McDonald’s The fast food industry has been a hybrid disruptor, making it so inexpensive and convenient to eat out that they created a massive wave of growth in the “eating out” industry. Their earliest victims were mom-and-pop diners. In the last decade the advent of food courts has taken fast food up-market. Expensive, romantic restaurants still thrive at the high end, of course.
MCI, Sprint These firms were low-end disruptors relative to AT&T’s long-distance telephone business. They enjoyed a unique opportunity to do this, because AT&T’s long-distance rates were set by regulation at artificially high levels in order to subsidize local residential telephone service.
Merrill Lynch Charles Merrill’s mantra in 1912 was to “Bring Wall Street to Main Street.” By employing salaried rather than commissioned brokers, he made it inexpensive enough to trade stocks that middle-income Americans could become equity investors. Merrill Lynch moved up-market over the next 90 years toward investors of higher net worth. Most of the brokerage firms that held seats on the New York Stock Exchange in the 1950s and 1960s have been merged out of existence because Merrill Lynch disrupted them.
Microsoft Its operating system was inadequate versus those of mainframe and minicomputer makers, versus UNIX, and versus Apple’s system. But its migration from DOS to Windows to Windows NT is taking the firm up-market, to the point that the UNIX world is seriously threatened. Microsoft, in turn, faces a threat from Linux. See also SQL.
Minicomputers Companies such as Digital Equipment, Prime, Wang, Data General, and Nixdorf were new-market disruptors relative to mainframe computer makers. Their relative simplicity and low price enabled departments (particularly engineering) in organizations to have their own computers, instead of having to rely on inconvenient, centralized mainframe computers that typically were optimized for generating financial reports.
Online stock- brokers Online trading of equities is a sustaining technology relative to the business models of discount brokers such as Ameritrade and is disruptive relative to full-service brokers such as Merrill Lynch. For Schwab, which started as a bare-bones discount broker but had moved up toward the mainstream market by the mid-1990s, Internet-based trading was disruptive enough that the company had to set up a separate division.
Online travel agencies Enabled by electronic ticketing, online travel agencies such as Expedia and Travelocity have so badly disrupted full-service, bricks-and-mortar agencies such as American Express that many airlines have dramatically cut the substantial commissions that historically they had paid to travel agencies.
Oracle Oracle’s relational database software was disruptive relative to that of the prior leaders, Cullinet and IBM, whose hierarchical or transactional database software ran on mainframe computers and was used to generate standard financial reports. Relational databases ran on minicomputers (and then microprocessor-based computers). Users without deep programming expertise could readily create their own custom reports and analyses using Oracle’s modular, relational architecture.
Palm Pilot, RIM BlackBerry Handheld devices are new-market disruptions relative to notebook computers.
Personal computers Microprocessor-based computers made by firms such as Apple, IBM, and Compaq were true new-market disruptions in that for years they were sold and used in their unique value network before they began to capture sales from higher-end professional computers.
Plastics Plastics as a category have disrupted steel and wood, in that the “quality” of plastic parts often was inferior to those of wood and steel along the metrics by which performance was measured in traditional applications. But their low cost and ease of shaping created many new applications, and plastics have pulled many applications out of the original metal and wood value networks into the plastic network. The disruption is particularly obvious if you look at where plastics were used in automobiles thirty years ago versus today.
Portable diabetes blood glucose meters Disrupted makers of large blood glucose testing machines in hospital laboratories, enabling patients with diabetes to monitor their own glucose levels.
Salesforce.com This company, with its inexpensive, simple, Internet-based system, is disrupting the leading providers of customer relationship management software, such as Siebel Systems.
Seiko watches Remember when Seiko watches were those cheap, throw-away black plastic watches? Seiko, Citizen, and Texas Instruments (which subsequently exited) disrupted the American and European watch industries.
Sonosite This firm makes a handheld ultrasound device that now enables health care professionals who historically needed the assistance of highly trained technicians with expensive equipment to look inside the bodies of patients in their care, and thereby to provide more accurate and timely diagnoses. The company floundered for a time attempting to implement its product as a sustaining innovation. But as of the time this book was being written, it seemed to have caught its disruptive stride in an impressive way.
Sony Sony pioneered the use of transistors in consumer electronics. Its portable radios and portable televisions disrupted firms such as RCA that made large TVs and radios using vacuum tube technology. During the 1960s and 1970s, Sony launched a series of new-market disruptions, with products such as videotape players, handheld consumer video recorders, cassette tape players, the Walkman, and the 3.5-inch floppy disk drive.
Southwest Airlines It was a hybrid disruptor because its original strategy was to compete against driving and buses and to fly in and out of nonmainstream airports. In addition, because its prices were so low, it also took business from established airlines. Just as Wal-Mart enjoys profit protection from being in small towns whose market can support only one discount store, many of Southwest’s routes offer the same protection.
SQL database software Microsoft’s SQL database software product is disrupting Oracle, which has moved up-market into expensive, integrated enterprise systems. Microsoft’s Access product, in turn, is disrupting SQL.
Staples With its direct competitors Office Max and Office Depot, Staples disrupted small stationery stores as well as commercial office supplies distributors.
Steel minimills Have been disrupting integrated mills around the world since the mid-1960s, as recounted in the text.
Sun Microsystems Sun, Apollo (HP), and Silicon Graphics, which built their systems around RISC microprocessors, took root in essentially the same value network as minicomputers, and disrupted them. These firms, in turn, are now being disrupted by CISC microprocessor-based computer makers such as Compaq and Dell.
Toyota Entered the U.S. market with cheap subcompact cars like the Corona. These were so inexpensive that people who historically couldn’t afford a new car now could buy one, or families could acquire a second car. Toyota now makes Lexuses, you may have noticed. Nissan has migrated from its Datsun to Infiniti, and Honda has progressed from its miniature CVCC to the Acura.
Toys ‘R Us Disrupted the toy departments of full-service and discount department stores, which has sent them up-market into higher-margin clothing.
Ultrasound Ultrasound technology is disruptive relative to X-ray imaging. Hewlett-Packard, Accuson, and ATL created a multibillion-dollar industry by imaging soft tissues. The leading X-ray equipment makers, including General Electric, Siemens, and Philips, became leaders in the two major radical sustaining technology revolutions in imaging: CT scanning and magnetic resonance imaging (MRI). Because ultrasound was a new-market disruption, none of the X-ray companies participated in ultrasound until very recently, when they acquired major ultrasound equipment companies.
University of Phoenix A unit of Apollo, the University of Phoenix is disrupting four-year colleges and certain professional graduate programs. It began by providing employee training courses for businesses, often de facto, but sometimes by formal contract. Its programs have expanded into a variety of open-enrollment, degree-granting programs. Today it is one of the largest educational institutions in the United States and is one of the leading providers of online education.
Unmanned aircraft These machines took root initially as drone targets to uncover hidden anti-aircraft emplacements. They then moved up-market into surveillance roles, and in the 2001–2002 war in Afghanistan, moved for the first time into limited weapons-carrying roles.
Vanguard Index mutual funds have been a low-end disruption relative to managed mutual funds. At the time of this writing, Vanguard’s assets had grown to rival closely those of the former undisputed mutual fund leader, Fidelity Management.
Veritas and Network Appliance Network-attached storage and IP storage area networks are disruptive approaches to enterprise data storage, relative to the centralized storage systems supplied by companies such as EMC. Some of these distributed networked storage systems are so simple to augment that an office assistant can simply “snap” an additional storage server onto a network.
Wireless telephony Cellular and digital wireless phones have been on a disruptive path against wireline phones for twenty-five years. Initially they were large, power-hungry car phones with spotty efficacy, but gradually they have improved to the point where, by some estimates, nearly one-fifth of mobile telephone users have chosen to “cut the cord” and do without wireline telephone service. The viability of the wireline long-distance business is now in jeopardy.
Xerox Photocopying has been a new-market disruption relative to offset printing, enabling nonprinters to make copies in the convenience of their workplace. Xerox’s initial machines were so expensive and complicated that they were housed in corporate photocopy centers manned by technicians.
Notes
1. We mentioned in chapter 1 that in early stages of theory building, the best that scholars can do is suggest categories that are defined by the attributes of the phenomena. Such studies are important stepping stones in the path of progress. One such important book is Richard Foster, Innovation: The Attacker’s Advantage (New York: Summit Books, 1986). Another study predicted that the leaders will fail when an innovation entails development of completely new technological competencies. See Michael L. Tushman and Philip Anderson, “Technological Discontinuities and Organizational Environments,” Administrative Science Quarterly 31 (1986). The research of MIT Professor James M. Utterback and his colleagues on dominant designs has been particularly instrumental in moving this body of theory toward circumstance-based categorization. See, for example, James M. Utterback and William J. Abernathy, “A Dynamic Model of Process and Product Innovation” Omega 33, no. 6 (1975): 639–656; and Clayton M. Christensen, Fernando F. Suarez, and James M. Utterback, “Strategies for Survival in Fast-Changing Industries,” Management Science 44, no. 12 (2001): 207–220.
2. Demanding customers are those customers who are willing to pay for increases on some dimension of performance—faster speeds, smaller sizes, better reliability, and so on. Less-demanding or undemanding customers are those customers who would rather make a different trade-off, accepting less performance (slower speeds, larger sizes, less reliability, and so on) in exchange for commensurately lower prices. We depict these trajectories as straight lines because empirically, when charted on semi-long graph paper, they in fact are straight, suggesting that our ability to utilize improvement increases at an exponential pace—though a pace that is shallower than the trajectory of technological progress.
3. After watching students and managers read, interpret, and talk about this distinction between sustaining and disruptive technologies, we have observed a stunningly common human tendency to take a new concept, new data, or new way of thinking and morph it so that it fits one’s existing mental models. Hence, many people have equated our use of the term sustaining innovation with their preexisting frame of “incremental” innovation, and they have equated the term disruptive technology with the words radical, breakthrough, out-of-the-box, or different. They then conclude that disruptive ideas (as they define the term) are good and merit investment. We regret that this happens, because our findings relate to a very specific definition of disruptiveness, as stated in our text here. It is for this reason that in this book we have substituted the term disruptive innovation for the term disruptive technology—to minimize the chance that readers will twist the concept to fit into what we believe is an incorrect way of categorizing the circumstances.
4. The Innovator’s Dilemma notes that the only times that established companies succeeded in staying atop their industries when confronted by disruptive technologies were when the established firms created a completely separate organization and gave it an unfettered charter to build a completely new business with a completely new business model. Hence, IBM was able to remain atop its industry when minicomputers disrupted mainframes because it competed in the minicomputer market with a different business unit. And when the personal computer emerged, IBM addressed that disruption by creating an autonomous business unit in Florida. Hewlett-Packard remained the leader in printers for personal computing because it created a division to make and sell ink-jet printers that was completely independent from its printer division in Boise, which made and sold laser jet printers. Since publication of The Innovator’s Dilemma, a number of companies that were faced with disruption have succeeded in becoming leaders in the wave of disruption coming at them by setting up separate organizational units to address the disruption. Charles Schwab became the leading online broker; Teradyne, the maker of semiconductor test equipment, became the leader in PC-based testers; and Intel introduced its Celeron chip, which reclaimed the low end of the microprocessor market. We hope that as more established companies learn to address disruptions through independent business units when faced with disruptive opportunities, the odds that historically were overwhelmingly favorable to entrant firms and their venture capital backers will become more favorable to established leaders who seek to create new-growth opportunities.
5. An exception to this statement is found in Japan, where a couple of integrated mills have subsequently acquired existing minimill companies.
6. The economists’ simple notion that price is determined at the intersection of supply and demand curves explains this phenomenon. Price gravitates to the cash cost of the marginal, or highest-cost, producer whose capacity is required for supply to meet the quantity demanded. When the marginal producers were high-cost integrated mills, minimills could make money in rebar. When the marginal, highest-cost producers were minimills, then the price of rebar collapsed. The same mechanism destroyed the temporary profitability to the minimills of each subsequent tier of the market, as described in the text that follows.
7. That cost reduction rarely creates competitive advantage is argued persuasively in Michael Porter, “What Is Strategy?” Harvard Business Review, November–December 1996, 61–78.
8. We recommend in particular Steven C. Wheelwright and Kim B. Clark, Revolutionizing New Product Development (New York: The Free Press, 1992); Stefan Thomke, Experimentation Matters: Unlocking the Potential of New Technologies for Innovation (Boston: Harvard Business School Press, 2003); Stefan Thomke and Eric von Hippel, “Customers as Innovators: A New Way to Create Value,” Harvard Business Review, April 2002, 74–81; and Eric von Hippel, The Sources of Innovation (New York: Oxford University Press, 1988).
9. This model explains quite clearly why the major airline companies in the United States are so chronically unprofitable. Southwest Airlines entered as a new-market disruptor (a concept defined in chapter 3), competing within Texas for customers who otherwise would not have flown at all, but would have used automobiles and buses. The airline has grown carefully into non-major airports, staying away from head-on competition against the majors. It is the low-end disruptors to this industry—airlines with names such as Jet-Blue, AirTran, People Express, Florida Air, Reno Air, Midway, Spirit, Presidential, and many others—that create the chronic unprofitability.
When leaders in most other industries get attacked by low-end disruptors, they can run away up-market and remain profitable (and often improve profitability) for some time. The integrated steel companies fled up-market
away from the minimills. The full-service department stores fled up-market into clothing, home furnishings, and cosmetics when the discount department stores attacked branded hard goods such as hardware, paint, toys, sporting goods, and kitchen utensils at the low-margin end of the merchandise mix. Today, the discount department stores such as Target and Wal-Mart are fleeing up-market into clothing, home furnishings, and cosmetics as hard goods discounters such as Circuit City, Toys ‘R Us, Staples, Home Depot, and Kitchens Etc. attack the low end; and so on.
The problem in airlines is that the majors cannot flee up-market. Their high fixed-cost structure makes it impossible to abandon the low end. Hence, low-end disruptors easily enter and attack; once one of them gets big enough, however, the major airlines declare that enough is enough, and they turn around and fight. This is why no low-end disruptor to date has survived for longer than a few years. But because low-end disruption by new companies is so easy to start, the majors can never raise low-end pricing up to levels of attractive profitability.
10. This history is recounted in a marvelous paper by Richard S. Rosenbloom, “From Gears to Chips: The Transformation of NCR and Harris in the Digital Era,” working paper, Harvard Business School Business History Seminar, Boston, 1988.
11. We would be foolish to claim that it is impossible to create new-growth companies with a sustaining, leap-beyond-the-competition strategy. It is more accurate to say that the odds of success are very, very low. But some sustaining entrants have succeeded. For example, EMC Corporation took the high-end data storage business away from IBM in the 1990s with a different product architecture than IBM’s. But as best we can tell, EMC’s products were better than IBM’s in the very applications that IBM served. Hewlett-Packard’s laser jet printer business was a sustaining technology relative to the dot-matrix printer, a market dominated by Epson. Yet Epson missed it. The jet engine was a radical but sustaining innovation relative to the piston aircraft engine. Two of the piston engine manufacturers, Rolls-Royce and Pratt & Whitney, navigated the transition to jets successfully. Others, such as Ford, did not. General Electric was an entrant in the jet revolution, and became very successful. These are anomalies that the theory of disruption cannot explain. Although our bias is to assume that most managers most of the time are on top of their businesses and manage them in competent ways, it is also true that sometimes managers simply fall asleep at the switch.
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