8.5 Disruptive innovation

This understanding of disruptive innovation happening, in smaller companies (a high proportion of which seem to be led by college drop-outs in the USA), has become something of an orthodoxy. Tushman and Anderson (1986) proposed that the differences in the innovative capacities of firms could be explained by whether an innovation enhanced or destroyed the competencies of established companies. The move to micro-computing, for example, challenged rather than supported the competency of companies like IBM, which focused on producing smaller numbers of very large computers and providing ongoing services to larger corporate customers. These were not the competencies required in the production of large numbers of lower value computers, effectively as commodities. Instead new entrants moved into the personal computer market and came to dominate it.

Christensen has come to see the term ‘disruptive technology’ that he had been using in his influential book The Innovator’s Dilemma (Christensen, 1997) as misleading (Christensen, 2006). He illustrates why this is so, using the example of the Digital Equipment Corporation (DEC). DEC was the leading maker of minicomputers during the 1960s and 1970s but missed out on the growth of personal computers during the 1980s. This was not because of the technology – DEC’s engineers had no problems with designing PCs – but rather because it missed out on the opportunity as a result of its business model. In the early 1980s, the company believed it could make 40% gross margin on PCs that would sell for $2,000. The problem was that proposals to develop PCs were competing for resources inside the company with proposals to make more powerful $500,000 minicomputers with a gross margin of 60%. Additionally, its existing customers for large computers were not the same customers as the likely customers for PCs, so making PCs would have brought the additional risks and costs associated with entering new markets. Given DEC’s internal logic, it is unsurprising that they did not focus resources on developing the PC.

By contrast, although we might argue that wireless telephony is a disruptive technology in relation to fixed-line telephony, major US fixed line companies like Verizon and SBC responded to the potential threat by simply buying up wireless operators. The wireless customers and profit models fitted with the fixed line operators’ existing business model, rather than disrupting them. For Christensen, then, it is not the technology that is disruptive, but the technology in relation to an incumbent’s business model. Consequently, he no longer talks of ‘disruptive technology’ but of ‘disruptive innovation’ that threatens a firm’s business model, and by contrast of ‘sustaining innovation’ that consolidates its position (Christensen and Overdorf, 2000). This is an argument that we would suggest anyone involved with innovation should keep firmly in mind.