My notes on HBS Working Paper 17-057 (PDF) titled Disruptive Innovation: Intellectual History and Future Paths by Christensen C., Altman E., McDonald R., and Palmer J. It complements my previous blog posts like Business Theory of Disruptive Innovation, Jobs To Be Done: Business Raison d’Etre, and Managing the Six Phases of Transient Competitive Advantage
3 principal components of disruptive innovation:
- The pace of technological progress outstrips growth in market demand for higher-performing technologies, causing incumbents to overserve the market and, as a result, creating a gap in lower market
- There is a strategically important distinction between different types of innovation
- Sustaining innovations: improve product along existing dimensions of performance (make a good product great)
- Disruptive innovations: usually cheaper but better at other dimensions (create a new product)
- Established profit models constrain investment in new innovations because they are typically less profitable
Anomalies uncovered in further research
- At first, the idea is that incumbents don’t invest in disruptive innovation. But that’s not true: investment ranges from little to freely flowing
- Opportunity framing vs. threat framing: threat framing usually leads to greater resource allocation
- However, despite investments, inertial forces prevented from adoption
- A small subset of incumbent leaders successfully dealt with disruptive innovations
- autonomous business unit separate from parent company free to enact own business mode
- Different types of disruptive innovation:
- Low-end disruptions: enter the low-end of the market, solidify market share and position in the value network, then move up-market
- New-market disruptions: compete against non-consumptions
- For disruption to occur, industries must be structured so that producing higher-performing products and services results in higher profitability for firms, giving them an incentive to go upmarket.
- Specific industries have an “extendable core” that allows firms to produce at first simple products at low cost, but eventually can make more sophisticated things at lower cost
Causal Pathway for Disruptive Innovation theory
- Insidious resource allocation process within the organization that favors “sure” investments
- Customers ultimately provide the firm with the resources it needs to survive
- Sustaining innovation serves and is valued by existing customers
- As performance improves, there is a more significant overlap between different market segments
- Disrupters invade contested up-market to increase economies of scale
- Incumbents retreat to uncontested up-market to protect profitability
Research with Intel on investment in disruptive innovation.
- If the innovation was sustaining and Intel was an incumbent in the target market, the venture would succeed.
- If the innovation was sustaining and Intel was an entrant in the target market, the venture would fail.
- If the innovation was disruptive and an autonomous business unit was formed to pursue it, the venture would succeed.
- If the innovation was disruptive and an integrated business unit was formed to pursue it, the venture would fail.
Using business plans to classify the ventures and survival to proxy performance, the theory correctly predicted the outcomes of 45 of the 48 businesses (94 percent accuracy rate) (Raynor, 2011)
Refining Performance Trajectories
- The variance in the speed of disruption across different industries
- The variance in speed of disruption within the same industry over time
Responding to Disruptive Innovation
Incumbent Response Strategies
- Separate organizational unit tasked with developing or commercializing the new innovation
- Aggressively invest in existing capabilities to extend current performance improvement trajectories to slow or delay the onset of disruption
- Boldly retreat by proactively repositioning to profitable new niches
- Organizational ambidexterity to manage conflicts arising from pursuing different types of innovations simultaneously
- Redefine the organization’s identity to convince customers to value their products not on functional dimensions but on characteristics like nostalgia, authenticity, etc
- Partner with or license startup technology once it advances beyond a certain threshold or acquire it altogether
- High brand status can help incumbents re-emerge after experiencing a decline due to disruption
- Combine the new technology with the existing one to ensure a smoother transition
- Improve existing technology while learning the uncertain technology
- The performance difference between using new technology to enhance existing products and deliver to an existing customer base (sustaining) versus using hybrid technology to target new customers or applications (disruptive)
- Hybrid may be of particular use to enter a market to support both legacy and new use
- Business model hybrids?
- Platform businesses are built around modular architectures; the primary competitive advantage is interaction with one another and building upon the others’ products
- Platform and network-based business strategies are emerging more rapidly, especially in IT- and cloud-enabled business models
- When products are not yet good enough to satisfy customer performance requirements, firms rely on highly internally interdependent and integrated product architectures to maximize performance. Firms cannot afford to adopt modular architectures because standard interfaces compromise performance
- When performance is satisfied, the basis of competition shifts to other product dimensions such as convenience, customization, price, and flexibility
- When the shift to less integrated happens, modular architectures enable simpler and more efficient interfaces between products. Disruptive entrant incorporating modularity strategy can be highly effective
Disruption through incumbent transitions to platform business
- When in an industry’s lifecycle, it’s effective for the incumbent to transition to modular/platform
- If differentiation is performance-based, platform business is sub-optimal
- If the industry over-serves and competition basis shifts to convenience, the platform may prove viable
Disruption through complementor ecosystem and network effect
- A strong link between the management of complementor ecosystems for disruptive innovation
- The competitive success of platform strategy hinges on the ability to create and harness network effects
- A pricing strategy can disrupt the incumbent. E.g., offer free products to gain adoption
- To build network effects, a firm may adopt strategies that rely on revenue sharing or royalties rather than sales revenues
- Coopetition as a form of defense against disruption
- Disruption is not a technology problem; it is a business model problem (and tightly related to the profit model)
- Two problems with Profit Model
- A measure of success -> drives investment decisions, especially when compensation is tied to financial success
- Shows short-term success -> drives investment decisions, avoiding the long-term return perspective
- New startups without defined profit formula as a success metric gauge success in different ways
- The use of financial metrics may unconsciously create bias against disruptive innovations
- Implications of marginal cost thinking and sunk cost fallacy
- Valuation metrics don’t work if you underestimate the true benefits of innovation
- Ratio-based metrics = manage by metrics (balance sheet management)
Updates to My Blog Post
I have updated my blog post titled “Managing the Six Phases of Transient Competitive Advantage” to include the Management Priority in each of the six phases:
Phase 1: The management is focused on its vision and aims to deeply understand the job to be done.
Phase 2: The management is focused on its vision and aims to find the right customers for its new product or service.
Phase 3: The management is focused on the operations as it aims to establish the right business and profit model to repeatedly deliver to the customer needs.
Phase 4: The management is focused on the operations as it aims to maximize the market opportunity.
Phase 5: The management is focused on finance as it aims to maximize the profit & loss statement.
Phase 6: The management is focused on finance as it aims to maximize the balance sheet statement.