The debate over disruptive innovation

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A roundup of management literature trying to make sense of the D word 

By Straight Talk editors

“Disruption,” as in “disruptive innovation,” has become a very popular word in business circles in recent years.  Unlike other buzzwords, it seems to have long-lasting staying power—many startups today promise to “disrupt” this or that industry, just like their predecessors did in the late 1990s.

Popularity breeds contempt and critics of the business theory behind the term and its creator, Professor Clayton Christensen of the Harvard Business School (who introduced it in a 1995 Harvard Business Review article and his 1997 book The Innovator’s Dilemma), have come forward to discredit it. The first shot was fired by Harvard historian Jill Lepore, who in a lengthy 2014 New Yorker essay marshalled historical data to show that Christensen presented it selectively in order to support his theory. Furthermore, Lepore argued, his theory fails the test of being a successful predictive model, citing Christensen’s 2007 prediction that the iPhone would not succeed because it was not “disruptive.”

Another line of attack was taken by Andrew King and Baljir Baatartogtokh of the Dartmouth business school, in an article published late last year in the Sloan Management Review.  Despite the theory’s widespread use, they argued, “its essential validity and generalizability have been seldom tested in the academic literature.”

Addressing this lacuna, King and Baatartogtokh asked 79 experts to examine the 77 cases of disruptive innovation that are mentioned in The Innovator’s Solution (by Christensen and co-author Michael Raynor) against the 4 key elements of the theory as they understand it: (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.

Based on the experts’ evaluation, King and Baatartogtokh concluded that “many of the theory’s exemplary cases did not fit four of its key conditions and predictions well… 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.”

In short, the threats faced by these 77 companies “cannot be understood from a single viewpoint.”  To managers that may consider this conclusion more difficult to adopt then the simple and straightforward prescriptions offered by the theory of disruptive innovation, King and Baatartogtokh suggest they do the following in response to the appearance of potential new rivals:  1. Managers should calculate the value of winning—has your industry become “structurally unattractive” and it’s time to plan “an organized retreat”?. 2. Managers should find ways to leverage existing capabilities—given potential synergies, does it make sense to enter a new market? 3. Where practical, they should work collaboratively with other companies—could they cooperate with the potential disruptor?

Be holistically responsive and don’t fall for the simplicity and convenience (as an excuse) of disruptive innovation theory advise King and Baatartogtokh: “Assessing new threats requires considering multiple perspectives, reflecting 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.’ But doing so is an excellent way to cede your business’s competitive advantage to more competent competitors.”

Christensen’s answer to his critics came in “What is Disruptive Innovation?” (co-written with Michael Raynor and Rory McDonald) published in the December 2015 issue of the Harvard Business Review. The theory’s core concepts have been widely misunderstood, they argued, and the critics are attacking the theory as it was first formulated and not its current version.

The authors use Uber, hailed by many commentators as a disruptive innovation to the taxi industry (or even transportation in general), as an example of the general misunderstanding of the theory.  To begin with, disruptive innovations first appear in “low-end or new-market footholds.” Uber, however, didn’t originate as either a significantly less expensive, low-end alternative to taxis, or as a service for people that never took them before. It started by offering simply a more convenient ride for mainstream customers.

In addition, disruptive innovations don’t catch on with mainstream customers until their quality catches up to the requirements of these customers. Uber, unlike startups fitting the disruptive innovator description, competed from the beginning with the incumbents instead of avoiding them. They have also raised the standards (rather than offering a “low-end” service) with innovations such the rating of the drivers by the passengers. These type of innovations, what the theory has labeled “sustaining innovations,” were the kind of innovations that established taxi companies should have implemented themselves to better serve their existing customers.

Words matter, the authors argue, and realizing the benefits of the theory of disruptive innovation means applying it correctly. They identify four key misunderstandings of their theory:

First, people should not describe a product or service at a specific point in time as “disruptive,” because disruption is a process. Innovations should be judged according to their potential disruptive trajectory over time.

Second, an important indicator of potential disruption is how different is the business model offered by the disruptor from the business model of the incumbents. The iPhone is used as an example: “The iPhone created a new market for Internet access and eventually was able to challenge laptops as mainstream users’ device of choice for going online.” This example also offers a correction to  Christensen’s previous assertion about the iPhone not being disruptive—it was a sustaining innovation in the context of other mobile phones but a disruption to laptops.   

Third, many disruptive innovations and the businesses built on them fail. The discussion of Uber should convince everybody that not all successful startups are “disruptive.” And fourth, established companies must balance the management of their existing businesses and new, disruptive ones, which means that at least for a period of time they will have to manage two very different operations. This has always been the main piece of practical advice offered by Christensen, all the way back to the dot-com boom, when he insisted that established companies must establish separate (and hands-off) Internet-focused business units. 

The conclusion of this rebuttal cum spirited defense of the theory is not that different, however, from the “multiple perspectives” suggested by King and Baatartogtokh. Say Christensen, Raynor, and McDonald: “Disruption theory does not, and never will, explain everything about innovation specifically or business success generally. Far too many other forces are in play, each of which will reward further study.  Integrating them all into a comprehensive theory of business success is an ambitious goal, one we are unlikely to attain anytime soon.”

Continuing the debate over disruptive innovation, the Sloan Management Review published in March of this year four responses by academics to the King and Baatartogtokh article discussed above, telling readers that few articles in the history of this periodical have garnered so much attention.

Juan Pablo Vázquez Sampere of the IE Business School in Madrid takes issue with King’s and Baatartogtokh’s methodology and their argument that the theory has never been tested in the academic literature. Martin J. Bienenstock of the law firm Proskauer Rose LLP and the Harvard Law School argues that King and Baatartogtokh’s finding that 38% of the 77 cases Christensen identified as disruptive innovations resulted in an outcome other than the incumbent floundering does not undermine Christensen’s warning to incumbents about the potential threat from disruptive innovation.

Ezra W. Zuckerman of the MIT Sloan School of Management believes that management theories and frameworks suffer from a “common imperfection” i.e., “it is not entirely clear what is the core idea and what is peripheral.” He brings up Geoffrey A. Moore’s popular 1991 book on technology marketing, Crossing the Chasm, and notes that “it has rarely been recognized that its core idea is in significant tension with what I believe is the theory of disruptive innovation’s core idea.”  Moore argued that niches are often very hard to use as springboards for “crossing the chasm” to the mass market. Christensen argued the opposite — that such “springboarding” happens more often than we might expect. For Zuckerman, disruption should be viewed in a broader way as a “theory of unexpectedly bridgeable chasms.” Christensen, he believes, has provided us with a very valuable insight when he recognized “that niches can potentially be the launching pads for ventures that unexpectedly come to compete successfully with the most capable, motivated incumbent companies.”

Joshua S. Gans of the University of Toronto explains King’s and Baatartogtokh’s findings by pointing out that “although disruption can happen, many businesses find ways of managing through it, and this can weaken any relationship between a disruptive event and the actual disruption. To be sure, facing disruption is no picnic. But it also isn’t the existential threat that so many see it as.” Gans suggests 3 sensible strategies for incumbents: Beat them, join them, or wait them out.

Indeed, as Steve Faktor points out, not only do most “disruptors” fail to put incumbents out of business, the vast majority instead sell out to them. “The numbers,” Faktor says, “couldn’t be clearer. Acquisitions are, by far, the vast majority of exits (in dollar value).”

Still, powerful ideas trump fact. As just one example of the persistent fear of disruption, regardless of its conformity to the theory or the real existential threat it embodies, a recent survey found that 24% of CFOs fear their business will be eliminated by disruption and 58% believe their industry is in danger, but most are doing nothing to stop it.

It may help reduce the anxiety of these and other business executives if they acknowledge that while  business success is indeed fleeting, it cannot be reduced to three competitive strategies or four principles of innovations or any other number of universal truths.

That in a business context there is never one “true” answer was already recognized by the founders of the Harvard Business School who put the business case study at the center of their teaching. Here’s what the school, where more than 80% of the classes are built around this teaching technique, says about it: “…the case method is a profound educational innovation that presents the greatest challenges confronting leading companies, nonprofits, and government organizations—complete with the constraints and incomplete information found in real business issues—and places the student in the role of the decision maker. There are no simple solutions…”

Similarly, one of the best articles ever published in the Harvard Business Review is the 1960 “Debate at Wickersham Mills.” Written by a senior business executive, it presents four different and conflicting views (or theories, if you will) of what a business is all about. Theories of business, unlike scientific theories, can be true and false at the same time. They are simply stories that describe an approach to running a business that may work in one context and fail in another. It’s best to regard them as food for thought, not unreflective digestion.