What’s disruptive innovation?

As we participate in project team meetings with people around the world, people from different parts of the organization and people that may work outside of the organization, I’m always fascinated to see how we’ve been able to build a common vocabulary. Whether it’s the term “open innovation”, “incremental innovation”, “strategic innovation”, “breakthrough innovation”, “product innovation”, “market innovation” or “disruptive innovation”, we seem to be in agreement on what each of these terms mean.

But, on occasions, I’ve found myself trying to provide a more specific definition of what those terms mean and have found it unexpectedly arduous. When I shared my questions with my team, I was surprised to see that they found similar difficulty in assigning specific meaning to commonly used terms.  Let’s start with defining “disruptive innovation”.

This is something that I have tried previously, but it turns out that I’ve read a couple new books and have had a number of thought-provoking conversations since then. This is leading me to reconsider what the term really means. I know what you’re thinking:

• Wait! You put us through this just a couple of months ago, only to come up with something different a few months later?”
• Well…. Sorry, but, yeah.

For me, the critical question in defining disruptive innovation is understanding what it is disrupting. In other words, I want to understand the object that is being disrupted. Disruptive, as a word, comes from Latin. The prefix “dis” means “apart” and the term “ruptive” comes from latin “rumpere” where it means “breaking”. Therefore, the term “disruptive” means “breaking apart”. In other words, disruptive innovation would break apart something through innovation. Disruptive innovation is a kind of innovation that breaks apart an existing order and announces a new kind of order. So far, so good: we know what disruptive means, but we still don’t know what it’s disrupting.

Reading Michael Porter’s Competitive Advantage has led me to the conclusion that disruptive innovation is disruptive if and only if it fundamentally alters the overall industry structure in which companies operate. In other words, disruptive innovation disrupts, or, as it were “breaks apart”, how value is shared in an industry.
In this respect, low cost automobiles, like Renault’s Dacia, are drawing a segment of consumers away from more expensive cars. Again, you would expect that Dacia is capturing some value of the automobile industry, to the expense of automobile incumbents.

Similarly, low-cost airlines are now competing head-to-head to with standard airlines on short distance flights. Low-cost airlines typically offer less comfort: no free meals, no baggage transfer, no assigned seats, no planes other than 737s. But, low-cost airlines still get you from point A to point B. Southwest Airlines‘ CEO, Herb Kelleher, once said that his competition in flying from point A to point B wasn’t American Airlines or other established airline companies but rather ground transportation, such as cars and buses.

In both cases, a new kind of product is capturing a share of industry value, which, otherwise, would have gone to industry incumbents.

So, that’s my first answer to what disruptive innovation is disrupting: disruptive innovation is breaking apart previous arrangements on industry value sharing and introducing a new arrangement on how value is to be share across the industry. Those who used to capture coveted industry value relinquish a portion of what they use to capture to disruptors. In other words, disruptive innovation alters both who’s getting industry-generated cash and how much they are getting.

I’ll term this kind of disruptive innovation as “low-end disruptive innovation”, a term I borrow from Clayton Christensen’s Innovator’s Solution.

But, there’s another kind of disruptive innovation – the kind of disruptive innovation that Renée Mauborgne talks about in the opening pages of his seminal book, Blue Ocean Strategy. He refers to “Le Cirque du Soleil” as a novel combination of theater and circus. This hybrid show draws different kinds of customers. While theater and circus goers attend to the “Cirque du Soleil”, there’s another group of customers, a group of customers that are neither regular theater goers nor circus goers. These customers want to try something new. They enjoy both the drama that the “Cirque du Soleil” brings to its shows, and the extraordinary physical performance that circus brings to the show, but, above all, they appreciate the combination of theater and circus.

Nintendo’s Wii, in my view, is another compelling example: the video game system brought new customers, such as the Elderly, who never owned a video game system, to the video game market.
Similarly, when Honda came out to the US, they competed against Harley Davidson. They soon found out that there was no way they would win the battle against Harley Davidson. Harley Davidson was offering great motorcycles that perfectly met existing customer needs in the US: reliability on high ways great for long distance travelling. Honda, unable to compete against Harley Davidson on its existing market, had to offer something different. Honda positioned its motorcycles as off-road recreational motorcycles (in French: “motocross”), very different from Harley Davidson road-bound motorcycles. And you could see American consumers driving their new Honda off-roads: in the forest, on dirt roads and so on. While US customers would use Harley Davidson to get somewhere; they would use a Honda motorcycle just for the fun: as the saying goes: “you meet great people on a Honda”. In other words, Honda offered something new; something different; Honda offered a new experience.

This kind of disruptive innovation, I’ll term “new-market disruptive innovation”, in reference to Clayton Christensen. New-market disruptive innovation spots new needs, new customers and offers a new kind of product. “New-market disruptive innovation” disrupts, breaks apart existing market segmentation and creates a new market, offering new revenue streams.

So, that’s my take on the many meanings of disruptive innovation. I hope it was useful. My point in brief:

• Disruptive innovation breaks apart previous arrangement on who’s getting what share of industry value
• Low-end disruptive innovation offers lower prices on an existing market. Low-end disruptive innovation disrupts pricing.
• New-market disruptive innovation identifies a new customer segment, new market and creates new products, which result in new revenue streams. New-market disruptive innovation disrupts markets segmentation.

Oh, no, as I’m writing these lines, I’m finding other areas that disruptive innovation is disrupting. I guess it will have to wait until next week.

In the meantime, how would you define disruptive innovation? And what does it disrupt?

Further Readings:

• For a detailed discussion of how “Le Cirque du Soleil” is a disruptive innovation, very different from both the Theater and the Circus, please refer to Chapter 1 of Blue Ocean Strategy
• For a discussion on how Southwest was successful in leading a cost-advantage strategy, please refer to Joan Magretta’s Understanding Michael Porter, chapter 4
• For a thorough presentation of cost-leadership strategies, please refer to Michael Porter’s Competitive Advantage, chapter 3
• For a clear explanation on the meaning of disruptive innovation and how it’s different from breakthrough innovation, please refer to Clayton’s Christensen’s recent interview, here
• For a distinction of low-end disruptive innovation and new-market disruptive innovation, please refer to Innovator’s Solution, chapter 2
• For a definition of “disruptive innovation” and an explanation of how it’s different from “sustaining innovation”, please refer to this interview of Scott Anthony. The interview continues with some discussion managing for disruptive innovation.