4 Business Ideas That Changed the World: Disruptive Innovation

AMY BERNSTEIN: Welcome to 4 Business Ideas That Changed the World, a special series of the HBR IdeaCast. In the 1980s, Clayton Christensen was in his 30s, the business guy at a startup. The company was making ceramics out of advanced materials, and it was able to take over the market niche from DuPont and Alcoa. That experience left Christensen puzzled. How could a small company with few resources beat rich incumbents? The question led to his theory of disruptive innovation, introduced in the pages of Harvard Business Review in 1995, and popularized two years later in The Innovator’s Dilemma.

The idea has inspired a generation of entrepreneurs. It’s reshaped R&D strategies at countless established firms, seeking to disrupt themselves before somebody else does. It’s changed how investors place billions of dollars and how governments spend billions more, aiming to kickstart new industries and spark economic growth. But the idea has taken on a meaning well beyond what Christensen actually described. Think about how easily we use the word disruption to explain any sort of innovation, business success, or industry shakeup.

It’s also drawn fire. Some critics argue the theory lacks evidence. Others say it glosses over the social costs of bankrupted companies, and debate continues over the best way to put the idea to work. On this special series, we’re exploring 4 Business Ideas That Changed the World. Each week, we talk to scholars and experts on the most influential ideas of HBR’s first 100 years. This week: disruptive innovation. With me to discuss it are Derek van Bever, senior lecturer and director of the Forum for Growth and Innovation at Harvard Business School, Rita McGrath, professor at Columbia Business School, and Felix Oberholzer-Gee, professor at Harvard Business School. I’m Amy Bernstein, editor of Harvard Business Review and your host for this episode. Let’s set some context. Rita, what was our understanding of innovation before Clay gave us disruptive innovation?

RITA MCGRATH: Yeah. I think our common understanding of it was something that came out of R&D groups. It was like big product, big materials, big physical things, innovation. The classic would be like DuPont nylon. They invented this thing, that meant women didn’t have to spend hundreds of thousands of dollars collectively on silk stockings, and they had nylon riots. Literally, people were charging at these trucks with this revolutionary substance.

I think that’s how a lot of people still thought about innovation, is something that was very tech-heavy in the sense of not digital, but just technology that was coming out of R&D labs and so forth. That was one pervasive thought. I think the next pervasive thought was that innovations that were successful added something. They were new and improved, and so you built a better mouse trap. You built a better nylon stocking, you made Kevlar and things became impermeable, and that it was always at the top of the market.

I think that was one of the things that Clay’s work revealed, which was that innovation did not have to be new and improved or better on the existing dimension of merit, but that it could actually be worse on whatever it was we used to judge products by. But it did something else that was different.

AMY BERNSTEIN: You mentioned technology. Was technology always a necessary component of innovation as understood then?

RITA MCGRATH: I think in our theory of innovation it was. I think the idea of really business model innovation to me, did not become a common topic of conversation really until the ’90s. Prior to that, it was really product-centric, I would say, innovation. Peter Drucker and people like that, talked a little bit about things like the advent of the knowledge worker and what the network society was going to mean, and that kind of thing but that was really early days.

AMY BERNSTEIN: Felix, so help us understand Clay and what shaped his thinking. He was a co-founder of a technology company when he started to consider disruptive innovation. What shaped his thinking?

FELIX OBERHOLZER-GEE: We know Clay as a faculty member at Harvard Business School, of course, first and foremost. But actually, by the time he arrived and became a faculty member, he had done many different things already. He was a missionary in Korea, he studied in the US and in the UK. He had earned an MBA from HBS. Then in the 1980s, together with faculty members at MIT, he had started a company called Ceramics Process Systems. The one experience that he had as CEO of the company, was quite dramatic and in part informed his thinking about disruptive innovation.

The basic technology that they had came out of an MIT lab, and it was exactly what Rita had alluded to. It was this idea, is there a way to make what we have today, is there a way to make it better? To improve on the quality? In their case, they made ceramic substrate that could be used in microelectronics. This is a very, very thin layer of ceramic that has excellent properties when it comes to conducting heat and power. They had better ideas how to make that. The challenge was that the technology was not so easy to scale up.

They were about 14 months late or so later than they had anticipated. By that time, a competitor had essentially duplicated or had a product that was very similar, and the price premium that they expected to earn had vanished. In retrospect, I think looking back at this particular type of innovation, Clay later found in his dissertation that if you go directly against established incumbents, your chances of being successful are not all that great. He would say, “Well, maybe 5%, 6% of these attempts are successful, but mostly you shouldn’t really get your hopes high up.”

AMY BERNSTEIN: Derek, let me ask you about this idea that Felix just described. Had anyone ever noticed this before? Was it all that novel?

DEREK VAN BEVER: It was really remarkably creative, what he did. The question that consumed him was why is it that sometimes a tiny, little upstart can unseat a powerful, industry-leading incumbent? It was the sometimes that really intrigued him. He was looking for the causal driver, not merely correlation, but what was it that caused this phenomenon? There were lots of descriptive explanations that had been advanced in the past. One was that industry leaders would become self-satisfied and complacent, and not see the attacker coming.

Another was that if you got attacked on too many fronts at once, Xerox versus Canon, you couldn’t respond adequately. What bothered Clay was that while these explanations were often true enough, there were also a lot of anomalies, instances where they didn’t hold. Clay used these anomalies as learning opportunities, rather than exceptions. What he realized was if you can approach an incumbent in a way that causes them to ignore you or to flee upmarket, you have the thing you need the most, which is time to build a foundation underneath your business.

Then finally, he gave names to phenomena that were familiar, particularly to businesspeople. He called the trajectory of innovation that is far and away the most common, he called that sustaining innovation. Any company that wants to be in business for any length of time, had better be really good at that. He called that trajectory underneath the existing incumbents; he called that disruptive innovation. That’s what’s hard for incumbents to see, because it typically presents as products that aren’t as good, that aren’t interesting to their best customers. And therefore, are not something that they can allocate resource toward.

FELIX OBERHOLZER-GEE: Or maybe if I can add a little twist to it. One of the things that I find most fascinating about the theory of disruption, is that it describes the reasons why the incumbent is unlikely to respond. For instance, because you have amazing margins with your best customers, and the incentive to serve a segment that doesn’t look very profitable to begin with, those incentives are just really muted.

Or you might have firm internal processes that make it really difficult to serve a new segment with much different demands in a way that seems both effective and eventually profitable. Even once you know about disruption, in part, it’s such a powerful idea because it speaks to the tendency not to respond. Even though from the outside it looks like you have all the resources, you have all the talent, you have everything that it would take to be responsive.

DEREK VAN BEVER: Felix, you’re reminding me, our colleague, Chet Huber, came into my office one day after I had been teaching in the course for a couple of years. He sat down in front of my desk and he said, “You do realize that this is a psychology course, right?” And boy, was that true.

AMY BERNSTEIN: Rita, Clay brought this idea to a much broader audience through HBR and through his book, The Innovator’s Dilemma. Tell us how that was received.

RITA MCGRATH: Well, I think before we get to Innovator’s Dilemma, let’s talk about “Disruptive Technologies: Catching the Wave,” because that was the HBR article that preceded it. Everybody’s forgotten this now, but he co-wrote that with Joe Bower, Harvard’s own Joe Bower, who had written a whole series of books and articles, and research drafts on how fundamental the resource allocation process is to corporate decision-making of all kinds.

The original idea was to build on what Derek was saying, companies allocate resources according to a logic, and that logic is sometimes not necessarily in their own best interest. When the book came out, The Innovator’s Dilemma, that was in 1997. This is another thing we’ve all forgotten, which is it did not become a runaway best-seller right away. It took a couple of years.

And if memory serves me, it was a picture of Clay with Andy Grove of Intel on the front cover of a business magazine. I think it was Forbes. The two of them are on the front cover, and Grove basically saying, “I am changing the entire direction of my company because of Christensen’s theory.” That’s when it hit the masses.

AMY BERNSTEIN: That’s exactly when I remember becoming familiar with it for the first time. I’d forgotten that. Thank you for that. Felix, why do you think the idea struck a chord? Why did the book finally take off, the idea finally take off? What was happening at that time?

FELIX OBERHOLZER-GEE: When we think about the late 1990s today, of course, what we think of most commonly is that the dot-com bust when the bubble burst. But of course, before the bubble burst, there was a dot-com boom. There was a deep sense that technology would change things in really radical fashion. It’s not a coincidence that Andy Grove and companies like Intel were under the impression that the future could look radically different from the way the past had looked. That past success didn’t really guarantee much when it came to predicting future success.

Part of that, I think, is interlinked with the way the new technologies created network effects. The idea, that as my technology scales, as I get lots of customers, as I get broad adoption, the value of technology increases correspondingly. The personal computer, the early beginnings of the internet, everything spoke to technology and network effects, in particular, would become dominant features of the business landscape. Now, one thing that is true, if you operate in environments with very strong network effects, on the one hand, they’re a real formidable barrier to entry.

But just like they fuel growth and they can make you very successful in a short period of time if successfully challenged, you can then also lose everything in a very short period of time. Andy Grove’s famous management mantra that instructed everyone to be really paranoid, had in part to do with how technology changed and how technology gave rise to business network effects that created stability and instability at one and the same time. That was obviously fertile ground for a thinker who came along and said, “Well, it looks like you’re doing really well today, but actually your success today may hide in some sense, the undoing of your business in the future.”

AMY BERNSTEIN: Derek, was that paranoia that Andy Grove was pushing? Is that what made the idea so relevant to businesspeople or what was it that made it resonate?

DEREK VAN BEVER: Well, first, unlike many academics, Clay was himself a businessperson earlier in his career. He instinctively understood the relevance of his work to business leaders. He understood the angle at which a businessperson would approach a question. In fact, he was answering the question he had had when he left business to come to academia. He was also careful never to pretend that he knew more than his audience about their business.

In that famous encounter he had with Andy Grove, in which Andy Grove kept asking him to say, “What does disruption mean for Intel?” Clay said, “I’ll explain the theory of disruption to you, but you know your business better than I do. You’re the one who’s got to figure out what the implication is for Intel.” He famously said, “I would’ve been killed if I had tried to out Andy Grove, Andy Grove on what the implication of disruption was for Intel’s strategy.”

AMY BERNSTEIN: Rita, who was the first to embrace it? We know about Andy Grove, of course, but what industries, where did the uptake happen?

RITA MCGRATH: I think the uptake happened in industries that were being challenged so automotive, for example. The advent of really inexpensive but super, high-quality, smaller cars in the ’70s and ’80s, had completely freaked that industry out. They glommed onto this theory as, “Oh, they were low-featured, they weren’t as good on the dimensions of merit that we’d previously competed on.” But the disruption theory gave the incumbent Big Three car makers an out.

I think those kinds of industries, steel, automotive, where they felt that there were these things happening at the low ends of the market. I think the other thing that made it popular at the time was, and we’ve forgotten this now, but there was a time in American business where entrepreneurship meant you couldn’t get a real job. It was not the glam, cool thing. The guy you wanted to be was the guy in the gray flannel suit.

I would say beginning in the Reagan Administration mid-‘80s, and then leading up to the dot-com boom, that was really when entrepreneurship, the whole idea of startups, started to be something people took seriously. Before that, if you weren’t Ford or 3M or something, people didn’t really think about you as a force for change in the economy. I think that moved towards entrepreneurship.

I would put it to the rise of companies like Microsoft, where briefly, Bill Gates was the most valuable man in the world. It legitimated that whole field. Then following closely on the heels of that was this idea of corporate entrepreneurship, which is we need to be able to create new businesses from within, and then we need to be doing this continuously. We can’t just have one great idea and live on it for decades, no more.

AMY BERNSTEIN: Did everyone embrace this theory when it finally took off? Or were there some who said, “No, that’s not making sense”? Were there critics?

RITA MCGRATH: Oh, there always are. Oh, there always are. There’s always people that say, “Are you kidding? I’m, insert name of company. Gillette in razor blades, or Pepsi or Coke or these big franchises.” There’s always people that say, “Don’t be ridiculous. There’s no way some little fly-on-the-wall company is going to be able to attack us in any meaningful way.” There was a whole chunk of people who just didn’t buy it. What I would say, and I want to build on what Derek was saying, and to some extent Felix, it gave managers an explanation. It gave them an out.

It said, “You’re not a bad manager, because you’re attending to your best customers and you’re trying to go upmarket, and you’re trying to increase your margins. You’re trying to do all these things that all the business textbooks at the time said was the right thing to do.” It doesn’t mean you’re a bad manager, but you can still find yourself in trouble. I think it was that combination of providing an explanation for a phenomenon that had not gotten a lot of attention up to that point. But also giving people an out saying, “Oh, I was hit by the innovator’s dilemma. Nobody could have seen that coming.” Right?

DEREK VAN BEVER: Right.

AMY BERNSTEIN: But did it explain anything else, Felix? Were there any puzzling business behaviors or phenomena that this theory helped explain, other than the one that Rita just described?

FELIX OBERHOLZER-GEE: I think what Rita described is really the core of what was appealing, and it often came across as a puzzle ex post. Once you see that Netflix has successfully disrupted Blockbuster, then the big question, of course, is, “Oh my God, if Netflix saw this opportunity, why didn’t Blockbuster, in the beginning, have a DVD shipping service? Why didn’t they see the promise of the internet?” In some sense, the most popular version of the theory that often we couldn’t see it because no one knew that it would be so big.

There’s 15 ideas around the corner that go nowhere. How am I to pick the one that I should really pay attention to? That explanation is much more disquieting, I think, and hard to live with because it doesn’t really tell you what you can and what you cannot do. It replaced that with an explanation that said, “Yes. Of course, it’s bad luck someone else had a really promising idea, but your incentives were actually not to respond in the first place.” That’s exactly why disruption is something really powerful.

Because your systems are set up in a way, your incentives are set up in a way, that in the moment the company that seems to have all the resources, that seems to have all the capabilities to do something, that the disruptor often does—typically, not a great quality—why the incumbent wouldn’t really do that successfully.

AMY BERNSTEIN: Derek, let’s get into the criticism that the theory has drawn. There have been a few critics. Jill Lepore, the Harvard historian, most notably, who said that there really wasn’t enough evidence to justify the theory. Well, first of all, what’s your view of that? You worked very closely with Clay. How did he respond to that criticism?

DEREK VAN BEVER: Anyone who knew Clay, knows that he had a handmade sign in his office that said, “Anomalies Wanted.” And it’s true. One of the things that made him such a powerful thinker, was that he was so humble and so open to criticism. It wasn’t as if you spot something that the theory doesn’t cover and say the theory, therefore, is discredited. For Clay, that was for him a building block. Now, we get to dig in and make it better.

That disruption theory was still under construction, absolutely fit Clay’s worldview. It wasn’t so much that businesspeople criticized the theory. I think the academy had a really hard time with it, in part for the reason that Felix is mentioning. That people would say, “Sure, ex post, you can spot disruption, but can you spot it ex ante? Can you spot the areas where disruption prospectively is going to be operative?”

Work has been done on that, but that was very much out there. Then also, disruption is not built on a quantitative model, which is the coin of the realm today, of course, so it’s really hard to determine the boundary conditions. Anybody who’s done research on growth, you have to define what success and failure are, and there is no objective standard. You’ve got to figure out, “Okay, what’s the structure of the experiment?” And then run it.

I will always remember, I went to Clay once with what I thought was a really smart question. I said, “Clay, how can you tell when a disruptor becomes an incumbent?” He looked at me indulgently, and he said, “Derek, you do realize these are just constructs, right?” It was he had this revolutionary idea, but he also realized he’d given names to forces, and there was still so much to be discovered.

RITA MCGRATH: Yeah, and I’ll jump in on this. Very famously, he was wrong, by the way, about some of the top-of-the-line innovations. He very famously predicted that the iPhone would fail. One of the most profound critics of the theory of disruption is Safi Bahcall, who wrote a book called Loonshots. He’s biotech CEO, he’s a trained physicist, da, da, da, da, da. In his work, what he’s looking at are these unloved, crazy ideas that some passionate person is pushing.

So something like mRNA virus chains and discovery, all kinds of discoveries. He called them loonshots because it wasn’t obvious that they were economically viable. But his argument would be very often what turns into a disruptive technology, is actually a bunch of people pursuing what they think is a sustaining technology. It ends up through the twists and turns that discovery takes, it ends up actually being completely disruptive.

An example of that would be the invention of the microprocessor. The people that came up with that stuff, were actually looking for better vacuum tubes. They thought they were doing sustaining innovation, and it turned out to take them in a completely different direction. I think there is a nuance to this, which is separating out the intent of the people making these discoveries from the actual market consequences.

AMY BERNSTEIN: Felix, any thoughts?

FELIX OBERHOLZER-GEE: I always liked Clay’s distinction in the article that he wrote for Harvard Business Review in 2015, where he explains why Uber is not a disruptor in his view. First, the theory is not really built to explain which of the disruptors is going to be successful. Even if you expose, see the patterns, say, “Oh my God, that’s amazing what they did, because they went in at the low end and they had a really great idea. Ultimately, built an amazing business.”

There’s nothing in the theory that out of the hundreds of people that try to do this, who’s going to be successful and who’s not going to be successful. Then the second point that he makes in that article that I’ve always found very important, and often among the critics, I think poorly understood, is that there is a sense of when is it going to happen fast and when is it going to take a long time? But ultimately, there’s very little in the theory that would describe end states.

That is if you see a company, a big, large incumbent that gets disrupted, can you say anything about the eventual size of that organization? Can you say anything about the return on investor capital of that company? The answer is, by and large, no. It might be that the segment that they hold onto, perhaps it’s a sliver at the very high end of quality, where you have customers with very high willingness to pay.

You can maintain perhaps a smaller but a financially super, super successful business. The idea of being disrupted, is not so much the disruptor has to, I don’t know, go bankrupt. Or it’s like it’s only really disruption if it looks like Kodak.

DEREK VAN BEVER: Right.

AMY BERNSTEIN: Rita, what was it about the way that Clay communicated that helped spread his ideas?

RITA MCGRATH: That is such a good question because I have had so many conversations with my fellow innovation professors over the years, who would say things like, “I came up with the concept of, fill it in, ambidextrous innovation, the attacker’s advantage.” There’s a whole list of things, and they’re very miffed that, “Well, I came up with that and nobody paid any attention. Clay talks about it, and everybody thinks it’s the best thing since the miracle of bandwidth.” I think I’d point to three things, master storyteller, absolutely masterful storyteller.

When Clay illustrated a phenomenon, he used relatable examples. He used an interesting story, he used a twist, and people could see themselves in that story. Second thing he did, was he took ordinary things and made them really interesting. I’ll go back to one of his most famous parables ever, the parable of the milkshake. What’s the job a milkshake has to do for you? People would be listening to it going, “You know, you’re right. At lunchtime, I have a different job I need to be doing, than when I’m picking my kids up from school. Yes, I see that now.”

He had that way of making the ordinary seem really extraordinary. Then I think the third thing was he was genuinely interested in your response to what he had to say. Many professors, I won’t name names, but many professors are much more interested in you hearing what they have to say, than being interested in what you have to say. I think with Clay, it was always the other way around.

AMY BERNSTEIN: Coming up after the break, we’re going to explore how the common perception of disruption is drifted from its original meaning. What lessons are there for us today? Stay with us.

Welcome back to 4 Business Ideas That Changed the World: Disruptive Innovation. I’m Amy Bernstein. Felix, let’s pull the camera back a little bit. How has Clay Christensen’s theory of disruption changed the way we think about strategy and competition?

FELIX OBERHOLZER-GEE: Well, in a way, the idea is almost a victim of its own success, so disruption is anywhere. In fact, the way most people use the word disruption these days has very little to do with Clayton’s idea. We come up with a new flavor for yogurt and people say, “Oh my God, the market for yogurt has been disrupted.” Despite that, I think it has done two things. The first is what Rita mentioned earlier, it’s given entrepreneurship a prominence.

It’s gone to a point now, when I tell my MBA students that most of the time, most innovation comes from large, established organizations, they look at me in complete disbelief. They actually don’t really think that large, incumbent organizations do anything that is all that innovative. It’s almost like the flip of what Rita described earlier, where we thought that, “Oh, if you’re an entrepreneur, you must be a loser.”

Now we’re giving, I think generally speaking, not enough credit to large companies and all the pretty amazing things that they do. One of the consequences of using disruption completely indiscriminately is that it’s now become synonymous with success. We look at Uber and they seem successful. Then we say, “Oh, the market for taxi services has been disrupted.” Success described in these very, very general terms I think is actually not very useful for setting strategy.

AMY BERNSTEIN: That’s interesting. If we now equate disruption with success, what about the other side of that, Rita? Can the theory of disruption be blamed for business failure? Can we say it’s brought down some companies, some firms?

RITA MCGRATH: I don’t know that the theory’s done that. It is possible to have badly managed firms in just about any circumstance. I think this builds on what Felix was saying. When the stories get told after the fact, we miss so much of what actually happened. What actually happened at Blockbuster was not the common mythology. The common mythology is Netflix emerged out of scorched earth and took the world by storm with CDs that you could mail in a red envelope. That is not true. Netflix in desperation, went to Blockbuster to try to be acquired.

They wanted to be Blockbuster’s online arm, and Blockbuster laughed at them. Literally laughed at them and said, “Get out of my office. What are you people? You’re a four-person dingbat operation, and we’re supposed to take you seriously?” That’s one of those stories that gets misunderstood. Kodak’s another one. The guy that sank Kodak had been running the printing business at HP. Lost out on the CEO race to run things at HP. And steered that company right over the cliff that was printing at home just at the moment that screens became possible, to be good enough to show pictures.

A lot of this stuff doesn’t really get remembered when we recall the stories. I don’t think the theory brings companies down. What I think brings companies down is the following: A failure to adequately balance today’s investments versus tomorrow’s. An unwillingness to make the financial and personnel commitments to little, new things. I see this all the time. You got your core business and it’s trundling along like an eight-lane highway. You got something with four people and a passionate advocate in charge of it, and it looks completely insignificant in the early stages.

When you think about why established companies get undone, it’s not because they didn’t make big, courageous moves, it’s because they didn’t allow the flourishing of lots of small, low-cost moves.

DEREK VAN BEVER: I completely agree with Rita. You can’t blame a theory for being explanatory. In fact, there has been research to try to validate the proposition that what disruption actually does through targeting non-consumption is to expand markets.

It may be that the providers of products and services change, revolve over time, but consumers benefit because there are more and more people who are available to consume products that are less expensive, more convenient, et cetera.

AMY BERNSTEIN: How has the theory evolved since it debuted, Felix?

FELIX OBERHOLZER-GEE: One of the really big additions was to distinguish between different types of disruption. We just talked earlier about the low-end entry, the low-end foothold that I think was very much on Clay’s mind when he first wrote about disruption. Toyota’s entry into the car market being one of the prominent examples. There wasn’t all that much in his ideas regarding competing against non-consumption. The idea you want to be that lower quality, lower priced version of something that we’re familiar with, or are you really competing for a segment that is not in the market at all?

Those differences turn out to be super, super important. In that sense, the theory has become richer. I think there’s also a little more of a sense that it’s not really a recipe. It’s not as though, “Oh, I follow this particular recipe and then I know I’m going to be successful.” We just know that the chances of entrepreneurs being successful are pretty low to begin with. Just like the probability of being disrupted if you’re a large and successful business are probably not all that large.

DEREK VAN BEVER: Could I add one thing to that? I completely agree that with Felix, that if you go back to [The Innovator’s] Dilemma, Clay was really describing one flavor of disruption at that time. Not new market disruption. But also, I think over time, you could see a shift in his language from talking about a disruptive technology to a disruptive positioning.

That it was really the creation of a new business model in all of its attributes. What’s the value proposition? What’s the profit formula, the capabilities, and priorities in that model? In fact, a technology can be shaped to be sustaining or disruptive. What is the model that’s being brought to market to compete with incumbents?

AMY BERNSTEIN: For the businesses that are trying to avoid being disrupted, Rita, what’s the best advice out there for them?

RITA MCGRATH: Well, you lift the lid off of any corporate portfolio, and it’s horrifying. What you see in there is somebody’s pet bunny from three CEOs ago and nobody said, “Why are we still doing that?” Or you’ve got these mission-critical, absolutely important projects that like half an intern is working on so you have this real disconnect.

DEREK VAN BEVER: These are the scars of a veteran, for sure!

RITA MCGRATH: I have been around the block on this. Anyway, then the last thing is your reward system. What do people believe they’re going to get rewarded for around here? One of the things that companies needed to do, if they’re going to avoid getting disrupted, you have to be in the game and you have to be willing to support small initiatives. There’s got to be some slack resource, there’s got to be the willingness to fund it. The number of times I have seen companies say, “Oh, we don’t want, we’re not going to be disrupted. We have this thing going on over here.”

No assumptions tested, no low-cost commitment tests. Big project teams with all the money in the world, on the assumption that they know what they’re doing and they don’t. There’s a real need for organizations that want to behave this way, to be willing to put some money behind what I call options. The idea of making a small investment today that could, not that will, but that could give you the right to create future choices. Companies that are going to be successful are going to get a lot smarter about that.

AMY BERNSTEIN: Well, let’s look at it from the other side, Derek. What’s the best advice for entrepreneurs or upstarts, who want to take advantage of disruptive innovation?

DEREK VAN BEVER: Yeah, pretty simple advice. Keep your cost structure low so that you’re able to exploit opportunities that are uninteresting to incumbents, too small, too remote, and target non-consumption. Don’t go after customers that they value, but rather go after segments that they’ve dismissed. The brass ring is if you can go after a segment that they’ve dismissed and they look at you and they go, “They just don’t understand this business.”

They let you grow a little bit and you get some success, and they look back at you a little bit later. And they go, “Oh, those poor dears. They just are not going to learn, are they?” Then they completely ignore you. That gives you the opportunity then to build from the bottom unmolested.

AMY BERNSTEIN: Felix, where does applying this theory most often go off the rails? Where are the difficulties in applying it?

FELIX OBERHOLZER-GEE: One difficulty for entrepreneurs is that it’s pretty difficult to distinguish non-consumption that actually has the promise from situations where there’s just no interest. You’re probably familiar with SimpliSafe, the home security company, I think is a beautiful example. Eleanor Laurans, one of the co-founders, she sits in Clay’s class. She literally goes out and tries to apply the theory thinking, “Why is there no home security for renters?”

How is it that leading company back then, that now ADT is serving homeowners, but renters are afraid maybe, or have a willingness to invest in home security as well. They built the company, literally built on the principles that she learned in the classroom. That yes, it’s a little less convenient, you don’t have someone who comes by your house and installs the equipment. You have to do that yourself, and so on, and so on. Then it turns out renters were just not really all that interested.

The fact that SimpliSafe is a very successful company today is just because a large fraction of homeowners actually found the value proposition of the company quite attractive. Distinguishing instances when you look at non-customers and what I tend to call near-customers, customers whose willingness to pay is in a useful vicinity, that turns out to be really difficult. Then for incumbent firms, I think one of the main difficulties is even if you’re successful at recognizing potential for disruption. Even if, as Rita suggested, you follow Clay’s advice and you set up a small group.

Typically, you take it out of the regular bureaucratic procedures, and you set it up as a separate entity, and they don’t have to worry about funding for a little while. We have lots and lots of examples where companies have done this successfully, where they build a shadow operation. Think Walmart, its online operations that get established, a million miles away, at least mentally, from Bentonville, in Silicon Valley, of course. Then there’s just no real way to bring that small, agile organization back and attach it to the supertanker.

You build something sort of interesting, sort of successful, but given the scale of the incumbent, it’s pretty meaningless. I think incubating new ideas, that’s what many incumbents are quite good at. But marrying these ideas back to the supertanker that has been on a set course for a long period of time, I think that remains extraordinarily challenging, with not that many examples of companies that have done this successfully.

DEREK VAN BEVER: Felix, you’re reminding me, Clay, when he was in the classroom, he would take that big index finger of his and he would go, “Where do you stick it?”

FELIX OBERHOLZER-GEE: Yeah.

DEREK VAN BEVER: His frustration was that companies would always try to stick it underneath the division that it is effectively disrupting. You know how that story ends, right?

FELIX OBERHOLZER-GEE: Yes.

DEREK VAN BEVER: Where it’s, “Oh, we’ll take care of this. Don’t worry, we’ll make sure that this grows just as fast as it should.” That’s often the last that you hear from it.

FELIX OBERHOLZER-GEE: Yeah. But then his view that simple organizational separation will lead to long-term success, that I think has not really been true for many companies either. I think that’s a really important question. Then the second, if you see disruption, if you think it’s going to happen, how good are you going to be? What are the chances that that’s a game that you can play successfully? Think of the large energy companies right now.

Most of them are making some investments in renewables, and we already see quite interesting dividing lines. Some of them being good at it, and some of them basically wasting money that doesn’t seem to have much of a payoff. Disruption itself implies that it’s almost costless to respond. But in the end, there’s capital, there’s talent, there’s attention that is required, if in fact, you want to be building something successful.

In an environment where entrepreneurship and the opportunity cost of trying new things are typically downplayed or are seen as very low, I tend to remind my students that the opportunity costs of trying to play yet another game, they can be quite sizable.

AMY BERNSTEIN: Let me throw out a question to the whole group here. Where do you all think our understanding of disruptive innovation is headed? What future are we looking at? I’ll go around the horn here. I’ll start with you, Rita.

RITA MCGRATH: Sure. What I’m encouraged by is when Clay and I were working together in the ’90s, we’d never actually wrote a paper together, we co-presented a lot of stuff, but not co-authored. But anyway, we were talking about this in the ’90s, and we would be like the only people in the room talking about these phenomena, and people would look at us as though we had two heads—or four heads I guess, between the two of us. Because I was talking about, “Well, you need to plan differently when you don’t have data.”

Clay was talking about, “Well, this little upstart could cause you problems, if the right circumstances prevailed.” I think what’s happened in the intervening decades, is people are now aware. People are now willing to say older models of strategy don’t apply, that newer models really make a difference. That is a far cry from being able to put that awareness into systemic action. I think what we’ve made a lot of progress on is the conversations are different.

There’s a lot more knowledge that there’s more to life than just sustaining innovations. That there are these phenomena we need to pay attention to. I think awareness is where we are. I think the next big chasm to be crossed is how do we now put that in practice in the management structures that we use to run large, complex corporations? There is so much knowledge about how you build innovation capability, how you build disruptive potential, how you actually make these things happen.

And yet, most managers aren’t taught it. If you think about the lifecycle of a competitive advantage, it has to come from somewhere. It has to come from an innovation or an invention, or an idea or something. Then you have to scale it, which is getting it into the business. Then you have this delightful period of exploitation, where you get to enjoy the fruits of your labor. That’s what we teach people. We don’t also teach them about what happens when the shoe has turned, the thing’s gone obsolete. Your 386 microprocessor is no longer the state-of-the-art. How do you now reconfigure your company to take advantage of the next new thing? Those are skills were not yet mainstream.

DEREK VAN BEVER: Yeah.

AMY BERNSTEIN: Derek?

DEREK VAN BEVER: Yeah. Going back to an aside I made a while ago, that when Chet said, “You know this is a psychology course, right?” It is interesting that 27 years after the publication of that book, we’re still bound to get caught up in this phenomenon. To pick up on what Rita said, I think we are going to understand more about how to respond to the phenomenon of disruption as incumbent companies. We’ll understand the different rate at which it works its way through industries.

Fifty years in steel, seemingly overnight in education, and we’ll understand more the importance of the performance metrics that we honor. What would’ve happened if US Steel had measured not gross margin, but net profit dollars per ton? Would they have abandoned such a huge swath of the steel market and imagined that they were doing the right thing? I think we’ll get better at continuing to tease out this puzzle of how do we confront our own cognitive weaknesses and blind spots and respond with more alacrity, more quickly and more effectively?

AMY BERNSTEIN: Last word to you, Felix.

FELIX OBERHOLZER-GEE: I think to me, one of the really big changes in technology in the economy today, is the ease with which companies can produce high-quality services and products at incredibly low cost. Remember, part of the dilemma for the incumbent, comes from the fact that you’re serving customers who have very high demands. And the implication was you, as a result, have very high cost. That makes it basically impossible for you to respond. Now today, we see so many companies that have amazing quality and a cost advantage at one and the same time.

This old notion in strategy of being stuck in the middle when you try to be both high quality and low cost, and then you end up being not really high quality because you’re thinking about cost. You end up not being really low-cost because you’re thinking about quality as well. This notion of “stuck in the middle,” to the extent that it doesn’t really apply, frees up incumbents to respond in a much more flexible manner to serious threats of disruptors.

Then it struck me as interesting, even in today’s conversation—I know I’m guilty of it myself—how many of our examples are product related? Well, what about services? In services, it’s almost true by definition that you get fabulous service from engaged employees. And the moment you have highly productive, highly engaged employees, you have this interesting combination of having a potential cost advantage that comes from high productivity. The very same ingredient that produces your cost advantage now produces your ability to satisfy even the most demanding customers.

That, to me, is a change that doesn’t say, “Oh, if I’m an entrepreneur, I shouldn’t use disruptive innovation as my guideposts, where to enter, how to develop my business.” But it says that the balance of who’s going to be successful and how easy it will be to disrupt large organizations, that balance is going to change over time in favor of large incumbents. The very formidable difficulties of disrupting their businesses.

AMY BERNSTEIN: That’s Derek van Bever and Felix Oberholzer-Gee of Harvard Business School, and Rita McGrath of Columbia Business School.

Next time in 4 Business Ideas That Changed the World: shareholder value. HBR editor in chief Adi Ignatius talks to three experts about the practice of making shareholders the chief priority for a company, for better and for worse. That’s next Thursday, right here in the HBR IdeaCast feed after the regular Tuesday episode.

This episode was produced by Curt Nickisch. We get technical help from Rob Eckhardt. Our audio product manager is Ian Fox, and Hannah Bates is our audio production assistant. Special thanks to Maureen Hoch. Thanks for listening to 4 Business Ideas That Changed the World, a special series of the HBR IdeaCast. I’m Amy Bernstein.

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