What Is a Disruptive Company?
Updated: 5 days ago
Nowadays, everyone is talking about disruption and disruptive companies. Disruption has become a buzzword for companies, products, and especially start-ups that wants to be seen as the new successful thing shaping the future. But what is the fuss all about, and what is actually a disruptive company?
Prof. Christensen’s starting point
It all started 1997 with the theory of the so-called Innovator’s Dilemma. Business Harvard School Professor Christensen wondered why great companies keep failing. So, he studied these cases and found the following pattern.
In his theory, established companies (incumbents) improve their products by adding new features and enhancing performance through sustaining innovations. This process ends in overperformance by offering features the mainstream does not want to pay for. Even though customers want better products over time, established companies are way faster in offering better products than actually needed by customers. In the end, established companies offer a fancy product that most people do not necessarily need. They do not need these new decorative features or better product performance.
Meanwhile, disruptive companies start to offer a new product to customers in the low-end segment (or at a niche segment). The disruptive company then starts to improve its innovative products over time. At one point, the disruptive company meets the demand of the mainstream and takes over most customers. Since now, the disruptive company satisfies the demand for a lower price than the now-former great companies do.
Innovator’s dilemma by Christensen
Source: adapted from Christensen et al. (2015)
Why is it called innovator’s dilemma?
Because established companies (incumbents) do everything right, they frequently improve their products (sustainable innovations), they focus on the more profitable high-end customer segment, and they increase profitability by offering appealing features and thereby collecting higher prices. The innovator’s dilemma is: by persuing the textbook and conducting sustainable innovations of their products, the established companies open the possibility of getting disrupted by a normally inferior company in the first place. As mention, under normal circumstances, the disruptive company has no chance to harm the established company. But by outrunning the mainstream market, the disruptive company can fill this gap. According to Christensen, the disruptive company is smaller and starts with lower product performance. By continually enhancing themself, they can meet the mainstream demand at a lower price.
Competition as an accelerator
Another reason why incumbents constantly improve their proposition lies in the competition as competition can push (differentiating) companies to constant sustainable innovations. For instance, being hustled by Samsung and other rivals, Apple has no other choice than to develop the products by its design, features, and brand image.
What is meant by a disruptive company?
Christensen’s theory started a discussion about disruption and about which company is actually disruptive and which is not. Many authors consider more companies as disruptive than Christensen does. For Christensen, a company is only disruptive when it fits into his model. Other authors extend the definition of disruptive companies to everything that disrupts existing companies.
For example, Tesla is for Christensen, not a disruptive company because it started at the high-end customer segment and not at the low-end (where a disruption should start according to his model), whereas many others consider Tesla as disruptive. The same for Uber. Uber did also not start at the low-end segment, and neither did taxis overperform (Taxis did not increase the performance of their products dramatically over time). So, Uber is for Christensen no disruptive company, while for most authors and especially most people talking about disruptions, Uber is disruptive.
Notably, there is no consistent definition. But the most significant and agreeable characteristics are:
Disruption is a process
No disruption happens from one day to another
The competition distinguishes from the usual competition
Because now the competitors have a different product with different propositions the competition is different than if both competitors have the same product just with a different brand and slightly different features
A disruptive company often creates a function in a new manner
E.g., Apple created a new function with the iPhone, now having touchscreen and apps
A disruptive company usually has new components in the proposition to the customers
E. g. in the case of digital cameras. In the beginning, digital cameras had worse photo quality than conventional cameras. But the new component of being able to save and send photos made the new technology more popular despite the worse photo quality.
Disruptive companies have a different business model
That allows them to have lower costs or to offer a different, innovative proposition to customers
Since disruption became such a fuzzy buzzword in the business world, it is important to know what is meant in the particular context: whether it refers to Christensen’s model or another definition. Possibly, sometimes when the word disruption is used, it does not mean an actual disruption since, to be a disruption, there has to be an existing company that gets disrupted.
Digital transformation vs. digital disruption
Business modeling and especially digital technologies are taking a remarkable role in disruptions, nowadays. Digital technology provides many opportunities for how to change things. Digital technology serves as a basis for future disruptive companies to utilize leaner business processes or to offer new products, respectively, services that have the potential to disrupt established companies. However, not every new digital company, business model, or product has the possibility of being disruptive even though it might change how things are done, simply because they do not disrupt another company. That is why it is important to know the difference between digital disruption and digital transformation.
Another company or industry gets disrupted
By a new proposition that is more appealing to the customers
Driven by digital technology
Changes the „game”, industry, competition
E.g., Netflix disrupted Blockbuster
Organizations adapt their processes, applications, infrastructure, etc. to the new digital age (change process)
Companies are still in the conventional competition (but they can generate advantages)
Could trigger disruptions
E.g., data analytics in marketing or internet of things in production
Digitalization is the basis for digital transformation. The digital transformation will lead us to the new digital age by including digital processes, applications, etc. whereas digital disruption is something more than just changing how things are done. By changing how things are done, disruptive companies create an innovative proposition that will, by time, attract the mainstream customer and then disrupt the established companies and hence changing the industry. At digital transformation, on the other hand, companies might get a disadvantage at acting too late to prepare for the digital age. But that companies struggle in regular competition, does not mean they are getting disrupted.
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