Low-End and New-Market Disruption
In The Innovator’s Solution: Creating and Sustaining Successful Growth Clayton Christensen takes the disruptive innovation framework he developed in The Innovator’s Dilemma one step further by defining two types of innovations: Low-End and New-Market. New-Market disruptions are those that complete with “nonconsumption” because they are “so much more affordable to won and simpler to use that they enable a whole new population of people to begin owning and using the product, and to do so in a convenient setting.” He gives the personal computer and Sony’s first transistor radio as examples because both products were introduced to entirely new consumers–those who had not previously had any access to computing power or radios. Low-End disruptions such as steel mini-mills and Asian automakers work by entering the market as a “not good enough” solution to products and services that are being offered by incumbent providers. Christensen says that these two types of innovation can be used simultaneously by the same firm. Southwest Airlines provided both an alternative to established carriers (low-end disruption) and targeted people who were not currently flying (new-market disruption).
Christensen gives three sets of questions as a test for disruption:
- Is there a large group of potential customers who have not historically had the resources to do this thing for themselves and have gone without it or have needed to pay someone else to provide it to them?
- To use the current product or service, do customers need to go to an inconvenient, centralized location?
- At the low end of the market, are the customers who would want to purchase a product with less, but good enough, performance if they could pay a lower price?
- Can a business model be created which allows for attractive profits at the price needed to win the business of these customers?
Finally, he asks “is the innovation disruptive to all the significant incumbent firms in the market?” If the innovation is sustaining to any one of the established players, the odds are that company will more successfully implement it than a new entrant.
In the video below, Christensen describes two dynamics that play a role in disruptive innovations. First, there is share price, which includes not only a discounted present value of cash flows that are forseeable from the existing businesses in a company, but also “a get that investors are making that management team will make new growth”. He says that if a company achieves growth, then growth is already discounted into the share price and therefore the company needs to keep surprising investors on the upside.
He then defines two types of disruption: low-end and new market. Low-end disruption are low-cost business models which do the same thing as leaders. New market disruptions provide a simplifying technology that a whole new set of customers can use (personal computer made it affordable and simple). They are competing against non-consumption. Unwilling, unable to create new business model that had different cost structure that could compete successfully against non-consumption
It appears as if non-consumption is a small market, but in reality it is huge