The Innovator's Solution

by Clayton Christensen

  TABLE 2 - 2

  Disruptive Strategies and Companies

  Company or Product Description

  802.11 This is a protocol for high-bandwidth wireless transfer of data. It has begun disrupting local-area wireline networks. Its present limitations are that the signals can’t travel long distances.

  Amazon.com A low-end disruption relative to traditional bookstores.

  Barnes & Noble Began as a local seller of mostly overstocked, surplus books. Evolved to become the dominant discount retailer of in-print books.

  Beef processing In the 1880s, Swift and Armour began huge, centralized beef slaughtering operations that transported large sides of beef by refrigerated railcar to local meat cutters. This disrupted local slaughtering operations.

  Bell Telephone Bell’s original telephone could only carry a signal for three miles and therefore was rejected by Western Union, whose business was long-distance telegraphy, because Western Union couldn’t use it. Bell started a new-market disruption, offering local communication, and as the technology improved, it pulled customers from telegraphy’s long-distance value network into telephony.

  Black & Decker Prior to 1960, handheld electric tools were heavy and rugged, designed for professionals—and very expensive. B&D introduced a line of plastic-encased tools with universal motors that would only last twenty-five to thirty hours of operation—which actually was more than adequate for most do-it-yourselfers who drill a few holes per month. In today’s dollars, B&D brought the cost of these tools down from $150 to $20, enabling a whole new population to own and use their own tools.

  Blended plastics These blends of inexpensive polyolefin plastics such as polypropylene, sold by firms such as Himont, create composite materials that in many ways share the best properties of their constituent materials. They are getting better at a stunning rate, disrupting markets that historically had been the province of engineering plastics made by firms such as GE Plastics.

  Bloomberg L.P. Bloomberg began by providing basic financial data to investment analysts and brokers. It has gradually improved its data offerings and analysis and subsequently moved into the financial news business. It has substantially disrupted Dow Jones and Reuters as a result. More recently it has created its own elecronic clearing network to disrupt stock exchanges. Issuers of government securities can auction their initial offerings over the Bloomberg system, disrupting investment banks.

  Boxed beef The “boxed beef” model of Iowa Beef Packers completed the disruption of local butchering operations. Instead of shipping large sides of beef to local meat cutters for further cutting, IBP cut the beef into finished or nearly finished cuts for placement directly in supermarket cases.

  Canon photocopiers Until the early 1980s, when people needed photocopies, they had to take their originals to the corporate photocopy center, where a technician ran the job for them. He had to be a technician, because the high-speed Xerox machine there was very complicated and needed servicing frequently. When Canon and Ricoh introduced their countertop photocopiers, they were slow, produced poor-resolution copies, and didn’t enlarge or reduce or collate. But they were so inexpensive and simple to use that people could afford to put one right around the corner from their office. At the beginning people still took their high-volume jobs to the copy center. But little by little Canon improved its machines to the point that immediate, convenient access to high-quality, full-featured copying is almost a constitutional right in most workplaces today.

  Catalog retailing Sears, Roebuck and Montgomery Ward took root as catalog retailers—enabling people in rural America to buy things that historically had not been accessible. Their business model, entailing annual inventory turns of four times and gross margins of 30 percent, was disruptive relative to the model of full-service department stores, which required 40 percent gross margins because they turned inventories only three times annually. Sears and Montgomery Ward later moved up-market, building retail stores.

  Charles Schwab Started in 1975 as one of the first discount brokers. In the late 1990s Schwab created a separate organization to build an online trading business. It was so successful that the company folded its original organization into the disruptive one.

  Circuit City, Best Buy Disrupted the consumer electronics departments of full-service and discount department stores, which has sent them up-market into higher-margin clothing.

  Cisco Cisco’s router uses packet-switching technology to direct the flow of information over the telecommunications system, rather than the circuit-switching technology of the established industry leaders such as Lucent, Siemens, and Nortel. The technology divides information into virtual “envelopes” called packets and sends them out over the Internet. Each packet might take a different route to the addressed destination; when they arrive, the packets are put in the right order and “opened” for the recipient to see. Because this process entailed a few seconds’ latency delay, packet switching could not be used for voice telecommunications. But it was good enough to enable a new market to emerge—data networks. The technology has improved to the point that today, the latency delay of a packet-switched voice call is almost imperceptibly slower than that of a circuit-switched call, enabling VOIP, or voice-over-Internet-protocol telephony.

  Community colleges In some states, up to 80 percent of the graduates of reputable four-year state universities take some or all of their required general education courses at much less expensive community colleges, and then transfer those credits to the university—which (unconsciously) is becoming a provider of upper-division courses. Some community colleges have begun offering four-year degrees. Their enrollment is booming, often with nontraditional students who otherwise would not have taken these courses.

  Concord School of Law Founded by Kaplan, a unit of the Washington Post Company, this online law school has attracted a host of (primarily) nontraditional students. The school’s accreditation allows its graduates to take the California Bar exam, and its graduates’ success rate is comparable to those of many other law schools. Many of its students don’t enroll to become lawyers, however. They want to understand law to help them succeed in other careers.

  Credit scoring A formulaic method of determining creditworthiness, substituting for the subjective judgments of bank loan officers. Developed by a Minneapolis firm, Fair Isaac. Used initially to extend Sears and Penney’s in-store credit cards. As the technology improved, it was used for general credit cards, and then auto, mortgage, and now small-business loans.

  Dell Computer Dell’s direct-to-customer retailing model and its fast-throughput, high asset-turns manufacturing model allowed it to come underneath Compaq, IBM, and Hewlett-Packard as a low-end disruptor in personal computers. Clayton Christensen, the quintessential low-end consumer, wrote his doctoral thesis on a Dell notebook computer purchased in 1991 because it was the cheapest portable computer on the market. Because of Dell’s reputation for marginal quality, students needed special permission from Harvard to use doctoral stipend money to buy a Dell rather than a computer with a more reputable brand. Today Dell supplies most of the Harvard Business School’s computers.

  Department stores Department stores such as Z.C.M.I. in Salt Lake City, Marshall Field’s in Chicago, and Macy’s in New York disrupted small shopkeepers. The department stores made money by accelerating inventory turns to three times per year, which enabled them to earn attractive profit with 40 percent gross margins. Because their salespeople were much less knowledgeable about products, at the outset department stores had to start at the simplest end of the merchandise mix, with products that were so familiar in use that they sold themselves.

  Digital animation The fixed cost and skill required to make a full-length animated movie historically was so high that almost nobody could do it except Disney. Digital animation technology now enables far more companies (such as Pixar) to compete against Disney.

  Digital printing Offset printing is being disrupted by the ability of local ink- and laser-jet printers to
print custom, on-demand color documents at ever-improving speeds and quality. It has initially taken root in applications such as sales brochures.

  Discount department stores Department stores such as Korvette’s in New York, and later Kmart, Wal-Mart, and Target, disrupted full-service department stores. The discount stores made money by accelerating inventory turns to five times per year, which enabled them to earn attractive profit with 23 percent gross margins. Because their salespeople were much less knowledgeable about products, at the outset the discount department stores had to start at the simplest end of the merchandise mix, with branded hard goods that were so familiar in use that they sold themselves. They subsequently have moved up-market into soft goods such as clothing.

  eBay Most of the Internet start-ups of the late 1990s attempted to use the Internet as a sustaining innovation relative to the business models of established companies. eBay was a notable exception because it pursued a new-market disruptive strategy—enabling owners of collectibles that could never turn the heads of auction house executives to sell off things that they no longer needed.

  ECNs Electronic clearing networks (ECNs) allow buyers and sellers of equities to exchange them over a computer, at a fraction of the cost of doing it on a formal stock exchange. Island, one of the leading ECNs, can handle on one workstation volume amounting to 20 percent of the NASDAQ’s volume.

  E-mail E-mail is disrupting postal services. The volume of personal communication that is done by letter is dropping precipitously, leaving postal services with magazines, bills, and junk mail.

  Embraer and Canadair regional jets The regional passenger jet business is booming, as the capacity of their jets over the past fifteen years has stretched from 30 to 50, 70, and now 106. As Boeing and Airbus struggle to make bigger, faster jets for transcontinental and transoceanic travel, their growth has stagnated; the industry has consolidated (Lockheed and McDonnell Douglas have been folded in); and the growth is at the bottom of the market.

  Endoscopic surgery Minimally invasive surgery was actively disregarded by leading surgeons because the technique could only address the simplest procedures. But it has improved to the point that even certain relatively complicated heart procedures are done through a small port. The disruptive impact has primarily been on equipment makers and hospitals.

  Fidelity Management Created “self-service” personal financial management through its easy-to-buy families of mutual funds, 401k accounts, insurance products, and so forth.

  Fidelity was founded a few years after World War II, but began its disruptive movements in the 1970s, as best we can tell.

  Flat-panel displays (Sharp et al.) We normally think of disruptive technologies as being inexpensive, and many people are puzzled at how we could call flat-panel displays disruptive. Haven’t they come from the high end? Actually, no. Flat-panel LCD displays took root in digital watches and then moved to calculators, notebook computers, and small portable televisions. These were applications that historically had no electronic displays at all, and LCD displays were much cheaper than alternative means of bringing imaging to those applications. Flat screens have now begun invading the mainstream market of computer monitors and in-home television screens, disrupting the cathode ray tube. They are able to sustain substantial premium prices because of their two-dimensional character.

  Ford Henry Ford’s Model T was so inexpensive that he enabled a much larger population of people who historically could not afford cars to own one.

  Galanz China’s Galanz captured nearly 40 percent of the world microwave oven market in the 1990s. Although the company could have followed a strategy of low-end disruption—using low-cost Chinese labor to make appliances for export—it instead chose to be a new-market disruptor, making ovens that were small enough and consumed little-enough power to be used in cramped Chinese apartments and were cheap enough for non-microwave-oven owners to afford. Once they had built a business model that could make profits at market-enabling price points for the domestic Chinese market, taking on the rest of the world was as easy as egg-drop soup.

  GE Capital Has disrupted major portions of the commercial banks’ historical markets, primarily through low-end disruptive strategies.

  Google Google and its competing Internet search engines are disrupting directories of many sorts, including the Yellow Pages.

  Honda motorcycles Honda’s Supercub, introduced in the late 1950s, disrupted makers of big, thunderous motorcycles such as Harley-Davidson, Triumph, BMW, and others. It took root as an off-road recreational motorized bicycle, and then improved. Honda was joined by Yamaha, Kawasaki, and Suzuki.

  Ink-jet printers These were a disruption to the laser jet printer and a sustaining technology relative to the dot-matrix printer. We put ink-jet printers toward the “new-market” end of the disruption spectrum because their compact size, light weight, and low initial cost enabled a whole new population of computer owners—primarily students—to individually own and use a printer. Although they were slow and produced fuzzy images at the outset, ink-jet printers are now the mainstream printer of choice, having pushed laser jets to the high end. Hewlett-Packard stayed atop this industry by setting up an autonomous inkjet business unit to compete against its laser jet printer business.

  Intel microprocessor Intel’s earliest microprocessor in 1971 could only constitute the brain of a four-function calculator. Makers of computers whose logic circuitry is based on microprocessors have disrupted firms that made mainframes and minicomputers, whose logic circuitry was based on printed wiring boards.

  Intuit’s QuickBooks accounting software Whereas the established industry leaders in accounting software enabled small-business managers to run all sorts of sophisticated reports for analytical purposes, QuickBooks, which was a derivative of Intuit’s personal finance software product Quicken, basically helped them keep track of their cash. It created a huge new market among very small business owners (most with fewer than five employees) who historically did not keep their books on computer. Within two years of launch, Intuit had seized 85 percent of the small-business accounting software market—mainly by creating new growth. The stealing of the established companies’ customers came later, as QuickBooks’ functionality improved.

  Intuit’s TurboTax PC-based accounting software is disrupting personal tax preparation services such as H&R Block.

  Japanese steel makers Firms such as Nippon Steel, Nippon Kokkan, and Kobe and Kawasaki Steel began their growth by exporting very low quality steel to Western markets starting in the late 1950s. As their customers (including disruptive Japanese automakers like Toyota) grew, the Japanese steel industry had to increase capacity dramatically, enabling it to incorporate the latest steelmaking technology such as continuous casting and basic oxygen furnaces in the new mills. This accelerated their up-market trajectory dramatically.

  JetBlue Whereas Southwest Airlines initially followed a strategy of new-market disruption, JetBlue’s approach is low-end disruption. Its long-range viability depends on the major airlines’ motivation to run away from the attack, as integrated steel mills and full-service department stores did.

  Kodak Until the late 1800s, photography was extremely complicated. Only professionals could own and operate the expensive equipment. George Eastman’s simple “point and shoot” Brownie camera allowed consumers to take their own pictures. They could then mail the roll of film to Kodak, which would develop it and return the photos by mail.

  Kodak Funsaver Kodak’s Funsaver brand single-use camera was born after painful labor within Kodak, because its profit model and gross margins were lower than Kodak could earn by selling roll film, and the quality of the images was not as good as those taken in high-quality 35mm cameras. But Kodak commercialized it through a different division, and it sold almost exclusively to people who would not have bought film anyway because they didn’t have a camera. Although it has potential to move up-market and take share against traditional cameras with a new brand, Maxx, we worry that Kodak might have s
topped driving it in this direction.

  Korean auto manufacturers (Hyundai and Kia) Korean automakers, including Hyundai and Kia, gained more points of world- wide market share in the 1990s than any other country’s automakers. And yet few of the established firms are concerned, because their gains have come in what is, to the established firms, the lowest-profit portion of the market.

  Linux The disruptiveness of the Linux operating system can only be expressed relative to the alternatives now in the market. Its most successful deployment thus far is within the market for server operating systems—sandwiched between high-end UNIX systems and the Microsoft Windows NT operating system (which has been moving disruptively up-market against UNIX for some time). From its initial foothold in Internet servers, it has gained significant share against UNIX operating systems such as Sun’s Solaris. The position of Linux may actually block the further up-market movement of Microsoft NT. Linux has begun to disrupt the market for operating system software on handheld devices as well.

  MBNA We noted earlier that credit scoring is a formulaic method of determining the creditworthiness of a loan applicant. It was originally implemented in commercial banks as a sustaining technology, to reduce the costs of credit evaluation. In the 1990s, however, it was deployed in high-volume, low-cost “monoline” business models by firms such as MBNA, Capital One, and First USA, which have substantially disrupted commercial banks’ credit card business. At the time of this writing, in fact, Citibank is the only remaining major commercial bank with a substantial and profitable credit card business.