenue.
Blockbuster’s model relied on physical stores, allowing customers to rent movies the same day—convenient, but only for those who lived nearby. Netflix’s DVD-by-mail service instead targeted overlooked markets by offering a wide catalog of movies at a low cost, including to people outside of Blockbuster’s service areas.
Netflix slowly grew in popularity and eventually expanded its offerings, including an unlimited DVD subscription service and eventually, online streaming. Blockbuster clung to its brick-and-mortar store model; it tried to emulate Netflix’s DVD-by-mail and streaming services, but too late. Netflix’s innovative strategy had fully disrupted Blockbuster.
According to the Christensen Institute, Netflix’s disruptive advantage came from three components:
1. Enabling technologies of mail and, later, the internet.
2. An innovative business model that eschewed physical store locations and customer late fees.
3. A coherent value network that included the US Postal Service and direct-to-consumer distribution.
Disruptive innovation FAQ
Do all startups rely on disruptive innovation?
Not all startups use disruptive innovation. By the technical definition, disruptive innovation must start in one of two footholds: low-end disruption or new-market disruption. Many startups succeed in other ways, such as developing better solutions to mainstream customer needs or increasing the size of the overall market.
What are the two main types of disruptive innovation?
The two main types of disruptive innovation are low-end disruption and new-market disruption. In the low-cost business model, a company creates a “good enough” inexpensive version of a product or service to enter at the bottom of the existing market. In new-market disruption, an entrant creates a new segment altogether by targeting an unserved or underserved customer base.
What does disruption mean in innovation?
Disruption in innovation is a process by which a smaller company with fewer resources successfully challenges established competitors by entering at the bottom of the market or creating new markets. Entrants typically offer simpler, low-cost products to start, and eventually move upmarket by creating products that target incumbents’ mainstream customers.
