Disruption is a process by which smaller companies with less resources successfully challenge established businesses. The term was coined by Clayton Christensen in his 1997 book “The Innovator’s Dilemma”.

Successful businesses understand the needs of their customers and build products on satisfying the most demanding of those customers. This leaves them blind to or too busy for less demanding customers or markets.

The disruptive process typically follows this pattern:

  • Small companies enter with simpler, cheaper products targeting overlooked segments
  • Established companies ignore these entrants because the segments appear unprofitable
  • New entrants gradually improve their offerings and move upmarket
  • Eventually, they displace the incumbents

The three core elements of Christensen’s theory are:

  • Performance Trajectories : The rate at which technology progresses is higher than the demand for technical performance. This means markets are overserved (too advanced, too many features) which leaves a gap between needs and performance, and blank space at the bottom of the market.
  • Innovation Types: Sustaining innovation improves existing products along dimensions that mainstream customers care about, enabling existing players to sell more to their best customers at higher margins and profitability. Disruptive innovation is usually inferior on common product dimensions, but offers a different mix of attributes (eg, simple, convenient, cheap) that appeals to low end customer segments or new customer segments, thus providing a foothold in these segments.
  • Organizational inertia: existing business models constrain established companies from investing in new technologies even if they have the resources and capabilities to do so. Disruption happens because the performance trajectory of innovative disruption happens faster than the performance trajector of sustaining innovations and customers’ demand for technological peformance, resulting in falling prices when disruptive innovations become good enough for mainstream customers.
Barriers to Disruption, and upward mobility

There are several barriers to upward mobility for disruptive innovations, and that is why very few companies are genuinely disruptive. These barries include:

  • Switching Costs: Customers may be comfortable with the current solutions, and switching away might require a lot of work or investment on their end. So they may not switch.
  • Technology Implementation: Existing technology infrastructure favros the incumbents, and requires significant investments to match.
  • Ecosystem: The presence of a deep and broad ecosystem of complementary products and serices makes it unattractive to leave the ecosystem for individual products.
  • New Technology: The technology needed to change the competitive landscape may not yet exist, which increases the uncertainty of the new solution.
  • Business Model: The disruptor would have to adopt the business models of the incumbents, including their higher cost structure eventually.
Key Takeaways

The distinction between sustaining innovation (improving existing products for current customers) and disruptive innovation (creating new markets with different value propositions) is crucial for strategic decision-making.

Understanding the true nature of disruption matters because it helps companies identify genuine threats and respond appropriately before it’s too late. Small competitors on a disruptive trajectory require immediate attention, while those simply operating at the edges may not pose the same level of threat.

Most recent example of Disruptive Innovation

Recently, we saw ChatGPT and friends come onto the market, with the ability to generate text, images and even code. They did not go after the high end users, the professionals and instead targeted an underserved market, the casual user, students and small businesses. Google Search for example, allowed you to get to an answer after combing through many search results and articles. But ChatGPT or Claude, just gave you a direct answer. And you could interact with it like you were talking to a human expert. You could ask follow up questions, seek clarification etc etc. This ease of use allowed users to look past its limitations, and embrace it. That gave GenAI a foothold in this market, that they could then build on. These users awed by what they say, took it to their workplaces, took it their friends and word spread like wildfire. Now OpenAI, Perplexity etc are billion dollar companies and they got there through disruptive innovation.

Read any of the following books:

  • “The Innovator’s Dilemma” by Clayton Christensen
  • “The Innovator’s Solution” by Clayton Christensen and Michael Raynor
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