A brief overview
Published in · 5 min read · Jan 8, 2023
Innovation is a crucial element in the success of any business, as it allows companies to differentiate themselves from their competitors and stay ahead of industry trends.
Innovation is important for businesses because it (HBS, 2022):
- Allows adaptability and helps businesses overcome challenges
- Promotes growth and helps businesses stay competitive
- Helps businesses differentiate themselves from their competitors
In this article, we will explore the theory of Clayton Christensen, a leading expert on innovation and growth, and how his concepts of sustaining and disruptive innovation are reflected in various industries and organizations globally.
Definition of business innovation
At MIT’s New Enterprises course for entrepreneurs, Professor Aulet (2013) dedicates a section to innovation. In this section, the equation proposed by Edward Roberts is discussed.
INNOVATION=INVENTION∗ COMMERCIALIZATION
Aulet (2013), points out four important aspects of this equation:
- Innovation is not the same as invention.
- Innovation adds value, making things better, cheap, and/or fast.
- Invention without commercialization is not innovation and commercialization without invention is not innovation.
- The invention is an idea and ideas without commercialization do not add value.
As defined in a Harvard Business School article: “Innovation is a product, service, business model, or strategy that’s both novel and useful.
Innovations don’t have to be major breakthroughs in technology or new business models; they can be as simple as upgrades to a company’s customer service or features added to an existing product.” (HBS, 2022).
In this sense, innovation can also be described as sustaining or disruptive (Cote, 2022).
Sustaining innovation involves improving existing products rather than creating completely new products or markets (Deloitte, 2022), whereas technology disruption occurs when the performance of a new technology surpasses that of the dominant technology, leading to the displacement of the dominant technology (Hajhashem & Khorasani, 2015).
In our article “Disruptive Thinking: The Key to Driving Innovation in Today’s Business World”, we touched upon a more concrete definition of disruptive innovation, one of Clayton Christensen’s, widely recognized as a leading expert on the topics of innovation and growth, and his theories have been widely adopted and implemented in various industries and organizations globally (HBS, 2020).
Christensen’s theory of disruptive innovation refers to a process in which a smaller company with fewer resources is able to successfully challenge established incumbent businesses (HBR, 2015).
This occurs when incumbents focus on improving their products and services for their most demanding and profitable customers, and in doing so, they exceed the needs of some segments and ignore the needs of others (Claytonchristensen, 2023).
As a result, these overlooked segments become vulnerable to disruption by smaller companies that are able to deliver more suitable functionality at a lower price (HBS, 2016).
The smaller company can then move upmarket and challenge the dominance of the incumbents. This process is called disruptive innovation because it disrupts the traditional way in which businesses operate in an industry.
Therefore, based on Christensen’s theory of disruptive innovation, it follows that there are three key types of innovation (HBS, 2020):
Sustaining innovation
Sustaining innovation, as described by Christensen, is the improvement or enhancement of existing products to maintain or increase profit margins.
This type of innovation is typically pursued by companies targeting their most profitable customers who are willing to pay for improved performance.
Sustaining innovation is often employed by incumbent leaders, as they listen to their existing customers and use those insights to create superior products and services.
However, this can also create opportunities for new companies to enter the market at the low end.
A sustaining innovation could be the introduction of new features or improved performance in a new version of a popular computer operating system.
For example, each new release of the Microsoft Windows operating system typically includes updates and improvements to the user interface, security features, and performance, without fundamentally changing the way the operating system functions.
This allows the company to maintain its position as a leader in the market and attract customers who are willing to pay for improved performance.
Low-end disruption
Low-end disruption, according to Christensen, occurs when a small company with fewer resources enters the market with a “good enough” product that is offered at a lower price than existing products.
This type of disruption is often successful because it allows the new entrant to capture the customers of incumbent companies, who may be attracted to the lower price point.
As a result of the low-end disruption, incumbent companies may be motivated to “flee” rather than compete with the new entrant, as it may not be profitable for them to do so.
One example of low-end disruption in the tech industry is the rise of low-cost smartphones from companies like Xiaomi and Realme.
These companies entered the market with affordable smartphones that offered many of the same features as more expensive options from established brands like Apple and Samsung.
They targeted price-sensitive consumers in emerging markets, and their success has caused major disruptions in the smartphone industry.
As these companies have gained more market share and improved their technology, they have also started to target more affluent consumers and expand into more developed markets.
This has further disrupted the industry and forced established players to reevaluate their strategies.
New-market disruption
New-market disruption refers to the creation of a new market segment by introducing products or services that were previously unaffordable or unavailable to a larger customer base.
This type of disruption occurs when companies offer a new measure of performance that makes expensive, previously unattainable products or services more accessible.
New-market disruption is different from low-end disruption, which involves offering cheaper versions of existing products or services to compete with established players in a market.
According to the theory of disruptive innovation, Netflix is considered a disruptive innovator in the DVD rental industry.
The company initially entered the market with a DVD rental-by-mail service that was an example of low-end disruption to the traditional brick-and-mortar rental stores, such as Blockbuster.
Netflix then disrupted its own business model by introducing streaming, which rendered physical media, such as DVDs, obsolete.
This new service, was a new-market disruption, as it disrupted the traditional model of purchasing or renting DVDs, and allowed customers to access a wide variety of content online for a monthly subscription fee.
As a result, Netflix’s streaming service became the dominant player in the industry and led to the extinction of DVD rentals.
Innovation is a key driver of success in the business world, and understanding the different types and approaches to innovation can help organizations develop strategies that drive growth and disruption.
Sustaining innovation involves improving existing products to maintain or increase profit margins, while low-end disruption occurs when a smaller company enters the market with a “good enough” product at a lower price than existing products.
New-market disruption involves creating a new segment in an existing market to reach underserved customers, and disruptive innovation refers to a process in which a smaller company is able to successfully challenge established incumbent businesses.
By understanding these different types of innovation and the theories that underpin them, businesses can develop strategies that allow them to stay ahead of the competition and drive long-term success.
