Clayton Christensen popularised the term “disruptive innovation” in his iconic book, “The Innovator’s Dilemma,” published in 1997.
The phrase describes a specific way that smaller companies can outcompete and eventually destroy their bigger rivals. And it has become an obsession for entrepreneurs, particularly in Silicon Valley.
But the Harvard Business School professor says the way his theories are thrown around in the tech industry is often just plain wrong, and he’s taken the time to set the record straight in the Harvard Business Review.
To explain, Christensen points out two big tech companies: one that is disruptive (Netflix), and one that is not (Uber).
Let’s look at Netflix first.
The primary reason why Netflix is disruptive is that, when it launched its mail-in subscription service, it didn’t go after the core customers of competitors like Blockbuster. Those customers rented new releases “on-demand,” two things Netflix originally didn’t provide.
Christensen claims that, initially, Netflix only appealed to a few customer groups: “movie buffs who didn’t care about new releases, early adopters of DVD players, and online shoppers.”
For Christensen, this is a hallmark of disruption. A disruptive company targets segments of the population that have been overlooked by its competitors, delivering an inferior (but more tailored) alternative, often at a lower price.
Then, eventually, a disruptive company like Netflix moves upmarket. It keeps the advantages it had at the beginning, and adds the things mainstream customers want. All of a sudden, there is no reason to have Blockbuster anymore.
In the case of Netflix, the huge shift came with the rise of streaming video. Netflix was able to appeal to Blockbuster’s core audience by providing, “a wider selection of content with an all-you-can-watch, on-demand, low-price, high-quality, highly convenient approach.”
And just like that, Blockbuster collapsed.
The reason why disruptive companies are often able to rise so quickly is that their larger competitors overlook them. They are not initially competing for the same customers, so the big guns brush them off — and in Blockbuster’s case, even refuse to acquire them for only $US50 million.
But not every company that is innovative is disruptive, according to Christensen.
The example he gives is Uber.
When it launched, Uber didn’t go after overlooked segments of the population, or provide a cheaper alternative to taxis. Uber just made a more convenient taxi system using your smartphone, going after the taxi companies’ core business right from the start. While Uber does now serve people living in areas often overlooked by taxis, they moved more downmarket than upmarket — the opposite of a disruptive company like Netflix.
Uber is innovative, sure, but not disruptive in the way Christensen used the word.
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