2.8 Disruptive Innovation

Marcos Antonio de Lima Filho, PhD.

Creative Destruction

Joseph Schumpeter’s notion of creative destruction is at the core of innovation economics. The economist introduced the concept whose lineage to disruptive innovation can be most clearly seen (Gans, 2016). Schumpeter was among the earliest scholars to note the disruptive nature of technological change, observing that it could lead to waves of “creative destruction” (Utterback & Acee, 2005). Creative destruction occurs when an invention disrupts a market by displacing an earlier technology or existing product or service (Kim & Mauborgne, 2017). Schumpeter believed that the concept of creative destruction described a key aspect of capitalism: the system’s ability to foster creativity by destroying and replacing outdated ideas and structures (Gans, 2016).

To fully grasp the concept of creative destruction, it is essential to understand its significance within the context of Schumpeterian economic theory. Schumpeter introduced the concept of technological stasis to demonstrate the significance of creative destruction and the role of entrepreneurs in a market economy. In a state of stasis, there is no room for improvement or progress, leading to a state of market equilibrium where entrepreneurship is non-existent:

Since the equilibrium economy is by definition a changeless and unending round of robotic behaviour, everyone on the market has perfect knowledge of the present and the future, and the pervasive uncertainty of the real world drops totally out of the picture. Since there is no more uncertainty, profits and losses disappear, and every business firm finds that its selling price equals its cost of production (Rothbard, 1987).

This static model may sound absurd, but the Walrasian equilibrium notion was the mainstream among most of his contemporaries. This Neo­classical view of production was very static, as firms were assumed to have fixed technologies and product sets (Beinhocker, 2006, p. 40). Schumpeter observed, however, that profits, an increase in production, and general standards of living were characteristic of most societies. He recognised a mismatch between equilibrium models and the observed economic growth and prosperity. Thus, Schumpeter insisted that for growth to occur, there must be “a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained” (Schumpeter, 1934).

Schumpeter then conceptualised creative destruction as the force responsible for adding discontinuity and change to the equilibrium model. “Innovation” (a change in embodied technical knowledge or production functions) is, for Schumpeter, the only possible avenue of economic development (Rothbard, 1987). The selection and adoption of innovations — whether radical or incremental, disruptive or purifying — are analogous to the processes of natural selection that introduce change and discontinuity, leading species to evolve. As new technologies bring our technological state to a new level, they challenge the current economic order (equilibrium), thus causing disequilibrium.

Schumpeter thus concluded that “creative destruction is incessantly destroying the old one, incessantly creating a new one” (1942/2010). This destruction has more to do with disruptions of previous industrial orders, fuelled by innovations that break with a technological status quo. In recent times, there has been a noticeable inclination among scholars and professionals towards disruptive innovations. Disruptors frequently make grandiose claims about an innovation’s potential to overthrow established market leaders, yet these assertions often prove to be empty. Besides the vagueness of such hype, this fixation on the new and “revolutionary” generates a bias against other modes of innovation that can also impact the economic order.

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Disruptive Innovation by Clayton Christensen

Following Schumpeter’s path-breaking work, several scholars explored the issue of innovations that ultimately transform industries: e.g., Utterback & Abernathy, 1975; Cooper & Schendel, 1976; Dosi, 1982; Abernathy & Clark, 1985; Tushman & Anderson, 1986; Foster, 1986; Henderson & Clark, 1990; Utterback, 1994. About a decade before The Innovator’s Dilemma was published, many authors delved into the disruptive nature of innovations, often using terms such as “disruption” or “discontinuities” to describe the phenomenon.

I observe a significant correspondence between these early works and the current theory of disruptive innovation, as they share various subcategories, properties, and hypotheses related to disruption. The overlap was so substantial that Christensen analysed the very same dataset under various alternative frameworks. In his doctoral dissertation, which focused on the disc drive industry, Christensen initially used the architectural innovation framework (Christensen, 1992a) but later explored other theoretical perspectives such as technology S-curves (Christensen, 1992b, 1992c), disruptive technologies (Christensen, 1993), and technological discontinuities (Rosenbloom & Christensen, 1994).

However, Christensen’s research also diverged from his peers in substance. The change from Discontinuances to Disruption was a fortuitous one. I consider that this new label can be better conciliated with the Schumpeterian notion of creative destruction, for whom the entrepreneur is a disrupter of an extant economic order. On the other hand, this rebranding may have caused a disconnect between Christensen’s theory and the decades of prior research. As a result, it’s possible that he inadvertently founded the research of disruptive innovations virtually de novo. The Innovator’s Dilemma introduced a new paradigm of disruptive innovation theory and laid the foundation for a new school of thought on the subject. Moreover, the book’s remarkable reception may have overshadowed previous academic research on the topic.

Over the years, disruption became an overused term, rendering it almost useless as a conveyer of meaning (Gans, 2016). However, as originally proposed, disruptive technology is a specific type of technological innovation:

In essence, a disruptive technology initially appeals only to a marginal market segment, but because of its improvement over time it can eventually satisfy the mainstream market. As a consequence, entrant firms that supported the disruptive technology displace incumbent firms that supported the prior technology (Danneels, 2009).

Some purist scholars still believe Christensen’s meaning provides the right anchor to ground the term (Christensen et al., 2015; Gans, 2016), while others advocate for finer categories of disruption, justifying it by saying that not all disruptive innovations are the same (Markides, 2006).

Christensen’s theory of disruptive innovation has gripped the business consciousness like few other ideas (King & Baatartogtokh, 2015). In a review of enduring business books, The Economist called the theory “one of the most influential modern business ideas.” His work has also been cited extensively by scholars working in diverse disciplines and areas, including new product development, marketing, strategy, management, technology management, and so forth (Danneels, 2004). Books on disruption have sold hundreds of thousands of copies, readings on disruption are among the most used in MBA classes, and a Google search suggests that “disruptive innovation” is the most popular innovation term (Sood & Tellis, 2011). Many leaders of small, entrepreneurial companies praise it as their guiding star; so do many executives at large, well-established organisations (Christensen et al., 2015).

Disruption is meaningful concept for scholars and practitioners, and Christensen deserves much credit for popularising this term and drawing attention to the impact of innovation and new technologies. The concepts articulated in The Innovator’s Dilemma have grown exponentially in use during the early 2000s (Figure 2.8.1).

In his book, Christensen argues that good managers face a dilemma because by doing the very things they need to do to succeed, such as listening to customers’ needs, investing in the business, and establishing unique capabilities, they run the risk of ignoring rivals with “disruptive” innovations (Christensen, 1997). The dilemma an established firm faces when dealing with disruption is usually in the form of a new technology (Gans, 2016). To avoid the “innovator’s dilemma”, Christensen urges incumbents to watch for disruptive technologies in the form of lower-quality substitutes that enter the market first by picking off the least-profitable customers and then, as the technology improves, moving up to become competitive with market leaders (Downes & Nunes, 2014).

Consequently, disruptive technologies are often linked to the replacement of established companies by new players. This is because established firms typically concentrate their R&D efforts on enhancing current technologies (i.e., sustaining technologies), making it difficult for them to keep pace with the new entrants that emerge with disruptive technologies. Christensen and authors revisited the concept in 2015:

“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality — frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbentsʼ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrantsʼ offerings in volume, disruption has occurred (Christensen et al., 2015).

A core element of the original theory of disruption that was noted but not explained by Christensen was that for it to occur, the theory requires that an entrant come in at the low end, appealing to a niche group of consumers who are willing to sacrifice on certain features available in other products (Gans, 2016). That is, disruptive innovation begins with the arrival of an inferior technology, which then crosses the line from inferior to superior and, in doing so, displaces market leaders (Kim & Mauborgne, 2017). Figure 2.8.2 illustrates Christensen’s disruptive innovation model.

The classic example here is the disruption and eventual displacement of leading disc drive players, which were caught off guard by bottom-up disruptors that initially entered the scene with simpler technology and inferior performance (Kim & Mauborgne, 2017). In essence, disruptive technologies usually start off with inferior performance. Nevertheless, as the performance of these technologies improves over time, they eventually reach or surpass the minimum performance levels required by the mainstream market (Danneels, 2004).

Therefore, according to Christensen, when entrants move upmarket to deliver the performance that mainstream customers require, and mainstream customers start adopting the entrants’ offerings in volume, disruption occurs. The key insight here is that the technology entering an industry need not be superior, as Schumpeter believed, but can enter as a Trojan horse with initially inferior performance that doesn't appear to threaten the mainstream market (Kim & Mauborgne, 2017). As a result, established players tend to disregard the new entrant until it becomes too late to react.

Another question that has been left unanswered is this: what are the essential characteristics of a disruptive technology, and what are its ancillary characteristics (Danneels, 2004)? Christensen (1997) stated that ‘‘products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use’’. Danneels (2004) questioned if these qualities are typical of Christensen’s cases but not necessarily of disruptive technologies:

For instance, do mainstream customers never initially value disruptive technology? Does disruptive technology always mature in a low-end segment? Does disruptive technology always start with lower performance? (…) Digital video discs (DVDs) always have had higher image quality than videocassettes; If a technology does not fit these ancillary characteristics, is it then not a disruptive technology?(Danneels, 2004).

Answering these questions is essential for the development of the theory. If disruption is strictly defined to emerge only from below, the concept will fail to account for the numerous instances of “disruption from above”. In fact, disruptions observed in the smartphone and commercial aviation industries deviate from Christensen’s inflexible definition of disruption. Most of these technological shifts were not propelled by smaller companies with limited resources that sacrificed certain features. Instead, some were driven by well-established corporations, such as Samsung, Apple, Boeing, and Airbus, which could invest heavily in R&D to reshape their respective markets. This broader perspective on disruption highlights the need for a more inclusive understanding of how industries can be disrupted, regardless of the market position of the companies driving the change.