How do successful businesses get pushed out of markets they once dominated? The theory of disruptive innovation—coined by Harvard Business School Professor Clayton Christensen—explains how smaller businesses can disrupt incumbents by entering at the bottom of a market with a low-cost business model.
According to Christensen, who teaches the online course Disruptive Strategy, there are three types of innovation:
- Sustaining innovation, in which a company creates better products to sell for higher profits to its best customers
- Low-end disruption, in which a company enters at the bottom of an existing market and offers a lower-priced product with acceptable performance, ultimately capturing its competitors' customers
- New-market disruption, in which a company creates and claims a new segment in an existing market by catering to an underserved customer base, slowly improving in quality until the incumbent businesses’ products are obsolete
Low-end and new-market disruption are examples of disruptive innovation, differentiated by their relationships with the existing market. New-market disruption occurs when an innovative product creates a new market segment, whereas low-end disruption enters at the bottom of the existing market to provide a “good enough” product to an overserved audience.
Understanding how disruption works can enable you to avoid it if you work at an incumbent business or drive it if you’re a new entrant. Here’s a closer look at one type of disruptive innovation: low-end disruption.
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DOWNLOAD NOWWhat Is Low-End Disruption?
Low-end disruption occurs when a company uses a low-cost business model to enter at the bottom of an existing market and claim a segment. As the entrant company claims the lowest market segment, the incumbent company typically retreats upmarket where profit margins are higher.
“Almost always, when low-end disruptions emerge, it creates a situation where the leaders in the industry actually are motivated to flee rather than fight you,” Christensen says in Disruptive Strategy. “That’s why low-end disruption is such an important tool to create new growth businesses: The competitors don’t want to compete against you; they just walk away.”
3 Characteristics of Low-End Disruption
Three characteristics separate low-end disruption from other innovation types:
- It offers “good enough” quality by market standards, but not the best. Customers at the top of the market likely won’t be interested in this product, making it seem non-threatening to incumbent businesses.
- It targets consumers at the bottom of the market. These are people overserved by the current product offerings—that is, they don’t need all the bells and whistles that come with an expensive price tag.
- It makes a profit at lower prices per unit sold than the incumbent businesses. This is essential because, as long as the profit margins are lower than incumbents’ products, they won’t be motivated to fight the entrant for market share. The incumbent businesses’ pursuit of profit is the causal mechanism that enables entrants to continue to move upmarket.
Related: 3 Examples of Disruptive Technology That Are Changing the Market
2 Examples of Low-End Disruption
Low-end disruption happens more often than you might think. Some of your favorite brands likely had to disrupt an incumbent business to get where they are today.
“[Low-end] disruption is how Canon attacked Xerox,” writes Christensen in The Huffington Post, “how Walmart and Target bested the department stores; how Southwest drove so many major airlines into bankruptcy; how Sony defeated RCA, and how Apple crippled Sony.”
Here are two examples of low-end disruption that offer insights for both new entrants and incumbent businesses.
1. 3D-Printed Real Estate
A low-end disruption emerging in the real estate construction market is 3D printing technology. 3D printers use digital files as blueprints to deposit layer upon layer of material—often concrete—in a specific design to construct a building.
A 3D-printed two-bedroom home can cost between $4,000 and $10,000 to construct, much less expensive than homes built using manual labor. Because 3D printers can create a home on-site, transportation fees are eliminated. Labor costs are also much lower compared to traditional construction jobs because the machine does all the hard labor. This also cuts the risk of costly human error and instances of injury. Despite the price of the 3D printer itself, this method of constructing homes is extremely cost-effective.
This low-cost method of building houses is most useful in deeply impoverished and disaster-stricken areas. The people in need of homes in those places don’t need fancy, large, or architecturally beautiful houses—they just need structurally sound homes.
3D printing has entered at the bottom of the real estate construction market, claiming the lowest segment: people who need homes that are “good enough.”
There’s speculation that 3D printing construction companies may continue to move upmarket, improving the quality of 3D-printed homes as they do so. By using a low-cost business model, 3D printing construction companies can motivate incumbent manual construction companies to flee upmarket. This disruptive technology is one to watch.
2. Toyota and General Motors in the Auto Industry
Another example of low-end disruption is Toyota’s entrance into the automobile industry. Up until 1957, General Motors (GM) controlled half of the United States auto market and was making strides internationally. GM’s strategy was to create a breadth of products to appeal to many audience types.
Toyota, a Japanese car manufacturer, released its first model—called the Corona—in 1957. The Corona wasn’t a luxury car, instead appealing to customers at the bottom of the auto market. It was a “good enough” vehicle at a reasonable price.
General Motors had models that targeted wealthier customers willing to pay for higher-quality cars, so it wasn’t motivated to fight Toyota for share of the lowest market segment.
Over the years, Toyota released new models—the Tercel, Corolla, Camry, Avalon, and 4-Runner—appealing to higher market segments and pushing GM further upmarket. Eventually, Toyota released the Lexus, a high-quality, luxury car that directly competed with GM for the highest market segment. This is near-successful low-end disruption.
The interesting twist is that GM survived—although not without losing billions of dollars and, eventually, CEO Rick Wagoner. In typical low-end disruption scenarios, the incumbent company is pushed out of the market by the disruptor and fails. GM, however, shifted its focus to the bottom of the market and produced small, energy-efficient vehicles when backed into the industry’s highest profit market segment. Poised to be disrupted, GM repositioned itself as the disruptor.
Because low-end disruption requires a business model that yields a lower profit than incumbent companies’—in addition to an economic recession—GM’s profits took a nosedive to the tune of $85 billion. When the company filed for bankruptcy in 2009, Wagoner asked the US government for funding to get it back on its feet. The government granted it with the condition that Wagoner resign.
Christensen disagrees with the forced resignation of a manager who successfully led a company through disruption.
“In reality, the decisions to retreat upmarket in the face of disruptive attack were made at General Motors in the 1970s and 80s by CEOs Thomas Murphy and Roger Smith,” Christensen writes in The Huffington Post. “Wagoner inherited the legacy of their having ignored the disruptive nature of the threats they faced. He and his team have done a remarkable job of working out of it—though much remains to be done.”
Under new management, GM remains one of the world’s most powerful auto companies, thanks in no small part to Wagoner’s decision to disrupt the disruptor rather than be extinguished.
Crafting Strategies for Disruption
These examples offer nuggets of wisdom for both entrants and incumbents. Still, one lesson rings true for both: A foundation in the theory of disruptive innovation can be the difference between a business that survives and one that fails.
Whether you’re approaching disruption from the perspective of an incumbent business or a new entrant, learning about types of disruptive innovation can enable you to craft strategies to prepare for or drive disruption.
Are you interested in driving innovation for your organization? Explore our six-week course Disruptive Strategy to learn the tools, frameworks, and intuition to develop winning strategies.
