Disruption from Two Directions

The book I have been recommending most over the last year is Clay Christensen’s The Innovator’s Dilemma. This is not a new book as the original hardcover came out in 1997.

The media has also been referencing the book as of late, in particular journalists from Wired Magazine. Clive Thompson also invoked the Dilemma in his article earlier this year on the rise of Netbooks. Robert Capps in his article The Good Enough Revolution for October issue mentions the book in reference to bottom up innovation.

Christensen’s thesis is that established companies are designed to take advantage of “sustaining innovations”, the sorts of ideas and inventions that create incremental improvements, and these improvements provide the inspiration for new products that better meet the needs of their existing customers.

These sorts of companies are ill prepared for “disruptive innovations”–game-changing technology or resource allocation that creates a new paradigm of performance. Disruptive innovations always offer inferior performance and higher cost at the start and incumbents disregard the developments because they meet neither the needs of their customers or demands of their shareholders. This is always the mistake.

Entrant companies, often the innovators themselves, are forced to find a new set of customers who value the innovation for a different set of reasons and this allows newcomers a small beachhead to operate from. As the performance of disruptive innovations improves faster than sustaining innovations, entrants are able to move into established markets, bringing with with them their lower cost structure. Incumbents are forced up market and out of their existing profitable markets.

The examples are numerous. Nucor started with low-quality rebar and went on to disrupt the entire steel industry with electric-arc furnaces. Amazon started with books and has gone on to disrupt retail as a whole using the Internet. Look at any part of the media industry and you’ll find disruptive, bottom up innovation.

Now consider Nicholas Carr’s alternate argument. In May 2005, Carr wrote a piece for Strategy+Business acknowledging Christensen’s work while suggesting another type of disruption–from the top down.

Carr provides equally compelling examples of disruption. Consider FedEx’s move into shipping. Their premium next-day offering bested both UPS and the postal service. This provided them a beachhead into greater package-delivery market. And while Carr’s uses the iPod in his essay, the introduction of the ultra-premium iPhone is an even better example of top-down disruption from Apple.

Here is Carr’s argument:

Innovative, topnotch products are usually very costly to produce. In the early stages of their development, only a small group of power users is able to justify their purchase. But production costs tend to go down quickly, as suppliers gain experience and scale and as the prices of the underlying technologies drop. At the same time, the broader market becomes aware of the benefits of the new product and increasingly open to embracing it. The astute innovator thus is able to use a high-end niche as an outpost for launching a raid on the broader market. The top-down disruptor simply follows the cost curve into the mainstream of buyers. In the process, it redefines the industry — and secures its own competitive dominance.

Christensen and Carr are both worthy of inclusion in your mental toolbox, as disruption from either direction can be a compelling strategy for companies to pursue.

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