Debating Disruptive Innovation

Few MIT Sloan Management Review articles garner as much attention as Andrew A. King and Baljir Baatartogtokh’s article “How Useful Is the Theory of Disruptive Innovation?” in the fall 2015 issue. After interviewing and surveying 79 industry experts, King and Baatartogtokh concluded that many of the 77 industry cases cited as examples of disruptive innovation by Harvard Business School professor Clayton M. Christensen and his coauthor Michael E. Raynor did not actually fit four of the theory’s key elements well.

King and Baatartogtokh’s article attracted the attention of a number of media outlets — and generated a number of interesting responses. In the essays here, two authors — Juan Pablo Vázquez Sampere of IE Business School and Martin J. Bienenstock of the law firm Proskauer Rose LLP — take issue with King and Baatartogtokh’s conclusions. A third author, Ezra W. Zuckerman of the MIT Sloan School of Management, explores an intriguing question: What if the most important aspects of the theory of disruptive innovation are something different from what its proponents — and its detractors — emphasize? Finally, in an article on page 83, Joshua S. Gans of the University of Toronto’s Rotman School of Management discusses King and Baatartogtokh’s findings in the context of his own research on disruption.

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Missing the Mark on Disruptive Innovation

By Juan Pablo Vázquez Sampere

Every time I hear about a new study on disruptive innovation, I feel excited about the possibility that someone will come up with a way to explain the theory in a much clearer and more transparent manner. More often than not, I end up disappointed — as I was by Andrew A. King and Baljir Baatartogtokh’s article, “How Useful Is the Theory of Disruptive Innovation?” in the fall 2015 issue of MIT Sloan Management Review.

For starters, King and Baatartogtokh argued that Clayton M. Christensen’s theory of disruptive innovation has not been adequately tested in the academic literature. I would encourage the authors to revisit the literature, because to my count, there are more than 40 articles, including much of an entire issue in a leading academic journal (the Journal of Product Innovation Management in January 2006), that test and challenge disruption in many different ways. Furthermore, disruptive innovation is composed of more than four elements, yet the authors chose to test only four.

What’s more, the authors surveyed only 79 experts to evaluate 77 industries. As a result, some of the conclusions attributed to the experts are questionable — such as one expert’s argument that it was unreasonable to assume that wood-products companies could respond to disruption from plastics, since the capabilities required were different. Yet many companies develop new and different capabilities. To name just a few examples, the Goodyear Tire & Rubber Co. retooled extensively to develop radial tires, IBM was successful at diversifying from mainframes to personal computers, and incumbent landline telephone operators developed capabilities for wireless communication. If incumbents can increase their profitability by introducing a particular product or technology, they often find a way. However, one of the fundamental tenets of the theory of disruptive innovation is that, when contemplating a disrupter, incumbents are motivated by profits to flee rather than fight the disrupter.

Another conclusion King and Baatartogtokh reach is that 38% of incumbents did not flounder as a result of disruption. That statistic may not be meaningful for several reasons. In some industries, such as retailing, the process of disruption can take decades. (In other industries, such as minicomputers when they were disrupted by personal computers, things can happen relatively fast, which makes it easier to see the entire picture of how the industry evolves.) Second, the disruption might affect only one business unit of the incumbent, so in some cases, the entire company survives even though that particular unit is no longer successful. Regulators may also intervene to help protect powerful incumbent companies. For all of these reasons, a long period of coexistence between incumbents and disrupters does not necessarily mean that the process of disruption has halted.

More generally, I believe there is a responsibility on the part of researchers to proceed carefully when testing a theory. It is truly important to find some sort of data set that is large enough and verifiable enough to support valid conclusions. That’s more important than making headlines.

Juan Pablo Vázquez Sampere is a professor of operations and technology at IE Business School in Madrid.

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Did the Critique of Disruptive Innovation Apply the Right Test?

By Martin J. Bienenstock

Having specialized in reorganizing companies in financial distress for 38 years, I have had a ringside seat to the causes and consequences of business failure. I use that experience to counsel boards of directors about formulating corporate governance to promote growth and avoid failure. It is vital to help boards detect and understand their companies’ problems when those problems can still be solved outside bankruptcy — and when the companies can still grow profits for shareholders.

In my experience, the cause of business distress that is most detectable, but often undetected or disregarded until material damage is done, is a disruptive innovation as defined by Harvard Business School professor Clayton M. Christensen. In his theory of disruptive innovation, Christensen has explained how and why industry-leading companies that pay attention to their best customers and improve products for them are susceptible to failure stemming from competitors’ products or services that are initially inferior and only attract a different market or the lower end of the leading company’s market. Of all the many different types of advice I give boards, the means of detecting disruptive innovations has been one of the most critical staples.

In their article, “How Useful Is the Theory of Disruptive Innovation?” in the fall 2015 issue of MIT Sloan Management Review, Andrew A. King and Baljir Baatartogtokh acknowledge that Christensen’s disruptive innovation theory “has gripped the business consciousness like few other ideas.” But they incorrectly conclude that the theory simply “provides a useful reminder of the importance of testing assumptions, seeking outside information, and other means of reducing myopic thinking.” That overlooks what Christensen discovered and vastly underestimates the importance of Christensen’s insights to executives and corporate directors.

When Christensen studied successful companies whose fortunes declined, he discovered one category of companies that failed or suffered diminished success when overtaken by companies that had initially offered inferior products appealing to customers who either could not afford the successful companies’ products or were the least profitable for the successful companies. More often than not, the market leaders were capable of offering the cheaper product. But, for seemingly valid business reasons, they declined to do so.

It is critical that boards of directors and senior management understand when following accepted principles of good management (such as paying attention to your best customers and focusing investments where you can increase profit margins) leads to failure. Christensen demonstrated that those accepted management principles are only situationally appropriate. That insight can be used not only to avoid failure but also to go on offense to displace competitors. Identifying and harnessing disruptive innovations to avoid failure and to grow shareholder value became far more attainable once Christensen identified the essential elements of a disruptive innovation — a phenomenon previously unnoticed.

The tests to identify a potentially disruptive innovation that Christensen and his coauthor, Michael E. Raynor, include in their book The Innovator’s Solution form a critical aspect of the theory for executives. The first test is to ask whether an idea or product will appeal to a large population of potential users who have gone without it or who have had to go to an inconvenient location to use it. If so, then there is a potential new market to be exploited.

The second test is to ask whether there are already customers at the low end of the market who would purchase an inferior, but still sufficient, product at a discount price that would enable a disrupter to earn a sufficient profit. If so, then there is a low-end market to be exploited. Finally, if either or both of the first two tests are passed, the final question is whether the disruptive idea is disruptive to all significant incumbent companies in the industry. If not (in other words, if the disruptive product is a sustaining innovation to a leading player’s product that that player can also improve), an entrant will likely fail with the idea, because an incumbent will have the advantage.

King and Baatartogtokh’s article did not test whether Christensen’s formula to identify a disruptive innovation that could take a leader’s market share holds up. Rather, they tested whether each of four variables they selected are present in each of 77 examples of disruptive innovation that Christensen and Raynor identified.

The bottom line is that Christensen’s theory is invaluable to business executives. He showed the power of a disruptive innovation to infiltrate a new market or low-end market with a product inferior to an incumbent’s product. He explained that disruptive products often improve and displace the incumbent’s products because the organizational cultures of incumbents usually cause them to avoid inferior products offering lower profit margins, which initially do not appeal to their best customers. This explains the problems and declines of countless once-successful companies — and is detectable and avoidable. King and Baatartogtokh’s article does not recognize this value of the disruptive innovation theory. Using Christensen’s theory has helped companies such as Intel Corp. and Johnson & Johnson identify and formulate innovative products. Simultaneously, the theory helps incumbents spot disruptions so they can deal with them without being overtaken.

Many incumbents end up floundering as a result of a disruptive innovation, while some extraordinarily well-capitalized incumbents do not. In some cases, for example, the incumbent ends up purchasing the disruptive innovator. Accordingly, King and Baatartogtokh’s assertion that 38% of the 77 cases from Christensen’s books resulted in an outcome other than the incumbent floundering does not undermine Christensen’s warning to incumbents about the potential threat from disruptive innovation. The point is that if incumbents do not identify and respond correctly to disruptive innovations at the outset, they can pay dearly by losing market share. Moreover, some of the 77 cases took place after publication of Christensen’s first book, The Innovator’s Dilemma, in 1997. Given the enormous influence and popularity of that book, it would be surprising if some of the incumbents in the 77 cases did not benefit from Christensen’s insights. Similarly, King and Baatartogtokh’s finding that in 31% of the 77 cases the disrupter competed with a product for which there had been no significant trajectory of sustaining innovation does not detract from Christensen’s discovery of the power of a disruptive innovation to infiltrate new markets and then go up-market to displace the leader.

Christensen has done what businesspeople wish all advisors would do. He extracted from his research a key reason why so many dominant companies fall. He explained it in understandable and compelling terms. He articulated simple tests to identify potentially disruptive innovations to help companies avoid failure and grow profits. Indeed, every board of directors anxious to carry out its fiduciary duties of care and loyalty wants to understand what makes successful companies lose dominance or fail. Christensen’s disruptive innovation theory addresses one of the most vexing and unsolved problems of decades of successful companies that faltered, failed, or simply stopped growing. Disruptive innovation theory thus rightfully earned its honored place on the board agenda.

Martin J. Bienenstock is chair of the business solutions, governance, reorganization, and bankruptcy group at the law firm Proskauer Rose LLP; he is also a lecturer at both Harvard Law School and the University of Michigan Law School.

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Crossing the Chasm to Disruptive Innovation

By Ezra W. Zuckerman

No theory or framework is perfect. And one common imperfection, which is present in Clayton M. Christensen’s theory of disruptive innovation as well as many other frameworks, is that it is not entirely clear what is the core idea and what is peripheral. This ambiguity has in turn made it unclear how valuable the theory is and what adjustments might make it more valuable. My own view is that there is a very useful core idea at the heart of the theory, one that scholars and executives alike would do well to heed, but this idea has yet to be articulated clearly, either by Christensen or by critics such as Andrew A. King and Baljir Baatartogtokh. This core idea is what I call “the surprisingly bridgeable chasm.”

Let me back up. When we consider any management theory or framework, it is useful to start by asking a few basic questions:

1. What question is the theory meant to address?
2. Does the theory improve upon (as a complement or substitute for) other answers to the question it addresses?
3. What ideas are at the core of the theory and what is peripheral?

Let’s consider the theory of disruptive innovation through the lens of those three questions.

1. What question is the theory meant to address?

Christensen’s theory of disruptive innovation is animated by an excellent question:

How is it that capable, motivated incumbent companies are unseated by startups that tend to have weaker capabilities and fewer resources? This would seem improbable, yet it happens more frequently than one would expect. Why?

Regardless of what one thinks of the theory of disruptive innovation’s answer to this question, the question remains a good one. In my view, this is the main weakness of Harvard University historian Jill Lepore’s prominent critique of the theory of disruptive innovation in a 2014 article in The New Yorker. Lepore raised a set of interesting points. A chief weakness of her critique, however, was that she did not adequately acknowledge the importance of the question that the theory of disruptive innovation addresses. I suspect this comes in part from the fact that Lepore is an outsider to the business field. She does not have to confront the question of why capable, motivated incumbent companies might be vulnerable. But we (both managers and management scholars who aspire to guide them) do.

2. Does the theory improve upon (as a complement or substitute for) other answers to the question it addresses?

One of the downsides of the great popularity of the theory of disruptive innovation is that that popularity has obscured the fact that there are other good answers to the question the theory addresses. In particular, two compelling answers to the question of why incumbents are vulnerable are “competency traps” (a phrase that was introduced by Barbara Levitt and James G. March in 1988 and that describes the paradoxical fact that it is more difficult for companies that are highly capable in one area or with one approach to develop new capabilities than it is for a new entrant to do so) and internal competition (that a company’s units have difficulty sharing common resources such as their brand and sales channels when the units compete for the same business).

Christensen and his coauthors are well aware of each of these issues and discuss them as part of their framework. But one does not need the theory of disruptive innovation to appreciate these points of incumbent vulnerability. The question is whether the theory has a distinctive insight to add to complement existing insights. Are incumbents vulnerable even when they do not fall prey to competency traps and are not riven by politics? Christensen and colleagues counsel that the answer is “yes.” But how and why is that?

3. What is at the core of the theory and what is peripheral?

Here is where things become fuzzy. In their article in the fall 2015 issue of MIT Sloan Management Review, King and Baatartogtokh argue that one key claim of the theory of disruptive innovation is that incumbents (precisely because they are so competent and motivated) overshoot customer requirements. And King and Baatartogtokh demonstrate convincingly that this customer overshoot usually does not occur. It is not clear to me, however, that the customer overshoot concept is at the core of the theory. When I teach the theory of disruptive innovation, I barely mention customer overshoot. Rather, I see it as essentially a secondary, reinforcing process but not a core one. My question is:

If we remove this assumption from the theory of disruptive innovation, does the theory still have a distinctive answer to the question of incumbent vulnerability?

A related question can be asked about “high-end disruption.” Since the earliest formulations of the theory of disruptive innovation, Christensen has been adamant that disruption can only come from “below” — in other words, beginning with customers that have zero or low willingness to pay for the dominant technology. Christensen’s premise seems to be the following: Since customers with low willingness to pay are the most dissatisfied with the existing technology, those with high willingness to pay will be most satisfied with current technology, and so incumbents who are capable and motivated to serve them are less vulnerable to losing those customers. The problem, however, is that those with high willingness to pay might be willing to pay even more if incumbents were willing or able to deliver products that better met their needs. And good research on “high-end encroachment” by Joseph Van Orden, Bo van der Rhee, and Glen M. Schmidt now indicates that incumbents can often be displaced from above — in other words, by entrants that begin by attacking customers with a high willingness to pay. (Schmidt and van der Rhee explained the practical implications of that research in a 2014 MIT Sloan Management Review article.)

One way to address this issue is to assert categorically that examples of high-end encroachment are not cases of disruption because by definition they come from the high end. This is essentially the approach that Christensen has taken. But the question I ask about Christensen’s insistence that disruption can only come from the low end is the same one I raised with respect to overshooting:

If we eliminate this assumption from the theory of disruptive innovation, does the theory still offer a distinctive answer to the question of incumbent vulnerability?

Put differently, what really is the core idea of the theory of disruptive innovation?

My own view is that the core insight of the theory of disruptive innovation can be captured — without requiring us to assume that disruptions always entail customer overshoot by incumbents and must always start with low-end customers — when we relabel it the “theory of the unexpectedly bridgeable chasm.” I take the term “chasm” from Geoffrey A. Moore’s classic 1991 book on technology marketing, Crossing the Chasm. Moore’s core insight was that new technologies often fail to parlay their popularity among early adopters into mass-market appeal; the reason is that, since mass-market customers typically have different needs and desires, early adopters serve as negative reference points.

Ironically, even though Moore’s book has been enormously influential, 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. Incumbents generally assume that innovations appealing to a niche will never threaten them because their customers have different needs, but surprise, surprise — sometimes those customers change their minds. And by that point, it is often too late for incumbents to play catch up.

If disruption is viewed in this broader way as a “theory of unexpectedly bridgeable chasms,” how is it that chasms that seem unbridgeable may be bridged? There are at least three well-known processes of bridging chasms by increasing returns — experience curves, network effects, and demand discovery — whose shape cannot be known until one starts to embark upon them. The first of these processes is the idea made prominent by the Boston Consulting Group in the 1960s and 1970s — the idea that the more that one engages in (or invests in) a production process, the better one gets at it. The second of these is the idea that became widely known with the rise of Microsoft in the 1980s — that demand is often driven by the number of other users that use a platform either directly or indirectly, causing markets to quickly tip from one platform to another. And the third is the very straightforward point (exploited to the hilt by Steve Jobs) that people often do not know what they like until they see it. None of these processes for bridging chasms is surprising in the abstract. But when one or more of these processes is salient, surprises can happen because no one can say in advance what particular shape these processes will take.

A second key question is why, in this broader view of the theory, incumbents are more vulnerable to such surprises than entrants. Here Christensen points to an important factor — that incumbents face a higher hurdle rate (in other words, expected rate of return above which they will invest) for investments in nascent markets than entrants. One reason for this applies to public companies: Pressure to maintain their current valuation “multiple” can dissuade them from pursuing opportunities in small, emerging new markets that appear to promise a lower multiple. Another reason, which draws on recent work in economic sociology, is that investment in a different niche can signal lower commitment to existing stakeholders (customers, employees, and investors).

The upshot of the above is that there is indeed a very useful idea at the core of the theory of disruptive innovation. In short, it is quite instructive to recognize that niches can potentially be the launching pads for ventures that unexpectedly come to compete successfully with the most capable, motivated incumbent companies. It is just one part of a larger set of ideas we have for understanding the vulnerability of incumbent companies. But it remains a very valuable insight, and we have Christensen and colleagues to thank for it. One hopes that in the future, the theory of disruptive innovation is recognized for what it is rather than promoted or attacked for what it is not. It is only through such judicious use and thoughtful revision that ideas become most valuable for clarifying thinking and action.

Ezra W. Zuckerman is the deputy dean of the MIT Sloan School of Management as well as the Alvin J. Siteman (1948) Professor of Strategy and Entrepreneurship at the MIT Sloan School.