Disruptive innovation is a term coined by Harvard Business School Professor Clayton Christensen, and one that he believed to be widely misunderstood.
“Many use ‘disruptive innovation’ to describe any situation in which an industry is shaken up and previously successful incumbents stumble,” Christensen writes in the Harvard Business Review. “But that’s much too broad a usage.”
In fact, the process of disruptive innovation is far more nuanced than that.
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DOWNLOAD NOWDefining Disruptive Innovation
Disruptive innovation is the process by which a smaller company—usually with fewer resources—moves upmarket and challenges larger, established businesses.
The process begins with a small company entering the low end of a market, or creating a new market segment, claiming the least profitable portion of the market as its own. Because the established, incumbent companies own the most profitable market segments, they most likely won’t fight the entrant for that market share.
The entrant then improves its offerings and moves upmarket with increasing profitability. Once the incumbents’ customers have widely adopted the entrant’s offerings in the mainstream market, disruption has occurred.
Understanding this process can empower aspiring entrepreneurs to seek opportunities to disrupt industries, and seasoned professionals to strategically avoid disruption.
Related: How to Identify an Underserved Need in the Market
Learn about the differences between disruptive and sustaining innovation in the video below, and subscribe to our YouTube channel for more explainer content!
Types of Disruptive Innovation
In the online course Disruptive Strategy, Christensen explains that there are two types of disruptive innovation: low-end and new-market.
Low-End Disruption
Low-end disruption is when a company uses a low-cost business model to enter at the bottom of an existing market and claim a segment.
Because there’s no profitability incentive to fight for the bottom of the market, a low-end disruption causes incumbent companies to focus their efforts on more profitable areas.
An example of a low-end disruption is the rise of retail medical clinics in the healthcare space. Large medical centers handle everything from a sinus infection to open-heart surgery and employ specialists to care for various injuries and ailments. Typically, the more serious the injury or illness, the more expensive the cost to the patient.
As a result, along with the convenience of location and waiting times, many people with low-grade injuries and illnesses opt to visit a retail medical clinic, such as CVS’s MinuteClinic, instead of going to their doctor’s office or a medical center.
According to the RAND Corporation, roughly 90 percent of visits to retail clinics are due to 10 acute conditions, including sore throat, ear infection, and conjunctivitis. Those same 10 conditions only account for 18 percent of visits to doctors’ offices, and just 12 percent of emergency room visits.
RAND also found that the quality of care at retail clinics for three of the acute conditions is equal to the quality of care received for those conditions at a doctor’s office. This enables retail clinics to own that low-end market segment.
Because doctors’ offices and medical centers offer care and treatment for a wider range of conditions than retail clinics do, and because many of those services are more lucrative than retail clinics’ services, they’re not motivated to compete for the “acute condition” market segment.
Over time, retail medical clinics may evolve to offer more specialized services, causing medical centers to back out of additional market segments. By continuing to claim increasingly specialized and profitable market segments, retail medical clinics can disrupt the medical industry.
Related: 3 Examples of Disruptive Technology That Are Changing the Market
New-Market Disruption
The other type of disruptive innovation is new-market disruption, which is when a company creates a new segment in an existing market with a low-cost version of a product.
The factor that sets new-market disruption apart from low-end disruption is its focus on an audience that doesn’t yet exist in the market. Offering a more cost-effective, simple, or accessible product effectively creates a new segment.
An example of a new-market disruption is the transistor radio. Starting in the 1920s, the radio market was dominated by large, expensive stereo systems that families purchased for their homes. The consoles were heavy, designed to be placed in the living room, and provided excellent sound quality.
Enter the portable transistor radio. Introduced to the market in 1954, Texas Instruments’ radio was small and inexpensive, with crackly sound quality. Whereas larger radio consoles and high-fidelity systems appealed to a wealthier audience who wished to sit and listen in their homes, transistor radios attracted an audience that hadn’t previously had any radio options: teenagers, the less wealthy, and those who worked jobs that required them to move around a lot.
The radio console boasted quality, but the transistor radio promised accessibility and freedom, creating a new segment in the radio market.
The incumbent companies had no economic incentive to go after the new market segment created by transistor radios, which were much cheaper and had a lower profit margin than radio consoles. Instead of competing with Texas Instruments, the incumbents let the company own the new market segment.
As time went on, the quality of portable radios drastically increased with the birth of the Sony Walkman, MP3 players, the Apple iPod, and smartphones. The demand for expensive, in-home radio consoles also diminished. Texas Instruments disrupted the radio market from the bottom up, eventually displacing the incumbent companies.
Thinking Like an Innovator
Whether you’re an aspiring entrepreneur or a seasoned business professional, you should understand both low-end and new-market disruption.
Using Christensen’s theory of disruptive innovation, you can break into new or existing markets and craft business strategies with disruption opportunities in mind.
Are you eager to learn more about disruptive innovation? Explore Disruptive Strategy—one of our online strategy courses—and download our free e-book on how to formulate a successful business strategy.
