The term “disruptive” is frequently used to describe successful businesses and business strategies, but Clayton Christensen has a specific definition of disruption in The Innovator’s Dilemma. For Christensen, disruption occurs when a firm enters a market by providing a “not good enough” solution to a problem that an incumbent company is already offering. Due to the incentives of capital markets, established firms will always seek to achieve the highest profit margins and will be happy to give up low margin, low end market segments to new entrants. Once the new entrants use a low cost strategy to win market segments, they will, for the same reasons, need to move up market and will continue to erode the market segments of the incumbent firm.
In the videos below, Christensen describes the basics of disruptive innovation and answers the question: “what kills successful companies?” His research has shown that principles of good management sow the seeds of failure.
If you do everything right, you are doomed.
In every market there are high end-very demanding customers which cannot be satisfied and low end customers who are overserved by almost nothing. In every industry, there is a trajectory of improvement which customers can use; however, innovating companies provide another trajectory which is faster than customers can use the improvement. These dramatic innovations help leaders sell more product to best customers and sustain market position of leaders. Many companies disrupted incumbents by bringing to market a product that wasn’t as good, but more affordable and simpler and easier to use.
Here Christensen describes the steel industry case study included in The Innovator’s Dilemma which illustrates an example of an industry which was disrupted in successive waves by low-end competitors (mini-mills).
Next, Christensen describes other examples of low-end disruptors such as Toyota, which started with sub-compact cars in the US market and then ended up manufacturing the Lexus brand.