What Is Disruptive Innovation? 2 Types of Disruptive Innovation

Disruptive innovation is innovation that shakes up an established industry (often using new technology) to reach previously overlooked segments of the market. Disruptive innovation occurs when a new entrant expands the market by providing either more affordable, more accessible, or a better alternative to a previously existing product or service.

Disruptive innovation refers to the process of changing the market, rather than the new product or service itself. Streaming services are an example of disruptive innovation. Video rental companies enjoyed success for decades before streaming services disrupted the existing market by using new technology to deliver entertainment directly to people’s TVs or computers for a low monthly price.

Harvard Business School professor Clayton M. Christensen popularized the theory of disruptive innovation in his books The Innovator's Dilemma and The Innovator’s Solution, published in 1997 and 2003, respectively. Disruptive innovation has since become one of the most popular business models used by entrepreneurs, startups, and smaller companies looking to increase their market share.

There are three main components of disruptive innovation:

1. 1. Enabling technology: Innovation necessitates the means to make a better product. For example, the transistor radio capitalized on the broadcast network to create a low-cost portable radio.
2. 2. Innovative business model: For a disruptive business to succeed, it must operate a new business model that targets new customers or low-end customers within a given industry. This is what separates a disruptive innovation from a regular innovation. Not all innovations are disruptive, even if they are unique.
3. 3. Coherent value network: In order for a disruptive innovation to take hold, it must be accepted across a coherent value network—the suppliers, distributors, and vendors all affected by the disruptive technology.

Harvard Business School professor Clayton Christensen identifies two main types of disruptive innovation:

1. 1. Low-end disruption: Many innovations struggle to find immediate success with mainstream customers. New entrants have to compete against established companies in established markets and are usually unable to create a product of high enough quality to meet customers’ needs at first. As a result, disruptive innovators tend to target market segments at the low end of the market. These customers are often viewed as less profitable customers by established companies. In this situation, the new entrant, capitalizing on new technologies, creates a low-end product that may be worse than the original but still meets the requirements of the most price-conscious customers. Once the disruptor establishes a foothold, they move upwards to increase profit margins by targeting the more demanding customers.
2. 2. New-market disruption: New market disruption happens when a new entrant expands the market by targeting customers who didn’t previously use a similar product at all. By offering a more accessible or cheaper product, the disruptive company thus creates a “new market.”

Many companies have adopted the disruptive innovation model to offer products and services that fundamentally change the nature of the industry.

1. 1. Example of low-end disupruption: An example of this is online booksellers, who targeted the bottom of the market, offering books for a lower price to customers who cared more about the low cost than the luxury of browsing in a bookstore to see available options. Over time, they were able to target high-end customers as well, which yielded higher profits.
2. 2. Example of new market disruption: The first computers—known as mainframes—were large, expensive, and challenging to operate. Therefore, the computer market initially only catered to large businesses. The first providers of personal computers—minicomputers—saw the untapped potential and capitalized on it. Although this disruptive technology was primitive compared to today’s computers, its price tag, functionality, and convenience appealed to the masses.

Not all innovation is disruptive. While disruptive innovation begins by expanding the market, sometimes driving out long-standing incumbents, sustaining innovation is incremental, and targets existing customers who were using a previous iteration of the product or service. Smartphone companies, which routinely innovate and use new technologies to improve on their existing products to increase profitability, are examples of sustaining innovation.

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