Q1) Discuss and illustrate with examples the two major elements in the Business Model framework of Disruptive Innovation. (25 marks)
Q2) Discuss and illustrate with examples the five major changes in the Data domain from the analog to the digital age. (25 marks)
Q3) Discuss and illustrate with examples the following concepts: (25 marks)
a) Electronic commerce versus e-business
b) Click-and-mortar versus brick-and-mortar organizations
Q4) Give one example of Inter-organizational information systems (IOSs), and illustrate its importance in creating business values. (25 marks)
A student considered to have cheated in course work should be given a zero mark for that particular piece of work. The case may be brought to the Student Disciplinary Committee if the Programme Director/Head of Academic Unit concerned deems it necessary to do. so. Students’ attention is drawn to the definition of plagiarism, i.e. “the presentation of another person’s work without proper acknowledgement of the source, whether protected by copyright or not, as the student’s own work”. All quotations and paraphrases taken or derived from the work of other authors should be properly acknowledged within the text of all assignments, and full bibliographic details of books/articles/websites used should be included in the reference list.
How Useful Is the
Theory of
Disruptive
Innovation?
FALL 2015
Few academic management theories have had as much
influence in the business world as Clayton M. Christensen’s
theory of disruptive innovation. But how well does the theory
describe what actually happens in business?
Andrew A. King
Baljir Baatartogtokh
Vol. 57, No. 1
Reprint #57114
http://mitsmr.com/1LezH20
I N N O VAT I O N S T R AT E G Y
How Useful Is the Theory
of Disruptive Innovation?
Few academic management theories have had as much influence
in the business world as Clayton M. Christensen’s theory of
disruptive innovation. But how well does the theory describe
what actually happens in business?
BY ANDREW A. KING AND BALJIR BAATARTOGTOKH
THE LEADING
QUESTION
How widely
applicable is
the theory of
disruptive
innovation?
FINDINGS
The theory’s essen
THE TURMOIL OF BUSINESS COMPETITION has often been likened to a stormy sea.
“Gales of creative destruction,” economist Joseph Schumpeter wrote, periodically sweep through
industries, sinking weak and outdated companies.1 In the mid-1990s, the winds of change appeared
especially powerful, threatening even some of the strongest businesses. Enter Clayton M. Christensen, a professor at Harvard Business School who is now considered one of the world’s leading
experts on innovation and growth. In his 1997 book, The Innovator’s Dilemma, Christensen provided an explanation for the failure of respected and well-managed companies.2 Good managers
face a dilemma, he argued, because by doing the very things they need to do to succeed — listen to
customers, invest in the business, and build distinctive capabilities — they run the risk of ignoring
rivals with “disruptive” innovations.3
PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED.
THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS AS ORIGINALLY PUBLISHED.
tial validity and
generalizability have
seldom been tested
in the academic
literature.
Many of the theory’s
exemplary cases
did not fit all its
conditions and
predictions well.
Theories can pro
vide warnings of
what may happen,
but they are no
substitute for
thoughtful analysis.
FALL 2015 MIT SLOAN MANAGEMENT REVIEW 77
I N N O VAT I O N S T R AT E G Y
Christensen’s theory of disruptive innovation has
gripped the business consciousness like few other
ideas. In a review of enduring business books, The
Economist called the theory “one of the most influential modern business ideas.”4 Other commentators
have noted that the theory is so widely accepted that
its predictive power is rarely questioned.5 The theory’s influence has spread far beyond the business
world. Christensen and his associates have proposed
disruption as a framework for thinking about vexing
social problems such as poverty, lack of access to
health care, illiteracy, and unemployment.6 The theory, or variations thereof, has been used in so many
settings that Christensen himself has expressed unease with some of the ways the theory is being
applied. In an interview with the editor-in-chief of
the Harvard Business Review, he said, “I never
thought … that the word disruption has so many
SAMPLE OF 77 DISRUPTIVE INNOVATIONS
This sample of disruptive innovations corresponds to the 75 cases listed in The
Innovator’s Solution and two cases discussed at length in The Innovator’s Dilemma.
• 802.11 (Wi-Fi)
• Amazon.com
• Barnes & Noble
• Beef processing
• Bell Telephone
• Black & Decker
• Blended plastics
• Bloomberg
• Boxed beef
• Canon photocopiers
• Catalog retailing
• Charles Schwab
• Circuit City, Best Buy
• Cisco
• Community colleges
• Concord School of Law
• Credit scoring
• Dell
• Department stores
• Digital animation
• Digital printing
• Discount department
stores
• Disk drives
• eBay
• ECNs
• Email
• Embraer and Canadair
regional jets
• Endoscopic surgery
• Fidelity Management
• Flat panel displays
(Sharp and others)
• Ford
• Galanz
• GE Capital
• Google
• Honda motorcycles
• Hydraulic excavators
• Inkjet printers
• Intel microprocessor
• Intuit’s QuickBooks
• Intuit’s TurboTax
• Japanese steelmakers
• JetBlue
• Kodak
• Kodak Fun Saver
• Korean auto
manufacturers
• Linux
• MBNA
• McDonald’s
• MCI, Sprint
• Merrill Lynch
• Microsoft DOS
• Minicomputers
• Online stockbrokers
• Online travel agencies
78 MIT SLOAN MANAGEMENT REVIEW FALL 2015
• Oracle
• Palm Pilot,
RIM BlackBerry
• Personal computers
• Plastics
• Portable blood
glucose meters
• Salesforce.com
• Seiko watches
• SonoSite
• Sony
• Southwest Airlines
• SQL database software
• Staples
• Steel mini-mills
• Sun Microsystems
• Toyota
• Toys-R-Us
• Ultrasound
• University of Phoenix
• Unmanned aircraft
• Vanguard
• Veritas and Network
Appliance
• Wireless telephony
• Xerox
connotations in the English language, that people
would then flexibly take an idea, twist it, and use it to
justify whatever they wanted to do in the first place.”7
So, what is the right way to use the theory of disruptive innovation? What are its core elements, and how
predictive is it? We decided to examine these questions by taking a closer look at the theory.
Our first discovery was that, despite the theory’s
widespread use and appeal, its essential validity and
generalizability have been seldom tested in the academic literature. Christensen’s initial research,
which formed the kernel of the theory, was based
mainly on the hard disk drive industry in the 1970s
and 1980s.8 He then published a few peer-reviewed
articles on the industry.9 Other scholars have published discussions of related case examples (notably
about Polaroid Corp., Smith Corona, and the disk
drive industry),10 but few quantitative tests have
been performed.11 The ones that have been published fail to provide confirmatory evidence for the
theory, suggesting instead that full-blown disruptions of the type that Christensen describes are rare
and that most managers respond effectively to
potentially disruptive threats. 12 In his defense,
Christensen has said that the lack of numerical
support is the result of the blunt measures used in
statistical analysis.13 More nuanced case analysis, he
argues, shows that the theory of disruptive innovation explains the failure of leading businesses, time
after time and industry after industry.
Spurred on by this argument, we decided that to
understand how to apply the theory of disruptive innovation, we needed to delve into the case histories of
dozens of disruptions identified by Christensen and his
coauthor, Michael E. Raynor.14 In order to examine the
numerous examples and appreciate their nuances, we
surveyed and interviewed one or more experts on each
of 77 cases discussed in The Innovator’s Dilemma and
The Innovator’s Solution, where Christensen and
Raynor lay out the elements of the theory.15 (See
“Sample of 77 Disruptive Innovations.”) To encourage unbiased responses, we granted all respondents
anonymity. (See “About the Research.”)
After interviewing experts on each case, we had a
further discovery: Many of the theory’s exemplary
cases did not fit four of its key conditions and predictions well. A handful corresponded well with all four
elements (notably, for example, the disruptions by
SLOANREVIEW.MIT.EDU
Salesforce.com, Intuit’s QuickBooks, and Amazon.
com). However, a majority of the 77 cases were
found to include different motivating forces or displayed unpredicted outcomes. Among them were
cases involving legacy costs, the effect of numerous
competitors, changing economies of scale, and shifting social conditions. Discussions with our industry
experts also helped us to identify the most generally
applicable elements of the theory of disruptive innovation as well as to define other ways managers can
guide businesses through stormy times.
Four Key Elements of the Theory
of Disruptive Innovation
Before surveying and interviewing experts on each
of the 77 cases, we identified four key elements of the
theory of disruption: (1) that incumbents in a market are improving along a trajectory of sustaining
innovation, (2) that they overshoot customer needs,
(3) that they possess the capability to respond to disruptive threats, and (4) that incumbents end up
floundering as a result of the disruption.
1. Incumbents are improving along a trajectory
of innovation. In The Innovator’s Solution, Christensen and Raynor argue that one of the key elements
of disruptive innovation is that “in every market
there is a distinctly different trajectory of improvement that innovating companies provide as they
introduce new and improved products.”16 An incumbent business’s improvement trajectory results
from what they call “sustaining innovation” — “the
year-by-year improvements that all good companies grind out.”17 (See “Four Elements of the Theory
of Disruptive Innovation,” p. 80.) Usually, the sustaining innovations improve the products in a few
established value areas. For example, auto companies might continue improving the horsepower or
torque of their engines. As Christensen and Raynor
explain, good managers strive “to make better products that they can sell for higher profit margins to
not-yet-satisfied customers in more demanding
tiers of the market.”18
2. The pace of sustaining innovation overshoots customer needs. A second element of
Christensen and Raynor’s theory is that the pace of
sustaining innovation along the trajectory of particular value propositions “almost always outstrips the
ability of customers in any given tier of the market to
SLOANREVIEW.MIT.EDU
ABOUT THE RESEARCH
We surveyed and interviewed 79 experts on 77 proposed examples of disruption identified by Christensen and Raynor. To identify suitable experts, we
scoured academic publications and reached out to industry associations, publishers, authors, and academic librarians. In all, we contacted 138 people; of
those, 82 agreed to participate in our study, and 79 finished one or more surveys about a specific case. Fifty-eight percent of the surveyed respondents
were academics; 18% were nonacademic authors of book-length historical
analyses; 10% were financial analysts of the industries involved; and 14% were
participants in the industries. Of the academics, 63% were from business
schools, with 46% of the academics from business schools ranked in the top
20 in 2015 by Bloomberg Businessweek. For consistency across the samples
and to maintain objectivity, we created survey questions to test the four main
elements of the theory: that there existed incumbents with sustained innovation; that they overshot customer needs; that they retained the capability to
respond; and that they floundered as a result of the disruption.i
To prevent bias, we explained the survey as a study of “industry transitions.”
A minority of experts (11%) responded to our request to answer a written questionnaire. The majority preferred to answer the questionnaire over the phone
(85%) or in person (4%). Following live surveys, we informed people of the topic
of our study and engaged in open discussions about how the case matched the
theory. Of our live interviews, 87% of the people agreed to be recorded.
use it. … Thus, a company whose products are
squarely positioned on mainstream customers’ current needs will probably overshoot what those
customers are able to utilize in the future.”19 To
illustrate their point, Christensen and Raynor use an
example from the 1983 computer industry, “when
people first started using personal computers for
word processing. Typists often had to stop their fingers to let the Intel 286 chip inside catch up. … But
today’s processors offer much more speed than
mainstream customers can use.”20
3. Incumbents have the capability to respond
but fail to exploit it. Christensen and Raynor claim
that incumbent companies frequently possess the
capabilities needed to succeed, but managers fail to
employ them effectively to combat potential disruptors. 21 “Disruption has a paralyzing effect on
industry leaders,” they write. “With resource allocation processes designed and perfected to support
sustaining innovations, they are constitutionally unable to respond.”22 Competitors with disruptive
innovations lull incumbent companies into complacency by avoiding a head-to-head competition
for the incumbents’ best customers. They target instead new and low-end customers, Christensen and
Raynor note, with “products and services that are
not as good as [those] currently available.” 23
Although inferior when measured against the value
propositions on which sustaining innovation has
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I N N O VAT I O N S T R AT E G Y
been focused, these disruptive products have other
attributes: They are simpler, more convenient, and
less expensive. Because an incumbent company’s
existing activities “determine its perceptions of the
economic value of an innovation [and] shape the
rewards and threats,” Christensen and Raynor
argue, managers fail to appreciate and address the
potential threat.24 If the disruption appears in a
new market, incumbent businesses “ignore the
attackers”; if among low-end customers, they “flee
the attack.”25
4. Incumbents flounder as a result of the disruption. Christensen writes that his original
research goal was the development of a “failure
framework” for “why and under what circumstances
FOUR ELEMENTS OF THE THEORY OF
DISRUPTIVE INNOVATION
This illustration shows four important elements of the theory of disruptive innovation:
(1) sustaining innovation, (2) overshoot of customer needs, (3) the emergence of a
disruptive innovation to which incumbents have the ability to respond, and (4) incumbent firms floundering as they are disrupted. Following Christensen and Raynor, we
collapse the multiple value dimensions of existing products to just one dimension
labeled “performance.” We also show customer needs as a line, although in fact
there is a distribution of needs.
4
Incumbents improving
along a trajectory of
sustaining innovation
Incumbents
are disrupted
and flounder
1
Customer
needs
Performance
Disruptive
innovation to
which incumbents
have ability to
respond
2
Sustaining
innovation
overshoots
customer needs
3
Time
new technologies have caused great firms to fail.”26
He does not specify the exact probability of failure,
but he leaves little doubt it is very high. “Performance oversupply,” he writes in The Innovator’s
Dilemma, “opens the door for simpler, less expensive, and more convenient — and almost
always disruptive — technologies to enter.” 27
Companies with these disruptive technologies,
he writes, “will always improve their products’ performance and in so doing eventually take over the
older markets.” 28 “Once the disruptive product
80 MIT SLOAN MANAGEMENT REVIEW FALL 2015
gains a foothold in new or low-end markets,” Christensen and Raynor write, “the disruptors are on a
path that will ultimately crush the incumbents.”29
What the Experts Reported
We intentionally did not mention disruptive innovation until the end of our discussions with experts
in order to elicit unbiased responses. For many of the
cases, experts reported historical evidence that corresponded with some elements of the theory. For
example, consistent with Christensen and Raynor’s
claim that managers tend to “ignore” low-end disruption, an author of a book on the history of book
retailing told us that higher-end bookstores had initially discounted the threat of mall-based stores.30
Similarly, a historian of publishing told us that managers of photo-offset printing companies had
doubted that digital printing would ever deliver the
speed and quality needed to compete.31 In many
other interviews, however, the experts pointed out
noteworthy discrepancies between case facts and
elements of the theory.
Not all cases included sustaining innovation.
In 24 cases (31% of the total), our experts were
skeptical of the existence of any meaningful trajectory of sustaining innovation prior to the
emergence of a presumably disruptive innovation
(for instance, market retailing before department
stores, bazaars before eBay, and four-year colleges
before community colleges).32 The case of largescale meatpacking provides a good example of such
an exception. Christensen and Raynor write that
“in the 1880s, Swift and Armour began huge centralized operations that transported large sides of
beef by refrigerated railcars.” They further claim
that “this disrupted local slaughter operations.”33
But our experts, both book authors on the history
of meatpacking, were skeptical that “sustaining
innovation” was, as implied by the theory, a meaningful part of the story. Local butchers, they pointed
out, were not on a trajectory of innovation.34 To
the contrary, they relied on tools and artisanal
practices that hadn’t changed for decades. Local
slaughter operations were replaced, the experts
argued, because of broader changes: the Union
Army’s demand for beef during the American Civil
War, the expansion of the railroads, the scale economies provided by the use of a “disassembly line,”35
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and opposition by local communities that wished
to see noxious slaughter operations closed.36
Not all incumbent companies overshot customers’ needs. In 60 cases (78% of the total), and
contrary to the expectations of the theory, our experts thought that incumbent companies were not
producing, or likely to produce, products or services that exceeded customer needs. For example,
hand animation was replaced by computer animation not because it outstripped what customers
wanted, but because it was too expensive. In the
case of local area networks, data rates increased
rapidly, but customers kept pace by developing
ways to use the increased bandwidth. In the cases of
Internet search engines’ replacement of print directories, two professors at top-ranked business
schools were skeptical that print directories such as
the Yellow Pages had surpassed anyone’s needs.37
Rather, the print directories were displaced, one
expert noted, because companies producing them
simply didn’t have the ability to respond: “There
are certain situations where the economics … just
don’t let reasonable managers respond in a way that
would disrupt the disruptor.”38 In other cases, experts noted that overshoot was difficult to achieve.
For example, when discussing whether surgery had
overshot customer needs, thereby enabling disruption by endoscopy, an M.D. and expert on the
business of health care asked, “What would such
overshoot look like: too little risk of death?”39
Prior to initiating our study, we anticipated that
overshoot would be common in cases involving the
computing industry, such as computer software or
hardware. But our experts (made up of computer scientists, historians, and business professors) suggested
that even here overshoot was infrequent.40 They acknowledged rapid growth in computing power driven
by Moore’s law (the observation by former Intel cofounder Gordon E. Moore that the number of
transistors on an integrated circuit doubles approximately every two years). But they were doubtful that
this led to neglect of average or low-end consumers.
Incumbent companies, one expert noted, often use
computing power to serve the needs of new, less-savvy
customers — not to overshoot customer needs.41
Apple Inc., for example, launched its original Macintosh in 1984 with a powerful central processing unit to
enable a user-friendly graphical interface.
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Many incumbents were incapable of responding to the potential disruption. In 30 cases (39%
of the total), our experts disputed Christensen’s
contention that incumbent businesses were capable of responding to the disruptive innovation. In
some cases, experts argued, incumbents were restricted, even barred, from using their capabilities
to respond. For example, in legal education, Christensen points to the weak response of incumbent
law schools to online legal training. But there are
clear limits to how far incumbent law schools can
go in exploring potentially disruptive online legal
education. In the United States, the American Bar
Association restricts the number of hours of online courses law schools can offer without losing
their accreditation and jeopardizing the ability of
their graduates to take the bar exam.42 Similarly,
until 1978, U.S. airlines were restricted from competing on price.43
In other cases, our experts doubted that incumbent organizations possessed the capabilities
needed to compete with a disruptive entrant.
Christensen and Raynor imply that national postal
services (for example, the U.S. Postal Service and
Canada Post) could have — and should have —
protected their positions in mail delivery from the
likes of AOL Inc. by offering their own email services.44 However, an expert was skeptical about the
practicality of this plan, pointing out that, for the
most part, executives running the postal services
had very little control over labor practices and price
structures.45 Moreover, beating AOL would have
required accessing new capabilities and resources
that public post offices didn’t have. A similar argument can be made concerning the wood-products
industry, many of whose products have been
disrupted by plastics. Christensen suggests that
wood-product companies should have anticipated
the threat from plastic producers. However, a professor at a leading engineering school told us it was
unreasonable to assume that companies with skills
in silviculture and sawmill technology had the capability to compete effectively against “disrupting”
producers of plastics.46
Approximately one-third of incumbents were
not displaced by a new technology. Christensen
says that disruptive innovators displace incumbent
leaders “nearly every time.” Our experts were not as
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convinced. They agreed that in about 62% of the
cases, incumbents floundered as a result of a disruptive competitor. However, in the remaining 29 cases
(38%), there were a range of outcomes. In some
cases (for example, credit scoring and business
lending),47 disruptions complemented incumbent
businesses by supporting their existing actions. In
other cases, disruptions coexisted with incumbent
businesses or allowed them to reach untapped customers (for instance, catalog sales and department
stores). In still others, disruptions have continued to
serve different markets (for example, physical and
online law schools).48
In summary, although Christensen and Raynor
selected the 77 cases as examples of the theory of
disruptive innovation, our survey of experts reveals
that many of the cases do not correspond closely
with the theory. In fact, their responses suggest that
only seven of the cases (9%) contained all four elements of the theory that we asked about. (See “How
Well Do the Cases Match the Theory?”) How can
we account for this discrepancy? Clearly, analysis of
the cases is open to interpretation, and one or more
of our experts may be mistaken in their judgment
of a particular case. But even several random
errors, given the large number of experts surveyed,
would not significantly change our main findings.
At least, our findings suggest, we should consider
what else could be going on.
Problematic Assumptions
We concluded each of our interviews by disclosing
the subject of our study and asking the expert to reflect on the theory’s usefulness in understanding
the case at hand. These conversations highlighted
several assumptions that limit the application or
predictive power of the theory of disruptive
innovation.
The Goal Some of our experts noted confusion
about the presumed goal of a business or organization. Christensen’s early work seems to imply that
companies should try to maintain market share. Experts familiar with this work noted that such an
assumption could lead to strategies that maintained
market share while harming profits. In response to
such criticism,49 Christensen clarified his position
in a 2006 publication, writing that he “had simply
82 MIT SLOAN MANAGEMENT REVIEW FALL 2015
assumed that the objective function of management
should be to maximize shareholder value.”50 This
clarified objective is problematic for the 9% of cases
we examined that represent nonprofit organizations or publicly regulated utilities. For example, an
author and expert on higher education noted that
the “access mission of community colleges often
runs counter to what presidents or other leaders
might do to cut costs or improve completion outcomes.” This expert adds: “That makes it not such a
great example for the theory [because] as a missiondriven institution, they are responsible to the public
and a higher calling.”51
Relative Rates of Improvement and Utilization
Christensen’s theory of disruption involves critical
assumptions about the rate of “sustaining innovation.” As described by Christensen and Raynor, the
theory assumes that “in almost every industry,”
sustaining innovation “outstrips the ability of customers in any given tier of the market to use it.”52
The resulting “overshoot of what customers can
utilize,” they write, “opens the door” for a disruptive innovation.53 Many of our experts identified
problems with this assumption.
Sustaining innovation can be too slow to keep
up with growing customer needs. For example, new
improvements in wood materials failed to keep
pace with growing construction requirements.
Likewise, even with the development of new processing technologies, many postal services failed to
satisfy growing customer demands for speedy
home delivery. In addition, customer needs often
respond to better performance, altering behavior
and, in turn, one’s perception of needs. Today, for
example, many of us feel we “need” to carry around
what are in effect supercomputers that take pictures and allow us to chat with our friends. 54 In
some cases, one expert pointed out to us, user needs
seem to be insatiable.55 What would it mean, she
asked, if food was too healthy, shelter too available,
or education too effective?
Relative Rates of Improvement of Sustaining
and Disruptive Technologies When both disrup-
tive and sustaining innovations compete to satisfy
ever-increasing customer demands, the relative
rate of improvement may be important. Our
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experts noted several cases where disruptive innovation had sputtered or where older technologies
had improved so quickly that new technologies
were eclipsed. For example, in 2003, Christensen
and Raynor predicted that ultrasound technology
would disrupt radiation imaging.56 However, the
opposite has occurred. Innovations in radiation
imaging (for instance, X-ray tomography), followed by nuclear magnetic resonance imaging
(MRI), have relegated the use of ultrasound to specialized applications such as prenatal care. Our
expert, the head of medical imaging at a major U.S.
hospital, claimed that in the foreseeable future
there was “no chance” ultrasound would displace
radiation technologies.57
Indeed, the assumption that “disruptive” innovations always beat “sustaining” ones has led
Christensen to make a number of erroneous predictions. For example, in an early publication,
Christensen and Joseph L. Bower claimed that disk
drive companies were ignoring the 1.8-inch disk
drives in a manner “eerily familiar” to what had happened following the emergence of previous formats.
They suggested that companies sticking with the
larger 2.5-inch format would be displaced by new
competitors. 58 When Gary Marks, then vice
president for disk drive marketing at hard drive
manufacturer Conner Peripherals, publicly disagreed, Christensen and Bower replied that Marks
was making “exactly the mistake we warn against.”59
Eventually, though, Marks was proven right: Today,
2.5-inch and 3.5-inch disk drives dominate the industry, and 1.8-inch drives are no longer produced.
Incumbents’ Ability to Respond Joseph Schum-
peter argued that waves of “creative destruction”
were a vital part of any economy because they
washed away businesses with obsolete capabilities.
By contrast, Christensen argues that leading companies often have the resources and abilities needed
to succeed but lack the values, modes of interaction, and decision making to do so.60 However, such
confidence is belied by the trials encountered by
many of the 77 cases we studied. Several of the
companies had to navigate fundamental transitions in technology (for example, from flat-glass to
roll-film photography, or travel agents to online
services), and others had to make the difficult
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HOW WELL DO THE CASES MATCH THE THEORY?
This Venn diagram maps the 77 examples listed in The Innovator’s Dilemma
and The Innovator’s Solution and shows the extent to which, in the opinion of
industry experts, they exhibit each of four key elements of the theory. Using
the industry experts’ assessments, only seven of the cases (9%) exhibited all
four elements of the theory.
1
4
Incumbents
disrupted and
flounder
62%
Incumbents engaged in
sustaining innovation
69%
Match
all four
elements
9%
2
Sustaining
innovations
overshoot
customer needs
22%
Incumbents had
3 capability to respond
61%
transition from analog to digital technologies (for
instance, from vacuum tubes to liquid crystal displays, physical mail to email, hand drawing to
digital animation). These technological shifts can
be treacherous, because they involve different engineering skills, new product designs, and new
production facilities.61
Managers Satisfying Existing Customers
Christensen and his collaborators argue that managers are doing an excellent job satisfying their
high-margin customers in their existing business
but are myopic about the threats posed by low-end
customers or new markets. In fact, in several of the
cases we examined, poor management left even
high-end customers dissatisfied. For example, by
the time Honda Motor Co. entered the United
States with a line of inexpensive offerings for the
U.S. motorcycle market, Harley-Davidson Motor
Co. was already being criticized by some of its customers for poor reliability. 62 Likewise, before
slaughterhouses were disrupted by boxed beef, they
already had been criticized for being unsanitary.63
And many people complain about the post office.
Christensen assumes that managers are myopic
when it comes to making good choices about new
markets created by disruptive innovations. Not so,
the director of a research program on corporate
strategy and innovation told us. His own research
and that of others showed that most managers made
choices that were aligned with their capabilities.
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Businesses with the capabilities needed to compete
tended to adopt disruptive innovations. Weaker
businesses tended to “play out their hands” by maximizing their returns in declining existing markets.
“On average,” he said, “managers make the right
choices.”64
In several cases, the right choice for an incumbent
may have been to avoid competing with a disruptive
innovation. Speaking of the airline industry, for example, one expert said, “The biggest contrast between
the Christensen model and what happened with the
airlines is that [Christensen says] the barrier is somehow cognitive. … [In fact] there are fundamental
structural barriers.”65 Switching to a low-cost, pointto-point airline business model would have required
a dramatically different fleet of airplanes, new workers, new airports, and new gates. “Sometimes [stuff]
happens,” he argued, “and the best response is to
adapt but not dramatically change the business
model.”66 A business professor and expert on digital
electronics made a similar point about the transition
from television tubes to digital displays. He noted
Sony Corp.’s losses in the display market and argued
that managers should have recognized their lack of
advantages and “prepared to exit” rather than fighting to defend Sony’s position.67
Other Factors at Work
Is there a better explanation than the theory of disruption for the patterns of success and failure across the
77 cases Christensen and Raynor cite? Having argued
that one theory is not adequate for explaining so many
diverse cases, we are cautious about overreaching.
Nevertheless, from our conversations with academics
and industry experts, we have identified some rough
patterns that could provide a starting point. These
patterns revolve around legacy costs, changing scale
economies, and the laws of probability.
Legacy Costs Several companies that Christensen
and his collaborators say were “disrupted” by new innovations were already severely weakened by legacy
costs in the form of investments and contracts. For
example, U.S. steel company managers, protected
from foreign competition by trade legislation,
agreed to labor contracts that included expensive
health care and pension provisions. When trade barriers fell, the costs became unsupportable. In a
84 MIT SLOAN MANAGEMENT REVIEW FALL 2015
postmortem of Bethlehem Steel Corp., Fortune
writer Carol Loomis explained the deadly spiral as “a
demographic nightmare, in which an ever-shrinking
number of active employees were charged with making profits sufficient to support the present and
future of an ever-growing number of retirees and
dependents.”68 Managers faced a nearly impossible
task. When Loomis asked former General Electric
Co. CEO Jack Welch if he could have saved Bethlehem Steel, he replied, “I don’t think Christ could
have done it.”69 Our experts told us that such legacy
costs played a similarly critical role in several other
cases, including automobiles, motorcycles, food
processing, and transportation.70
Changing Scale Economies In at least 40% of the
77 cases, changing business conditions increased the
economic advantages of scale and thereby limited
the number of businesses that could profitably serve
the market. The resulting “disruption” was really a
well-known economic process that selected for a few
well-placed businesses, incumbents and entrants
alike, that could best leverage scale economies. For
example, we mentioned earlier that the expansion of
national railroads allowed a few meatpacking plants
to harness economies of scale and drive down costs.
Previously, such scale advantages had been constrained by the inability to ship meat long distances,
but the expansion of railroads and the availability of
railcars with ice removed these barriers. These developments allowed meatpackers near major rail hubs
to harness massive scale economies and distribute
inexpensive meat to broad regions of the country.71
In recent decades, the development of the Internet and reliable parcel delivery has created similar
scale challenges for brick-and-mortar bookstores.
Before the tremendous growth of e-commerce,
Borders Group Inc. and Barnes & Noble Inc. leveraged economies created by the superstore format
to gain a competitive advantage over smaller
bookstores and mall-based chains.72 Online technologies meant that the assets represented by
superstores could be trumped by an enormous,
largely centralized distribution system. Because
online sales costs continually fell with volume,
whoever gained an initial advantage was likely to
take the entire market; it didn’t matter whether it
was a startup or an incumbent. Changing scale
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economies turned legacy investments in superstores into a liability. A professor at a leading U.S.
business school told us, “[T]he problem for Borders was that they needed all of their customers,
and so when Amazon started to siphon them off
they simply couldn’t cover fixed costs.”73
When network externalities provide a broad
scale advantage, some businesses are faced with a
winner-take-all competition. Economist W. Brian
Arthur has demonstrated that in such competitions, a few early sales can initiate a feedback loop
of network advantage that tips all customers to one
supplier.74 Microsoft DOS became the dominant
operating system for personal computers because
IBM’s imprimatur suggested that others would
adopt the operating system.75 To gain future scale
economies, customers joined the DOS standard,
further entrenching Microsoft’s position. Eventually, the scale benefits became so great that even
superior operating systems such as Apple’s MacOS
could not gain significant market share.
The Laws of Probability Sometimes incumbents
are simply outnumbered by the sheer quantity of
new competitors. In at least 30% of the 77 cases we
considered, new infrastructure and changing demographics caused an expansion of business
opportunities and a “gold rush” search for the best
business models. Incumbent companies participated in this rush just as readily as new entrants,
and they often picked what appeared to be good
claims. Because of their numbers, however, new
entrants were able to cover more ground in the
aggregate. The laws of probability thus said that in
most cases new entrants would stake the best claims
and be the biggest winners.
For example, the construction of highways
following World War II greatly stimulated the
development of “roadside America.”76 New forms
of service franchising inspired hundreds of food
service chains to enter the market with different offerings and business models.77 So many investors
rushed in that speculators even created financial
instruments for investing in franchise models. As
with any gold rush, fundamental economics eventually forced a shakeout. Although many of the old
chains (such as Howard Johnson’s and Dairy
Queen) managed to survive, some of the new companies (such as McDonald’s and Burger King)
proved to have selected better franchise models and
eventually emerged as the biggest winners.
The same pattern was repeated with the rise of the
Internet. Because online business required little investment in physical assets, almost anyone could start
an online company. Thousands of entrepreneurs
rushed in to explore every imaginable idea. Existing
businesses once again explored promising new business models, but because they were fewer in number,
they couldn’t stake as many claims as the swarms of
entrepreneurs. Although the majority of online startups would ultimately fail, their sheer numbers meant
that some of them would strike it rich.78
Using the Theory of
Disruptive Innovation
The threats faced by the companies in our sample
were deeply challenging, and they cannot be understood from a single viewpoint or solved by a single
prescription. Instead, managers need to evaluate
difficult problems from a number of different perspectives. In that spirit, we do not advocate discarding
the theory of disruption. Rather, we recommend
using its best parts in addition to classical approaches
to strategic analysis.
The theory of disruptive innovation provides a
generally useful warning about managerial myopia.
Many of our experts noted examples of managers
who overlooked or misunderstood the importance
of an emerging threat. A professor of business innovation told us, for example, that managers working
The threats faced by the companies in our sample were
deeply challenging, and they cannot be understood from
a single viewpoint.
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in relationship management software had overlooked the threat posed by Salesforce.com. In many
other cases, managers in incumbent companies misunderstood the value of innovations by rivals.
Suppliers such as Swift and Armour discounted
boxed beef because the meat was frozen, and they
had previously failed in their own attempts at frozen
beef. Later, according to an industry historian who
has chronicled this story, “they all slapped their foreheads … and said, ‘Oh man, we really screwed up
back then.’”79 Similarly, although managers at Xerox
didn’t completely neglect the market for self-service
copiers, they do seem to have misunderstood the
value of Canon’s dry-toner innovation in reducing
service costs and customer inconvenience.80 In summary, we believe that the theory of disruptive
innovation provides a useful reminder of the importance of testing assumptions, seeking outside
information, and other means of reducing myopic
thinking.
Yet our discussions with experts suggest that the
full theory of disruptive innovation should only be
applied when specific conditions are met. Christensen’s theory was inspired by an industry that he
admits is highly unusual; as he wrote, “nowhere in the
history of business has there been an industry like disk
drives, where changes in technology, market structure, global scope, and vertical integration have been
so pervasive, rapid, and unrelenting.” He suggests that
few other industries “offer researchers the same opportunities for developing theories.”81 Perhaps so,
but the theory’s unusual birthplace suggests the
need for an evaluation of similarities between the
disk drive industry and any setting where theory is
to be applied. One business school professor told us,
“Here is what I tell my students who label everything a disruption. Where is the improvement
curve? Because the fundamental assumption of the
theory is that the improvement curve [the rate of
sustaining innovation by incumbents] is going up
faster than the consumer’s ability to absorb those
improvements.”82 This assumption is critical, the
professor explained, because it drives vital parts of
the theory of disruption, such as the expectation
that disruptive threats will emerge among low-end,
overserved customers.
Even when there is a rapid improvement curve
and potential for the improvement to exceed customer needs, the theory of disruptive innovation
should be considered a warning rather than a prediction. The theory describes case examples of
dysfunction and failure, not what the average business may do. For example, an expert in a top-rated
technical school told us that his research on the disk
drive industry suggested that the case of one disk
drive company, Seagate Technology Inc., indeed
matched the theory of disruption. Seagate does
seem to have overlooked the value of emerging 3.5inch disk drives, and as a result, it was temporarily
displaced from leadership in the industry. Yet most
of the time, Seagate and other companies responded effectively to presumably disruptive
threats. 83 Thus, the theory provides a good reminder of potential pitfalls, he argued, but in no
way does it predict what most companies will do.
A telling example of how risky it can be to use
the theory to predict the behaviors of incumbent
companies can be found in a teaching case, coauthored by Christensen himself, describing a startup
company with an idea for developing a very thin
camera. The company’s management knew it could
not compete with established companies if they
chose to make a similar product. However, management hoped that the “disruptive” nature of the
company’s “credit card camera” would cause big
players to ignore them. Unfortunately, an established competitor noticed the product and jumped
into the market with a superior offering.84 Contrary to what the theory predicted, the startup, not
the incumbent, was driven from the market.
Our discussions with experts suggest that the full theory
of disruptive innovation should only be applied when certain
conditions are met.
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What Should Managers Do?
Given the evidence that the theory has limited predictive power, how should managers react to the
appearance of potential new rivals? We propose a
fairly straightforward diagnostic based on authenticated modes of analysis. First, managers should
calculate the value of winning. Second, they should
find ways to leverage existing capabilities. And
finally, where practical, they should work collaboratively with other companies.
Calculate the value of winning. Christensen
and his collaborators seem to assume that no matter what industry or market a company is in, it
should fight to maintain control. But this is folly. In
many of the 77 cases, factors such as low barriers to
entry, the emergence of substitutes, and an increase
in the number and aggressiveness of rivals turned
once-profitable industries into profitless deserts.
Indeed, choosing to fight without studying the options violates a basic principle of strategy: The first
step in responding to any major innovation is assessing whether the industry continues to be an
attractive place to compete. When industries become structurally unattractive, it may be time to
plan an organized retreat.
Harvard Business School professor Willy C. Shih
has studied the challenges that businesses with analog technologies faced in responding to new digital
technologies. “Such transitions are competencydestroying,” he writes, because “the capabilities, tacit
knowledge, and experience base of the incumbent
analog firms are rendered irrelevant.”85 He adds,
“While the firms may still possess valuable complements like brands or sales and distribution channels,
such transitions are immensely challenging because
of the exposure to commoditization.”86 Digital technologies often cause barriers to entry to fall and
competition to become cutthroat. As a result, Shih
argues, companies should evaluate the potential for
profits in a new market before they jump in.
Leverage existing capabilities. Managers
should analyze how their existing capabilities can
be deployed most profitably.87 If current capabilities can be used or extended, it may make sense to
expand into a new market. Amazon.com Inc., for
example, expanded from books to other vertical
markets where it was able to command some advantage from online sales. However, companies
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need to pay attention to the potential synergies between existing and new businesses.
Sometimes choosing the right way to use capabilities means reconsidering the existing identity of
the organization.88 Consider the case of Eastman
Kodak Co. According to popular opinion, Kodak
failed because it didn’t move aggressively and effectively enough into digital imaging. Fujifilm
Holdings Corp., according to this view, succeeded
because it developed a successful line of digital
cameras. However, the reality is that this version of
the story is a myth. Fujifilm survived not because it
developed a new line of digital cameras but because
it used its capabilities in chemicals and information
technology to develop successful products and
services in coatings, cosmetics, and document processing. Fujifilm continues to make a few cameras,
but it barely recoups its operating costs.89 It is prospering not because it defended its position in
imaging, but because it expanded into other areas.
Work collaboratively with other companies.
The prospect of an entrepreneur with new technology potentially disrupting incumbent businesses
can make managers wary of cooperating with entrants. In several of the cases we explored, however,
incumbents recognized the potential for working
with new entrants. The Walt Disney Co., for example, responded to the emergence of computer
animation by cooperating with and eventually
acquiring Pixar Animation Studios. Disney could
have continued to compete with Pixar and tried to
drive it from the market, but Disney managers
wisely recognized that their company’s strengths
were in marketing, distribution, and creating positive experiences at parks, cruise ships, and resorts;
Pixar, by contrast, was a content developer.90 Many
pharmaceutical companies routinely use a range of
approaches, including cooperation, when facing
competition from biotech startups. Rather than
seeing every biotech company as a potential disrupter, pharmaceutical company executives often
cooperate with biotech startups to leverage their
own strengths.
There is nothing radical about employing such
classic approaches to strategic analysis. Indeed, good
analysis often is based on old-fashioned spadework
and careful consideration. Assessing new threats requires considering multiple perspectives, reflecting
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on one’s own biases, and a willingness, if necessary, to
jump into the unknown. Faced with the prospect of
this leap, managers may be tempted to turn to the
theory of disruption, as Christensen himself says,
“to justify whatever they wanted to do in the first
place.”91 But doing so is an excellent way to cede
your business’s competitive advantage to more competent competitors.
In summary, stories about disruptive innovation can provide warnings of what may happen,
but they are no substitute for critical thinking.
High-level theories can give managers encouragement, but they are no replacement for careful
analysis and difficult choices. Should a company
stay in the fight in a particular market and incur the
cost of doing so, or should it exit the market and see
those revenues vanish? Should a company invest in
a profitable but declining business, or should it
turn away? Is the best course to maximize returns
by letting the business slowly die? These are heartwrenching choices. Following simple theories or
using quick analogies may provide a sense of certainty, but they are no substitutes for careful,
fundamental analysis of the nature of competition
and the sources of competitive advantage.
Andrew A. King is a professor of business administration at Tuck School of Business at Dartmouth College,
in Hanover, New Hampshire. Baljir Baatartogtokh is a
graduate student at the University of British Columbia
in Vancouver, British Columbia. Comment on this article at http://sloanreview.mit.edu/x/57114, or contact
the authors at smrfeedback@mit.edu.
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16. Christensen and Raynor, “Innovator’s Solution,” 33.
17. Ibid, 34.
18. Ibid., 33.
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19. Ibid., 33.
20. Ibid., 34.
21. This distinguished disruption from previous theories.
Scholars had long argued that companies are displaced
when their capabilities become obsolete or surpassed by
those of competitors. Christensen broke from this tradition by arguing that companies are displaced despite
possessing the capabilities needed to succeed.
22. Christensen and Raynor, “Innovator’s Solution,” 35.
23. Ibid., 34.
24. Ibid., 44.
25. Ibid., 46.
26. Christensen, “Innovator’s Dilemma,” viii.
27. Ibid., 213.
28. Ibid., 232.
29. Christensen and Raynor, “Innovator’s Solution,” 34.
30. Anonymous expert, Barnes & Noble interview,
July 28, 2015.
31. Anonymous expert, digital printing interview,
July 28, 2015.
32. This might seem surprising, but our expert told us that
for many years colleges focused on “opening doors to
new types of students: GIs after wars, underrepresented
minorities, low-income students.” The expert noted that
for many years there was not any discussion of performance. Some scholars, the expert noted, were of course
focused on improving research.
33. Christensen and Raynor, “Innovator’s Solution,” 56.
34. Anonymous expert, boxed beef interview, October
22, 2014; and anonymous expert, centralized beef slaughtering operations interview, October 21, 2014.
35. D. Hounshell, “From the American System to Mass
Production, 1800-1932: The Development of Manufacturing Technology in the United States” (Baltimore,
Maryland: Johns Hopkins University Press, 1985).
36. Anonymous expert, boxed beef interview, October
22, 2014; and anonymous expert, centralized beef
slaughtering operations interview, October 21, 2014.
37. Anonymous experts, Internet search engines
interviews, October 9, 2014 and October 22, 2014.
38. Anonymous expert, Internet search engine interview,
October 24, 2014.
39. Anonymous expert, endoscopic surgery interview,
October 1, 2014.
40. Anonymous expert, computers based on reduced
instruction set computing microprocessors interview,
November 24, 2014; anonymous expert, direct sales
computer retailing interview, February 18, 2015; and
anonymous expert, minicomputers interview,
October 27, 2014.
41. Anonymous expert, Microsoft DOS interview,
October 22, 2014.
42. Anonymous expert, online law schools interview,
October 10, 2014.
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43. Anonymous expert, discount airline (Southwest)
interview, November 3, 2014.
44. Christensen and Raynor, “Innovator’s Solution.”
45. Anonymous expert, email interview, October 15, 2014.
46. Anonymous expert, plastics interview, November 14,
2014.
47. W. Scott Frame, A. Srinivasan, and L. Woosley, “The
Effect of Credit Scoring on Small-Business Lending,”
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2001): 813-825.
48. N. Wecker, “Weigh the Benefits, Disadvantages of
Attending a Non-ABA Law School,” December 17, 2012,
www.usnews.com.
49. C. Markides, “Disruptive Innovation: In Need of Better
Theory,” Journal of Product Innovation Management 23,
no. 1 (January 2006): 19-25.
50. Christensen, “Ongoing Process,” 50.
51. Anonymous expert, community colleges interviews,
October 6, 2014, and August 26, 2015.
52. Christensen and Raynor, “Innovator’s Solution,” 33.
53. Ibid., 213.
54. This rapid expansion in consumer “needs” may explain why Christensen predicted the iPhone wouldn’t
succeed. See J. McGregor, “Clayton Christensen’s Innovation Brain,” June 15, 2007, www.bloomberg.com.
55. Anonymous expert, centralized beef slaughtering
operations interview, October 21, 2014.
56. Christensen and Raynor, “Innovator’s Solution.”
57. Anonymous expert, ultrasound imaging interview,
October 28, 2014.
58. J.L. Bower and C.M. Christensen, “Disruptive Technologies: Catching the Wave,” Harvard Business Review
73, no. 1 (January-February 1995): 51.
59. G. Marks, “Letters to the Editor: Disruptive Technologies,” Harvard Business Review 73, no. 2 (March-April
1995): 8-9; and C.M. Christensen and J.L. Bower, “Disruptive Technologies: Reply,” Harvard Business Review
73, no. 3 (May-June 1995): 17.
60. For example, Christensen and Bower write: “Our conclusion is that a primary reason why such firms lose their
positions of industry leadership when faced with certain
types of technological change has little to do with technology itself — with its degree of newness or difficulty,
relative to the skills and experience of the firm. … We find
that firms possessing the capacity and capability to innovate may fail when the innovation does not address the
foreseeable needs of their current customers.” See
Christensen and Bower, “Customer Power,” 198.
61. Anonymous expert, LCDs interview, November 12,
2014.
62. H.S. Thompson, “Hell’s Angels: The Strange and Terrible Saga of the Outlaw Motorcycle Gangs” (New York:
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63. M. Ogle, “In Meat We Trust: An Unexpected History
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64. Anonymous expert, small-format disk drives interview, October 15, 2014.
65. Anonymous expert, discount airline (Southwest)
interview, November 3, 2014.
66. Anonymous expert, discount airline (Southwest)
interview, August 22, 2015.
67. Anonymous expert, LCDs interview,
November 12, 2014.
68. C.J. Loomis, “The Sinking of Bethlehem Steel,”
Fortune, April 5, 2004, http://archive.fortune.com.
69. Ibid.
70. As this article was undergoing review, Harvard Business School professor Willy C. Shih published a blog post
on Harvard Business Review’s website on the importance
of legacy costs in explaining the failure of U.S. steel mills.
See W.C. Shih, “Breaking the Death Grip of Legacy Technologies,” May 28, 2015, https://hbr.org.
71. Ogle, “In Meat We Trust.”
72. Anonymous expert, online book sales interview,
October 24, 2014; and P. Ghemawat, B. Baird, and
G. Friedman, “Leadership Online: Barnes & Noble vs.
Amazon.com” (Boston: Harvard Business School Case
Services, 1998).
73. Anonymous expert, online book sales interview,
October 24, 2014.
74. W.B. Arthur, “Competing Technologies, Increasing
Returns, and Lock-In By Historical Events,” Economic
Journal 99, no. 394 (March 1989): 116-131.
75. M. Campbell-Kelly and W. Aspray, “Computer:
A History of the Information Machine,” 2nd ed.
(Boulder, Colorado: Westview Press, 2004).
76. J.A. Jakle and K.A. Sculle, “Fast Food: Roadside Restaurants in the Automobile Age” (Baltimore, Maryland:
Johns Hopkins University Press, 2002).
77. Anonymous expert, interview on the rise of fast food,
October 30, 2014.
78. B. Goldfarb, D. Kirsch, and D.A. Miller, “Was There
Too Little Entry During the Dot Com Era?” Journal of
Financial Economics 86, no. 1 (October 2007): 100-144.
79. Anonymous expert, boxed beef interview,
October 22, 2014.
80. Anonymous expert, countertop photocopiers
interview, September 17, 2014.
81. Christensen, “Innovator’s Dilemma,” 3.
82. Anonymous expert, telecommunications (circuit
and packet switched), July 30, 2015.
83. Anonymous expert, disk drive industry interview,
October 15, 2014.
84. C.M. Christensen and S.D. Anthony, “Making SMaL
Big: SMaL Camera Technologies,” Harvard Business
School case no. 603-116 (Boston: Harvard Business
School Publishing, 2003).
85. W.C. Shih, “Competency-Destroying Technology
Transitions: Why the Transition to Digital Is Particularly
Challenging,” Harvard Business School background note
613-024, August 2012, 9.
86. Ibid., 9.
90 MIT SLOAN MANAGEMENT REVIEW FALL 2015
87. C.E. Helfat, S. Finkelstein, W. Mitchell, M. Peteraf,
H. Singh, D. Teece, and S.G. Winter, “Dynamic Capabilities: Understanding Strategic Change in Organizations”
(Malden, Massachusetts: Wiley-Blackwell, 2007); and
M.E. Porter, “The Five Competitive Forces That Shape
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88. R. Adner and D.C. Snow, “Bold Retreat: A New Strategy for Old Technologies,” Harvard Business Review 88,
no. 3 (March 2010): 76-81.
89. FujiFilm Holdings Corp., “Annual Report 2014,”
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90. J. Alcacer, D.J. Collis, and M. Furey, “The Walt Disney
Company and Pixar Inc.: To Acquire or Not to Acquire?”
Harvard Business School case no. 709-462 (Boston:
Harvard Business School Publishing, 2009).
91. “Clay Christensen on the Recent Debate,”
June 27, 2014.
i. Specifically, our survey asked experts the following
questions:
Part A) Please think back prior to the advent of [NAME
OF DISRUPTIVE INNOVATION] (e.g., [EXAMPLE OF DISRUPTIVE INNOVATION NAMED]) in the [BASE YEAR].
(1) Prior to that, were there firms engaged in [NAME OF
INDUSTRY] with significant market share (e.g., > 5%)?
(2) Prior to the advent of [NAME OF DISRUPTIVE INNOVATION], were firms in [NAME OF INDUSTRY] improving
in performance? (3) Did this improvement rate exceed
what most customers could absorb (e.g., some say that
word-processing software added features faster than
most consumers could learn them)? (4) Prior to the advent of [NAME OF DISRUPTIVE INNOVATION], did firms
in [NAME OF INDUSTRY] have the ability to create a simpler, lower cost, but profitable product that would appeal
to current non-customers? Part B) Please now think
about how older companies in [NAME OF INDUSTRY] responded to the emergence of [NAME OF DISRUPTIVE
INNOVATION] (e.g., [EXAMPLE OF DISRUPTIVE INNOVATION NAMED]). (1) Did legal or contractual barriers
prevent these incumbent companies from developing or
adopting [NAME OF DISRUPTIVE INNOVATION]? (2) Did
leading firms in [NAME OF INDUSTRY] flounder as a result of [NAME OF DISRUPTIVE INNOVATION]?
Coding: If any expert on a case responded to A1 or A2
“yes,” then we concluded leading companies with a trajectory of sustaining innovations existed. If the response
to A3 was “yes,” then we concluded overshoot had
occurred. If experts answered “yes” to A4 and there were
no legal barriers (B1), then we judged that incumbents had
the capability to respond. If experts responded “yes” to
B2, we judged that incumbents had been disrupted. Note:
In phone interviews, we explained that “floundered”
could be interpreted as having lost significant market
share. If multiple experts on the same case disagreed on
the answer to a question, we gave the benefit of the doubt
to the theory of disruption, and agreement with that element of the theory of disruption was judged confirmed.
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The Five Domains of Digital Transformation:
Customers, Competition, Data, Innovation, Value
Prof. SEE-TO Wing-kuen, Eric
Reference:
The Digital Transformation Playbook: Rethink Your
Business for the Digital Age (Columbia Business School
Publishing)
2
Background Story:
Britannica — Reinvented established business
• Britannica is represented the definitive
reference resource in English for
hundreds of years before the rise of the
Internet.
• With the adoption of new technologies,
customers’ behaviors were changing
dramatically. Britannica changed strategy,
not only pivot to a purely online
subscription model for its encyclopedia
but also develop new product.
• By the time it stopped publishing the
print set, the sales represent only about
1% of business, still profitable as before.
Britannica experimented with various
delivery media, price points, and sales
channels for its products
2
The Five Domains of Digital
Transformation
Customer
Value
Innovation
Data
Competition
4
Five Domains of Strategy Is Changing
• The impact of digital is bigger because it changes the constraints under
which practically every domain of business strategy operates. Digital
technologies transform:
o How we connect and create value with our customers. The relationship is much
more two-way: customers’ reviews and participation are important.
o How we need to think about competition. Not just within our industry but also
outside industry.
o Perhaps most significantly in how we think about data. The biggest challenge is
turning the enormous amount of data into valuable information.
o The ways that businesses innovate. Digital technologies enable continuous testing
and experimentation. Constant learning and the rapid iteration of products are
becoming the norm.
o Think differently about how we understand and create value for the customers.
Constantly pushing the envelope to find next source of customer value is now an
imperative.
5
Changes in Strategic Assumptions from the Analog to the Digital Age
Customers
Competition
From
To
As mass market
As dynamic network
Communications are broadcast to customers
Communications are two-way
Firm is the key influencer
Customers are the key influencer
Marketing to persuade purchase
Marketing to inspire purchase, loyalty, advocacy
One-way value flows
Reciprocal value flows
Economies of (firm) scale
Economies of (customer) value
Competition within defined industries
Competition across fluid industries
Clear distinctions between partners and rivals
Blurred distinctions between partners and rivals
Competition is a zero-sum game
Competitors cooperate in key areas
Key assets are held inside the firm
Key assets reside in outside networks
Products with unique features and benefits
Platforms with partners who exchange value
A few dominant competitors per category
Winner-takes-all due to network effects
6
Con’t
Data
Innovation
From
To
Data is expensive to generate in firm
Data is continuously generated everywhere
Challenge of data is storing and managing it
Challenge of data is turning it into valuable information
Firms make use only of structured data
Unstructured data is increasingly usable and valuable
Data is managed in operational silos
Value of data is in connecting it across silos
Data is a tool for optimizing processes
Data is a key intangible asset for value creation
Decisions made based on intuition and seniority
Decisions made based on testing and validating
Testing ideas is expensive, slow, and difficult
Testing ideas is cheap, fast, and easy
Experiments conducted infrequently, by experts
Experiments conducted constantly, by everyone
Challenge of innovation is to find the right solution
Challenge of innovation is to solve the right problem
Failure is avoided at all cost
Failures are learned from, early and cheaply
Focus is on the “finished” product
Focus is on minimum viable prototypes and iteration
7
after launch
Con’t
Value
From
To
Value proposition defined by
industry
Value proposition defined by
changing customer needs
Execute your current value
proposition
Uncover the next opportunity for
customer value
Optimize your business model as
long as possible
Evolve before you must, to stay
ahead of the curve
Judge change by how it impacts
your current business
Judge change by how it could
create your next business
Market success allows for
complacency
“Only the paranoid survive”
8
Customers
• In digital age, we are moving to a world best described not by mass
markets but by customer networks.
• Customers today are constantly connecting with and influencing each
other and shaping business reputations and brands.
• Their use of digital tools is changing how they discover, evaluate,
purchase, and use products and how they share, interact, and stay
connected with brands.
• Businesses need to recognize that a dynamic, networked customer may
just be the best focus group, brand champion, or innovation partner
they will ever find.
9
Mass market model
Company
Customers
10
Customer network model
Comments
Blogs
Company
Option 411
Competition
• How businesses compete and cooperate
with other firms
o Today the biggest challengers may be
asymmetric competitors—companies from
outside the industry that look different but
that offer competing value to the customers.
o At the same time, the business may need to
cooperate with a direct rival due to
interdependent business models or mutual
challenges from outside the industry.
o Competition is increasingly a jockeying for
influence between firms with very different
business models, each seeking to gain more
leverage in serving the ultimate consumer.
12
Fierce Competition in Mainland China Mobile Phone Markets
13
Airbnb vs Hotel Industries
14
15
Class Discussion
Let’s discuss:
•
Have you ever seen any interesting business
competition in your lifetime?
•
Do you think the fierce competition is a good
or bad thing to company / public?
16
Data
• How businesses produce, manage, and utilize
information
o Today data generated in unprecedented quantities
from every conversation, interaction, or process inside
or outside these businesses.
o Generate without planning, can increasingly be
utilized with new analytical tools.
o These “big data” tools allow firms to make new kinds
of predictions, uncover unexpected patterns in
business activity, and unlock new sources of value.
o Data is becoming the lifeblood of every department
and a strategic asset to be developed and deployed.
17
The Weather
Channel
• Weather data becomes Business
©Photo: The Weather Channel
18
Innovation
• The process by which new ideas are
developed, tested, and brought to the
market by businesses.
o Digital technologies make it easier and
faster than ever to test ideas, we can gain
market feedback from the beginning of
innovation process, all the way through to
launch, and even afterward.
o In this approach, products are developed
iteratively through a process that saves time,
reduces the cost of failures, and improves
organizational learning.
19
• iPhone puts extremely complex sensors, just for a quick
and safety unlock.
20
21
©Exponentially
22
Value
• The value a business delivers to its customers—its value proposition.
o The only sure response to a shifting business environment is to take a path of
constant evolution, looking to every technology as a way to extend and improve
our value proposition to our customers.
o Focus on seizing emerging opportunities, divesting from declining sources of
advantage, and adapting early to stay ahead of the curve of change.
23
The MET
Case:
– Founded in 1870, the
Metropolitan Museum of Art has
long been one of New York’s top
tourist attractions.
– They extended and enriched the
experience of museum by creating
the App “the Met”
– The museum is using social media
to engage those outside its halls.
25
• The MET move the art work into the mobile platform.
26
Class Discussion
Let’s discuss:
•
Do you know any interesting case which old
business gives customer new value by
technology?
•
(E.g. People’s Daily release a new mobile app for
read news online)
27
The Digital Transformation Playbook
Domains
Strategic themes
Key concepts
Customers
Harness customer networks
•
•
•
Reinvented marketing funnel
Path to purchase
Core behaviors of customer networks
Competition
Build platforms, not just products
•
•
•
•
Platform business models
(in)direct network effects
(dis)intermediation
Competitive value trains
Data
Turn data into assets
•
•
•
Templates of data value
Drivers of big data
Data-driven decision making
Innovation
Innovate by rapid experimentation
•
•
•
•
Divergent experimentation
Convergent experimentation
Minimum viable prototype
Paths to scaling up
Value
Adapt your value proposition
•
•
•
Concepts of market value
Paths out of a declining market
Steps to value prop evolution
28
Harness Customer Networks
• Customers behave more like tightly connected networks, every
business must learn to harness the power and potential of customer
networks.
• Learn to engage, empower, and co-create with customers.
• Leverage the ways that happy customers influence others and drive
new business opportunities.
• Collaborate with customers directly.
• May learning to think like a media company.
• Create effective customer strategy require:
o
o
o
o
Customers as strategic assets
Reinvented marketing funnel
Path to purchase
Core behaviors of customer networks (accessing, engaging, customizing, connecting, collaborating)
29
• Customer share their ideas on Xiaomi’s Facebook
official pages and official forums.
30
Build Platforms, Not Just Products
• May involve becoming a trusted intermediary who brings together competing
businesses, as Wink brought together Philips, Honeywell, Lutron, and Schlage.
• Or, as Uber and Airbnb, building a business whose value is created largely by
its partners, with its platform acting as the critical connection point.
• Or, combining the best elements of both traditional and platform business
models, as Best Buy and Amazon.
• Firms may learn when and where to cooperate with their fiercest competitors,
as Samsung does with Apple.
• Developing a digital-age competitive strategy requires understand:
o
o
o
o
o
Platform business models
Direct and indirect network effects
Co-opetition between firms
The dynamics of intermediation and disintermediation
Competitive value trains
31
• Apple’s product line share one platform: Account, App
Store and Media Store
32
Turn Data Into Assets
• Building a strong data asset may begin with effectively collaborating with
data partners, as Caterpillar does with its sales distributors.
• A data asset may yield value in the form of new market insights.
• Data can add value by helping to identify which customers require the most
attention.
• Data can be used to help businesses personalize their communications to
customers.
• The value of data can be found in identifying contextual patterns, like when
Naviance helps high school students understand their odds for admission as
they apply to different colleges.
• To create good data strategy, must begin with:
o
o
o
o
An understanding of the four templates of data value creation
The new sources and analytic capabilities of big data
The role of causality in data-driven decision making
The risks around data security and privacy.
33
Traffic Speeds Data Analysis
Route Planning
Improved Transport Efficiency
34
YouTube Real-time
Recommendations
35
Innovate by Rapid Experimentation
• Firms today need to master the art of rapid experimentation based
on validating new ideas through rapid and iterative learning.
• Rapid experimentation can involve continuous A/B and multivariate
testing, like Amazon and Google use to refine their online services.
• Other experiments may use minimum viable prototypes to explore
new products.
• Experiments should involve rigorous testing of an innovation’s
assumptions.
• Once an idea has been validated through experiment, it requires
careful piloting and rollout.
• Any business that commits to rapid experimentation must learn to
encourage smart failures within its organization.
36
37
Traffic Randomly Dropping into
Two Versions
Quick A/B Testing
38
Adapt Your Value Proposition
• Learn to focus beyond current business model and zero in on how can
best deliver value to customers as new technologies reshape
opportunities and needs.
• May involve discovering new customers and applications for its current
products.
• May evolve a business’s offering while its old business model is under
severe threat: Britannica.
• Adaptation may mean aggressively developing a new suite of products
in anticipation of rapid customer changes.
• May mean experimenting with new ways to engage a business’s
customers while they are still loyal to it.
39
Conclusion
• How to transform to compete in a digital economy?—Upgrading your
strategic thinking
• Integrate 5 domains of business strategy that digital is changing
o
o
o
o
o
Customers—Build customer networks
Competition—Build platforms
Data—Utilize big data
Innovation—Develop rapid experimentation
Value—Create disruptive business models
40
Mastering Disruptive
Business Model
Prof. SEE-TO Wing-kuen, Eric
Reference:
The Digital Transformation Playbook: Rethink Your Business for the
Digital Age (Columbia Business School Publishing)
Edited by Xiaowen LI Ryan
Disruption Defined
• Business Disruption (not an society conception)
• Existing industry
• Offers far greater value to the customer
• Cannot compete with directly
Disruption Defined
• Not all innovation is disruptive
Disruptive ≠ Extremely Innovation
Example: LittleMissMatched for
socks business
Innovation Business Model ≠
Disruptive
Disruption requires an incumbent
Disruption In the Digital Age
• Digital technologies are rewriting the rules of business
Example:
Craigslist – Online classified service
Airbnb – software powered challenger to the traditional hotel industry
GrubHub – Restaurant food delivery
Disruption: offering new value to the customer
Digital Technologies
Theories of Disruption
• Schumpeter –
Industry disruption: inherent pattern in capitalism
Successive cycles of capitalist invention birth new
industries while destroying their predecessors.
Theories of Disruption
• Christensen The disrupter always starts out selling to buyers
in a new market.
A Business Model Theory of Disruption
• Business Model
• Business model is a term that has taken on varying definitions with its
growing popularity as a tool for strategy formation.
• Author: To use the business model specifically as a predictor of business
disruption, and for this purpose, the schema can be simpler.
Two Sides of a Business Model
• First side: value proposition
The value that a business offers to the customer
• Second side: value network
The people, partners, assets, and processes that enable the business to create,
deliver, and earn value from the value proposition.
Two Sides of a Business Model
The Two Differentials of Business Model
Disruption
• A challenger must possess a significant differentials on each side of the
business model
1.
A difference in value proposition that dramatically displace the value
provided by the incumbent (at least for some customers)
2. A difference in value network that creates a barrier to imitation by the
incumbent
The Two Differentials of Business Model
Disruption
• There is no disruption just traditional competition
Without the first differentials, there is no disruption, just traditional
competition.
Without the second differentials, however, an incumbent would simply be able
to watch the success of an innovative new challengers and profitably imitate it
with a copycat offering of its own.
Value Proposition Differential
•
–
Key value proposition generative that are common
to digital disrupters include the following:
Price
Free or “freemium” offer
Access: access content or services remotely,
anywhere, any time.
Simplicity
Personalization
Aggregation: add value by aggregating many sellers
for customers to choose from
Unbundling: splitting apart traditional bundles
Integration (rebunding)
Social
Value network differential
• Key components to consider in
–
analyzing a challenger’s value
network include the following:
Customers
Channels
Partners
Networks
Complementary products or services
Brand
–
Revenue model
Cost structure
Skills and processes
Physical assets
IP assets
Data assets
The Two Differentials in Christensen’s New
Market Disruption
• Where the value proposition differentials is difference in price or
access and the value network differential includes a difference in
customer segment.
Digital Disrupters: iPhone, Netflix, Warby Parker
• All three are in consumer businesses, and the disruption did not follow
the traditional new market theory of disruption.
• Two of the incumbents were completely disrupted and left the
business where they had recently been the market leader.
• One disruption is newer and still ongoing.
iPhone vs Nokia
iPhone vs Nokia
• Business Model Disruption: iPhone(Disrupter) vs Nokia(Incumbent)
iPhone vs Nokia
•
Customer quickly come to see iPhone is not slightly better but vastly better.
Difference:
–
Physical Design (Innovative touch screen)
Integration (Put multiple function into one device)
Much attention paid to Apple’s highly developed design capabilities.
Building Environment:
–
Customers paying for call/data contracts with AT&T
Move customers from iTunes/iPod to iPhone
Open up App Store to attract developers by sharing them profit
Netflix vs Blockbuster
Netflix vs Blockbuster
• Business Model Disruption: Netflix (Disrupter) vs Blockbuster
(Incumbent)
Value proposition differentials
•
•
•
•
No late fee
Easy access (product comes to you)
Wider choice
Personalized recommendations
Value network differentials
•
•
•
•
•
E-commerce website
Subscription pricing model
Data assets and recommendation engine
Warehouse and mail distribution system
No retail costs
Netflix vs Blockbuster
•
–
Difference:
Elimination of late fees
If customers return it late will charged a late fee – aggravating and
unavoidable.
Netflix hates late fee and give flat monthly fee that allowed customer to keep
movie for longer time.
– Elimination of retail store
Rather than going to retail store, customer choose movie on Netflix’s website
and receive movie at home by mail.
– Provide personal recommendation
Nexflix offered a sophisticated recommendation tool.
Netflix vs Blockbuster
• Why Blockbuster didn’t launch a copycat of Netflix?
– Hard to build a pricing model
– Website and recommendation engine
– Mailing system designed for shipping DVD
• It was possible for Blockbuster to replicate the service, but not at the
same price and with same profit.
Warby Parker vs Luxoticca
• Business Model Disruption: Warby Parker (Disrupter) vs Luxoticca
(Incumbent)
Value proposition differentials
Value network differentials
• Much lower price ($95)
• Accessibility
• Social cause
•
•
•
•
Online channel
Low retail costs
Vertical integration
B corporation status
Warby Parker vs Luxoticca
• Traditional customer experience when purchasing glasses
– They have going to retail store
– Cost upward of $300
– Returning late for the product
• Warby Parker offers its own brand of fashionably designed glasses
primarily through e-commerce sales at a price of $95.
– The company allows consumer to select 5 frames to be mailed to them
for free to try on.
Warby Parker vs Luxoticca
•
•
–
Difference in value proposition
Price: only one-third of price to traditional product
Potential in access: for consumers who want to avoid multiple service
It donate one pair of glasses (but not sell for glass and frame)
Environment issues: 100% carbon neutral
Difference in value networks
Online sales channel: lower retail costs
Vertical integration (owns the brands, manufactures and entire sales
channel)
By contrast, Loxottica licenses many of brands makes its cost structure
would likely prevent it from coming close to Warby Parker’s price.
Three Variables in Business Model Disruption
Theory
• The theory of business model disruption can identify and explain the
cause of disruption by a wide variety of challengers and in different
industries.
• Three important variables are:
– Customer trajectory
– Disruptive scope
– Multiple incumbents
Customer Trajectory
• Business model disrupters can enter the market through one of two
trajectories:
–
Outside in: the disrupter starts by selling to buyers that are not currently served
by the incumbent.
–
Inside-out: From the beginning, the disrupter starts by selling to some sub
segment of the incumbent’s current customers.
However, many cases of business disruption today take the opposite
customer trajectory: inside-out.
Case: Netflix did not start by appealing to customers who had specifically
to those who never used video rental service like Blockbuster
Instead, its appeal was specifically to those who had- pointing to their frustration
with late fees and promising a better customer experience.
Disruptive Scope
• There is sometimes an assumption that whenever disruption occurs,
the incumbent’s business, product, or service will be replace 100
percent by disruptive challenger.
• But in many cases of business disruption, the scope is not 100 percent.
Case: Amazon’s e-book selling give customer more choose, threat to
booksellers.
Multiple Incumbents
• A single disruptive business model can actually disrupt more than one
incumbent.
• Case: The iPhone posed a disruptive threat not just to mobile phone
companies (like Nokia) but also to desktop software companies (as
Microsoft discovered that Windows was no longer the world’s
dominant system)
Tool: The Disruptive Business Model Map
Step 1: Challenger
The challenger you identify here may be a new
competitor to your own established business.
•
•
Note that we are not yet labeling this challenger as “the disrupter”
In describing the challenger, you need to include its key offering:
What are its unique products and services?
Step 2: Incumbent
You may choose either a category of related businesses or leading example
of the category in order to make the analysis more concrete as you compare
the business models of the challenger and the incumbent.
Step 3: Target Customer
This is the customer being served by the challenger.
Step 4: Value Proposition
The focus here is exclusively on the benefit to the customer: what value
could they gain from the challenger’s offer.
Step 5: Value Proposition Differential
To identify elements of the challenger’s value
proposition that are unique and different.
Step 6: Value Network
Define people, partners, assets and processes – that
enables the challenger to offer its value proposition.
Step 7: Value Proposition Differential
How does the challenger’s value network differ from that
of the incumbent?
Step 8: Two-Part Test
Does the challenger pose a disruptive threat to the
incumbent?
•
•
First, you need to assess how significant the differential in value is to
the customer;
Second, do any of the difference in value networks create a barrier
that will prevent the incumbent from imitating the challenger.
Tool: The Disruptive Response Planner
Step 1: Customer Trajectory
• Outside-in or Inside-out?
– Outside-in disrupters begin by selling to noncustomers of the
incumbent and then work their way inward to encroach on the
incumbent’s own customers.
–
Inside-out disrupters follow a different path. They begin by selling to a
segment of the incumbent’s current customers and then work their
way outward to take more of its markets.
Step 1: Customer Trajectory
• Who is the first?
– Identify which specific types of customers will likely be first to adopt
the disrupter’s product or service?
• Who is the Next, and what will Trigger them?
– Identify who will be attracted to the offer next.
– For inside-out disrupters, that is likely another subgroup of customers
– For outside-in disrupters, When will the disrupter “tip” from selling to
non customers and start to reach your own customers?
Step 2: Disruptive Scope
•
–
How much of the market(customers) are likely to wind up switching to the
disrupter once it is well established.
Use case
Make two lists: in what situations do customers purchasing your offering?
–
In what situations do customers utilize it?
Customer Segment
You should subdivide the customers for which you and the disrupter are competing.
Network effects
Many services, especially platform businesses, become more valuable with each new
customer that participants.
Case: as more customers bought iPhones, it became easier for Apple to attract more
developers to create apps for the platform.
Step 3: Other Incumbents
–
Value Train
Start by asking which product or service the disrupters most resembles.
–
Substitution
To think of products or services for which the customer may substitute the
disrupter’s offering.
Step 4: Six Incumbent Responses to Disruption
–
As an incumbent, you have six possible responses when faced with a
disruptive challenger:
Three strategies to become the disrupter
•
•
•
Acquire the disrupter
Launch an independent disrupter
Split the disrupter’s business mode.
Three strategies to mitigate losses from the disrupter
•
•
•
Refocus on your defensible customers
Diversify your portfolio
Plan for a fast exit
Launch an Independent Disrupter
Acquire the disrupter
–
The most direct response for an incumbent faced with a disruptive
challenger is to simply acquire the challenger.
Case:
Facebook to WhatsApp
Google to Waze
Launch an Independent Disrupter
The incumbent must be willing to cannibalize your own core business.
Launch an Independent Disrupter
Split the Disrupter’s Business Model
– What if the incumbent lacks some core capabilities – like intellectual
property, brand reputation, essential skills or the right partners?
In that case, simply insulating a new initiative from the rest of the organization is not
sufficient.
–
But the incumbent may still be able to re-create the disrupter’s business model by
splitting the job with other businesses.
Case:
Google launched the Android system in response to Apple’s iPhone
Refocus on Your Defensible Customers
The incumbent must be willing to cannibalize your own core business.
To refocus the incumbent’s core business on those customers it has the best chance of
retaining.
Launch an Independent Disrupter
Diversify Your Portfolio
–
Diversifying portfolio of products, services and business units.
Case:
Kodak and Fujifilm
Plan for a Fast Exit
When a disruptive challenger poses an irresistible threat to an
incumbent’s entire market and there is no feasible way to launch a
disruption of its own, the incumbent needs to plan for a fast exit.
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