This post is by Ryan Moore from Openview Labs
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If you spend much time in the startup and tech ecosystem, you’ve probably heard the term “disruptive innovation” more times than you can count. Our culture is fascinated with underdogs and overnight successes— companies, products, or services that seem to rise out of nowhere and completely change their respective industries. But not all companies that are commonly known as disrupters actually fit the traditional definition of disruptive innovation. We’ll examine the term’s origins, look at true disruptive innovations from past and present and examine why Uber and Tesla are mislabeled as disrupters.
- What is disruption?
- Innovations are mischaracterized as disruptive
- Potential disruption
What Is Disruptive Innovation?When Clayton M. Christensen coined the term “disruptive innovation” in a 1995 paper for Harvard Business School, he wasn’t just speaking of breakthrough innovations that make good products better. Innovations are constantly occurring in every industry, but to be truly disruptive an innovation must entirely transform a product or solution that historically was so complicated only a few people with a lot of money and skills had access to it. A disruptive innovation is often a much more simple, low-grade solution that’s more affordable and accessible to a larger population, which opens it to an entirely new market. This often upturns established industries and overthrows existing market leaders. Disruptive innovations typically take hold at the bottom of the market, meeting the same needs as high-market solutions in a simple and relatively cheap way. They are usually underrated at first, and tend to be seen as “low-class.” But due to their low costs and other advantages, they move quickly up the market and eventually become more appealing than their sophisticated competitors. Christensen noticed that big, powerful companies at the peak of their power aren’t asleep at the wheel as they are driven out by disrupters. They’re usually innovating away themselves. But these established companies drive what’s called “sustaining innovations,” which are modifications and improvements on existing services. They make their top-tier products better and better to serve their most sophisticated and demanding customers, which can seem like a smart business move considering that serving the top of the market increases their profit margins the most. They aren’t bothered by disrupters taking hold at the bottom of the market, because it appears too low-tier and low-gross-margin to warrant attention. But this oversight creates space for new players to get a foothold at the bottom, eventually creeping their way upmarket to topple the incumbent. There are several markers that distinguish true disruptive innovators:
- They are low-cost and highly accessible.
- They have lower gross margins than their contemporaries or the incumbent.
- They serve a smaller low-end target market at first, before expanding to a vast market due to their accessibility.
- They’re hard to see coming and aren’t taken seriously. They quietly, slowly “climb the ladder” and can take years or decades to gain traction before they dramatically upend competitors.
True Disruptive Innovation Examples
1. Steel mini mills“Mini mills” dramatically disrupted the steel industry once dominated by the great integrated steel companies of the 20th century. Traditional steel companies at the time manufactured a wide range of steel qualities. They made low margins on cheap rebar, but also produced sheet steel and thicker structural steel used to make cars and equipment, which they then sold at a much higher margin. Then came the mini mill. Small companies found a way to melt down scrap metal recycled from cars and manufacturing waste, which was up to 20% cheaper than what the integrated mills were spending. But the metal product was poor quality, suited for rebar but not cars. Rebar is at the bottom of the steel market, and since it was a low-margin product, integrated steel companies were happy to lop it off the bottom of their product line and leave the mini mills to compete with one another. By 1979, mini mills had driven the last of the integrated mills out of the rebar market and the price of rebar had dropped by 20%. But mini mills didn’t stop there. They figured out how to make slightly higher quality steel and came for the next-lowest product type, which integrated steel mills once again were happy to leave to mini mills. After all, this would allow the integrated steel mills to focus on high-margin steel and improve their profit margins even more. This pattern continued until suddenly, mini mills had taken over. Not one integrated steel company had built a mini mill, and all but one have since gone under. This example illustrates that a disruptive innovation typically is not an overnight success. Christenson writes, “It took more than 40 years before the mini mill Nucor matched the revenue of the largest integrated steelmakers.” But after getting a foothold at the bottom of the market and taking one step at a time, they eventually reached the top.
2. Video streamingVideo streaming on platforms like Hulu and HBO might seem like an obvious improvement over cable and Blockbuster. But take a closer look and it’s clear how radical this disruption really was. Video streaming took the entertainment industry completely by surprise, quickly rising from the bottom of the market as a low-cost way for people to watch shows and movies to eventually disrupting the cable industry and driving video rental stores into the ground. Netflix has become the largest subscription video provider in the US, outstripping cable and satellite. And it’s not just cable and stores—video streaming companies are changing the way video is produced. Nearly two decades after Netflix’s launch, streaming providers are out to “capture the entire trillion-dollar Hollywood ecosystem” with new content production models. Tech giants like Amazon, Google and Apple want in on the game with their own production and streaming platforms. Like many disrupters, Netflix took hold in a small, niche market: movie buffs who didn’t care about new releases and didn’t mind waiting a few days for DVDs to arrive in the mail. The service was slow and didn’t offer brand-new hits right away. Blockbuster served a different type of customer that rented more on impulse and prioritized new releases, and therefore ignored Netflix. Forbes’ Arnie Alsin illustrates this point by drawing a parallel between the rise of streaming platforms and the rise of television:
“The current wave of digital, Internet-based streaming content disruption mirrors the introduction of the television in the 1940’s. Both disruptions radically redefined content platforms, business models, and customer habits. And perhaps predictably, both disruptions were met with cynicism by incumbent executives and spectators who simply laughed them off. Blockbuster’s former CEO, Jim Keyes, told the Motley Fool in 2008 that Netflix isn’t ‘even on the radar screen in terms of competition.’ By 2010, Blockbuster had gone bankrupt.”Incumbents like video stores and cable providers remained focused on the profitable customers in front of them, not the disruptive innovation bubbling at their feet. And soon enough, they were out of date and out of sync with the way everyday people love to watch movies and television.
3. RadiosTransistor radios first took hold in a low-end niche market, then completely changed the world. In the 1950’s, middle-class families typically owned nice radio consoles manufactured by companies like RCA and Zenith. These models used vacuum tubes and offered excellent sound quality, but they were inefficient, clunky, and expensive. Then, Sony’s transistor radios arrived on the scene. They were cheap, small, and portable … but the sound quality was awful. But for teenagers, transistor radios meant personal freedom and the ability to hear music wherever and whenever they wanted. After all, it was the only radio they could afford. Teenage radio listeners were a market that barely existed at the time, and high-end radio companies didn’t bother with them. But over time, transistor radio quality got incrementally better, and their popularity followed. Billions were manufactured during the 1960s and 1970s. These radios changed the way the world consumed music and radio, sparking a “musical and cultural revolution” and setting the stage for other personal music players like the Walkman, CD players, and even smartphone music apps. But by this time, companies like RCA and Zenith were already far behind.
4. Online encyclopedia and referenceOnline reference services like Wikipedia have disrupted traditional encyclopedias such as the Encyclopedia Britannica. But it took over a decade to put them out of business, quite the feat considering these encyclopedias were widely considered the gold standard for centuries. According to Peter Daisyme, “You’d have to pay $1,000 or more for a few hundred pounds’ worth of hardcover [encyclopedia] volumes, and hope that it lasted more than a year or two of relevance before its important details were updated. Wikipedia is updated constantly, and is available for free, though it didn’t carry much trust at first.” This is a point worth noting: at first, internet references like Wikipedia were untrustworthy. They were considered a low-quality alternative to the more established, recognized traditional encyclopedias. Yet they were available cheaply or for free, for a much wider audience than expensive encyclopedias. Meanwhile, they featured constantly updated information instead of requiring readers to wait for and purchase new issues as they came into print. These are hallmarks of classic disruptive innovation, and represent a great example of how long it can take to overthrow an incumbent. The success doesn’t come overnight, but it is certainly swift and final.
5. SmartphonesSmartphones and their accompanying app business model disrupted laptops as the primary way consumers use the internet. Today, well over half of website visits come from mobile phones instead of desktop computers. But even more importantly, smartphones and their app marketplaces completely changed how we interact with online services and products, which gave rise to many services that didn’t previously exist. Smartphones help illustrate some nuances about the disruption concept. For example, Apple’s iPhone is widely hailed as a disrupter, but it didn’t disrupt the smartphone market itself. At the time it was released, it was an improvement on existing smartphone models and targeted the same customers—a hallmark of sustaining innovation. Christenson himself predicted that the iPhone would be a flop because he recognized it as a sustaining innovation in the space. But the iPhone did spread widely as a disruption. It just disrupted something completely unexpected: the laptop market. Apple used the iPhone to usher in a new business model, which let developers far and wide create applications and connect directly with consumers. This changed the way people accessed the web and created a new market of app users and phone users. Smartphones started giving laptops a run for their money as the most popular way to use the internet.
6. Personal computersJust as smartphones disrupted laptops and personal computers, personal computers once disrupted earlier computing predecessors like the mainframe computer. Mainframe computers were the first manifestation of digital technology, according to Christenson. They were powerful, but required a lot of money and skill to own and use. Only the largest corporations and universities had them, and they cost several million dollars. Meanwhile, only experts with years of training could even operate them. Mini computers followed, and eventually, the desktop computer was invented. It soon found its way into homes all over the world. With a bit more time and innovation, laptops (and then smartphones) continued to democratize technology. All of a sudden, the market for computers was massive when compared to the previously elite, centralized market; so many more people could access these products. Christenson says, “It was very hard for the pioneers of the industry to catch these new waves. Most of those were created and dominated by new companies.”
7. Retail medical clinicsRetail medical clinics are an example of a disruptive business model that is shaking up the hospital model and traditional doctor’s offices. Patients can go to retail clinics to get relief from common maladies, such as allergies and sinus infections, or receive routine vaccinations and blood tests. They’re typically located in accessible areas with convenient opening hours for easy walk-in appointments. Christenson himself worked on this problem alongside two doctors. They realized that the incumbents, big hospitals and doctors’ offices, “were like integrated mills,” because they could do everything. They had expert doctors and specialists who had received years of training and accumulated years of experience—they could interpret patients’ problems and prescribe custom solutions. But because this model was very customized, unique and unpredictable, it was also very expensive in terms of expertise and administration because it couldn’t be routinized. As Christenson and colleagues explain it, “We call this a “solution shop” business model. In contrast, a number of convenient care clinics are taking a disruptive path by using what we call a “process” business model: They follow standardized protocols to diagnose and treat a small but increasing number of disorders.” By lowering the level of expensive expertise and providing relatively easy, cheap, convenient and accessible services that have been turned into repeatable processes, retail clinics are opening up care to a wider market and disrupting longstanding incumbents in healthcare.
8. PhotographyDigital cameras were an innovation that started to compete in quality and price with film cameras roughly 20 years ago. Today, cell phone cameras have disrupted the photography market as a whole, fundamentally redefining what it means to take a photo and who has access to this type of technology. Kodak engineer Steve Sasson invented the digital camera in the 1970’s, but the company rejected it. Sasson says, “It was filmless photography, so management’s reaction was, ‘that’s cute — but don’t tell anyone about it.’” As Roberto Saracco describes this moment, “many at Kodak (and elsewhere) were convinced that it was just a crude version of photography that would have never affected the well-established photography market.” Indeed, cellphone cameras were crude at first—much like the early transistor radios. But people used them anyway because phones were in the palm of their hand and incredibly convenient. This opened up an entirely new market for photography. And each year, cell phone camera quality gets better. Today, Apple has a “Shot on iPhone” billboard campaign that prominently displays high-quality photos taken by everyday consumers on their iPhones—a far cry from hiring sought-after expert photographers who were the only ones with access to the proper equipment to produce a great shot.
9. LightbulbsIn the light bulb industry, LEDs (light emitting diode) and CFLs (compact fluorescent lights) dramatically disrupted incandescent light bulbs. For many decades, incandescent bulbs were the only realistic choice for illuminating the home or office. When LEDs arrived on the market, they were so low-quality and unreliable that they developed a reputation to match; no one thought they’d ever be considered a viable alternative to incandescent bulbs. But eventually, LED bulbs became more reliable. Suddenly, they were a much more effective alternative to incandescent bulbs:
- More efficient than incandescent light bulbs, using 80% less electricity
- Longer-lasting than standard light bulbs by years or decades, up to five times longer than any comparable bulb on the market
- Cheaper than alternatives. “If you replaced 20 incandescent bulbs with LED light bulbs throughout your home, you could save up to $3,260 over their 23-year lifespan (and that’s assuming utility rates don’t rise).”