Take Root in Disruption
The startling conclusion suggested by the research that led to my writing The Innovator’s Dilemma was that many successful companies stumble from prominence not because they’re badly managed but precisely because they are well managed. They listen to and satisfy the needs of their best customers, and they focus investments at the largest and most profitable tiers of their markets. Mastering these paradigms of good management gives established companies, as a group, an extraordinary track record in producing sustaining innovations that bring better products to established markets. It matters little whether the innovation is incrementally simple or radically difficult, as long as it enables good companies to make better products that they can sell for higher margins to their best customers in attractively sized markets. The companies that had led their industries in prior technologies led their industries in adopting new sustaining technologies in literally 100 percent of the cases we studied.In contrast, the leading companies almost always were toppled when disruptive technologies emerged-products or services that weren’t as good as those already used in established markets. Disruptive innovations don’t initially perform well enough to be sold or used successfully in mainstream markets. But they have other attributes-most often simplicity, convenience and low cost-that appeal to a new, small and initially unattractive (to established firms) set of customers, who use them in new or low-end applications.
The chances a new company could become successful if its entry path was a sustaining strategy-trying to make a better product than the incumbents and selling it to the same customers-were about six percent in our study. The chances of success for firms that entered with a disruptive strategy were 33 percent. The disparity stems from the motivation and position of the leading firms. They have far more resources to throw at opportunities than entrants do. When newcomers attack customers and markets attractive to the leaders, the leaders overwhelm them.
All companies are burdened with “asymmetric” motivations in that they must move toward markets that promise higher profit margins and the most substantial and immediate growth and cannot move down market toward smaller opportunities and profit margins. When new entrants take root with customers in markets that are unattractive to the leaders, they are safer-and it has nothing to do with how much cash or proprietary technology they have. They are safe because the incumbents are motivated to ignore or even exit the very markets that the entrants are motivated to enter. Taking root in disruption, therefore, is the first condition that innovators need to meet to improve the probability of successfully creating a new growth business. If they cannot or do not do this, their odds of success are much smaller.
There are two tests to assess whether a market can be disrupted. At least one of these criteria must be met in order for an upstart to be disruptively successful. If a new growth business can meet both, the odds are even better.
1. Does the innovation enable less-skilled or less-wealthy customers to do for themselves things that only the wealthy or skilled intermediaries could previously do?
When an innovation fulfills this condition, even if it can’t do all the things existing offerings can, potential customers excluded from the market tend to be delighted. For example, many people loved the first personal computers, no matter how clunky the booting process and limited the software the machines could run, because the alternative to which they compared the PC wasn’t the minicomputer-it was no computer at all. Filling such a void reduces the capital commitments and technological achievements required for an innovation to become viable and creates new growth markets. I call the process of finding and nurturing these opportunities creative creation. After a technology takes root in new markets, and after new growth is created, disruption can invade the established market and destroy its leading firms.
Even if innovators succeed in cramming disruptive technology into an existing market application, the incumbents typically win. Digital photography, online consumer banking and hybrid-electric vehicles are examples of potentially disruptive technologies that were deployed in such a sustaining fashion. Billions were spent on these innovations to beat out already acceptable and habitual technology; little net growth resulted, as sales of the new products cannibalized sales of the old; and the industry leaders maintained their rule.
2. Does the innovation target customers at the low end of a market who don’t need all the functionality of current products? And does the business model enable the disruptive innovator to earn attractive returns at discount prices unattractive to the incumbents?
Wal-Mart, Dell Computer and Nucor are examples of disruptive companies that attacked the low ends of their markets with business models that allowed them to make money at discount prices. Wal-Mart started by selling brand-name products at prices 20 percent below department store prices and still earned attractive returns because it turned inventory over much more frequently. Such a disruptive strategy can create new growth businesses but does not create new markets or classes of consumers. It has a high probability of success because the reported profit margins of established companies typically improve if they get out of low-end, low-margin products and add in their stead high-margin products positioned in more-demanding market segments. By assaulting the low end of the market and then moving up, a new company attacks, tier by tier, the markets from which established competitors are motivated to exit.