- Introduction
The term ‘disruptive Innovation’ has gained wide popularity since it was first introduced by Christensen (Christensen, 2003). However, this concept has also caused debate as to what exactly is meant by ‘disruptive Innovation’, how it can be applied and to what extent it can be useful to anticipate and respond to the emergence of disruptive technologies.
Chapter 2 will introduce and critically evaluate the concept of ‘disruptive innovation’ (Christensen, 2003). Chapter 3 will show how this concept can be applied to the cases of Skype, Nintendo and Linux. Chapter 4 will attempt to derive conclusions from the literature review on disruptive innovation and its application to the selected cases.
- ‘Disruptive Innovation’ - a useful theoretical concept?
Christensen first introduced the concept of ‘disruptive technology’ in 1995 (Christensen & Bower, 1995). In his studies of hard-disk drives, he observed that many companies operating in the mainstream market had failed in retaining their market power or gone into bankruptcy. This was due to the emergence of other companies which offered products which were typically simpler, cheaper, lower in performance and more convenient to use and were appealing to customers in a niche market.
Established products became ever more complex and sophisticated over time and exceeded the ability of customers to adopt these products, while ‘disruptive technologies’ offered other features, e.g. low price, simplicity. ‘Disruptive technologies’ occurred at the low-end of the market and was initially not perceived as a threat by established firms (Christensen & Bower, 1995). Ultimately, the ‘disruptive technology’ improved in performance, expanded into a mass market and eventually replaced established technologies.
Christensen distinguishes between ‘sustaining technologies’ which improve the performance of already established products in the mainstream market and ‘disruptive technologies’ which have attributes which customers in other segments of the market value (Christensen & Bower, 1995).
Research emphasises that the reasons why companies invest in established markets rather than in potentially ‘disruptive technologies’ lies in the technological trajectories of companies, meaning companies do not have an unlimited choice of strategies available. A company’s opportunities are path - dependent, e.g. constrained by its position, knowledge and competencies accumulated over time (Nelson & Winter, 1982 & Dosi, 1982). This makes responding to ‘disruptive technologies’ very difficult for established firms.
The difficulty in defining what precisely a ’disruptive technology’ is relates to the question if technologies are in themselves inherently disruptive. ‘Disruptive technologies’ can be a threat to some companies while opportunities for others, in other words they are either competence - destroying or competence - enhancing (Tushman & Anderson, 1986). An example would be the internet, which may be a disruptive technology to some firms, while an opportunity to others, e.g. amazon in bookselling (Daneels, 2004). However, Christensen emphasised that competence - destroying technologies serving a mainstream market do not constitute ‘disruptive technologies’ (Christensen & Bower, 1996).
This points to the possibility that it is not technologies themselves which cause the disruption to established companies but rather the impact of these technologies on firm’s internal processes, their accumulated knowledge - base and competences. Therefore, Christensen eventually extended the term ‘disruptive technologies’ to ‘disruptive innovation’ to extend its potential applicability (Christensen, 2003).
Nevertheless, the difficulty still remains to accurately define different types of innovation. For instance, Henderson & Clark classified innovation according to the knowledge required to develop new products which includes two dimensions: knowledge of components and knowledge of the linkages between components (Henderson & Clark, 1990). This includes incremental, modular, discontinous and architectural innovation (Henderson & Clark, 1990).
However, it has been pointed out that researchers classified the same innovation differently depending on their definitions (Garcia & Calantone, 2001) e.g. the electrical typewriter could be classified as ‘discontinous’ due to causing industrial disruption (Utterback, 1996) or as ‘incremental’ as it concerns adding new features for improving an already existing product (Rothwell & Gardiner, 1988). In addition, the term ‘radical innovation’ is often used interchangeably with ‘disruptive innovation’. However, while disruptive innovation refers to products which are specified as being initially cheaper, simpler and lower performing than rival products and aimed specifically at a niche market, ‘radical innovation’ seems to be broader defined and refers to a substantially different technology while offering a distinct increase in customer benefits (Chandy & Tellis, 1998).
While the terminology for disruptive innovation seems to be confusing, it becomes even more complicated if the term ‘disruptive innovation’ also refers to technologies, products and business model innovations.
For instance, Hamel emphasises the need for ‘business concept innovations’ by reconfiguring existing business models to enable a company to stay ahead of its competitors in a fast changing environment (Hamel, 2000).
The problem arises when ‘disruptive innovation’ refers to technologies, products and business models alike as conclusions about one aspect of a specific type of ‘disruptive innovation’ cannot be generalised across all types. For instance, while Christensen shows that disruptive innovations eventually dominate the market, this is not true of business model innovations, e.g. low budget - airlines have captured approx. 20% of the entire market (Markides, 2006). This distinction has important implications as it affects the strategies established companies may want to adopt in the light of emerging, disruptive innovations elsewhere. Therefore, imitating a competitor’s product or business model may not necessarily be adequate as it may lead to an erosion of the existing customer base (Markides, 2006).
It is also difficult to apply the concept of ‘disruptive innovation’ across different product categories. Utterback shows that some products do not fit into this concept as some displayed in their initial stages higher performance and / or higher price than their rival product (Utterback, 2005). This may be due to the complexity of most products which usually have more performance features in comparison to the disk drives Christensen studied (Utterback, 2005). There is therefore the possibility that customers simply trade different features for others when deciding to purchase a new product (Daneels, 2004).
The distinction between sustaining and disruptive innovation as proposed by Christensen is based on the innovation, product and technology lifecycle concepts.
According to the innovation lifecycle model, the innovation process starts with an exploration phase of technological possibilities and market needs which are initially unknown. Over time, a dominant design emerges in the ‘transitional phase’ and the choice of options becomes focused along technological trajectories. This is followed by refining the product to improve product performance in the ‘specific phase’ (Abernathy & Utterback, 1978).
The Product Lifecycle Concept (PLC) states that products follow a pattern of market development where a product is first introduced to the market, followed by market growth when demand begins to accelerate, the stage of market maturity where demand grows at the replacement rate and finally, the product enters the market decline stage where consumers lost interest and sales start to decline. The product lifecycle can be seen as an S-shaped curve (Levitt, 1965).
The technology life cycle follows a similar pattern as the PLC starting with an introduction stage, where there is initially slow progress in performance due to the technology not being well known, followed by a growth phase, where the technology rapidly improves in performance around a dominant design. The new technology becomes widely known and sales increase rapidly. The technology then enters a maturity phase, where progress slows down significantly (Foster, 1986 & Utterback 1994).
However, it has been demonstrated that the development of technologies follows an irregular pattern with longer phases of no growth interrupted by performance jumps (Sood & Tellis, 2005). Further, new technologies may emerge above or below the performance of existing technologies and originate in established as well as in entrant firms (Sood & Tellis, 2005).
The limited validity of the product lifecycle has been emphasised and research points to the fact that this model cannot be generalised across industries, products and services e.g. many brands remain in a leading market position 2 - 3 decades after their introduction (Mercer, 1993).
It also remains unclear when a product enters a certain stage in the lifecycle as some products diffuse very slowly while others display rapid growth (Dhalla & Yuspeh, 1976). The length of the different stages varies between products and some products experience a sudden revival and proceed to a period of renewed growth (Dhalla & Yuspeh, 1976). In fact, the time when a product enters a specific stage of the PLC and its length depends on a variety of factors, e.g. in the initial stage this may be the perceived comparative advantage of the new product relative to the alternative, barriers to adoption or information and availability (Day, 1981). It has also been shown that the PLC model actually works in reverse order for services where innovation in processes comes first which create the necessary conditions for product innovation to occur (Barras, 1986).
Based on these observations, it is questionable if the concept of ‘disruptive innovation’ is useful as some ‘disruptive’ innovations do not necessarily replace older products.
In addition, Varadarajan shows that incremental innovation plays a vital role as part of a competitive strategy by extending the timeframe of radical innovations (Varadarajan, 2009). This can take place by entering new markets in product categories where the firm is present, e.g. entering new markets, market segments or new geographic markets (Varadarajan, 2009). Equally, a firm may enter markets where it does not have a presence yet, e.g. entering new markets which are currently fragmented or emerging markets (Varadarajan, 2009). It may also succeed in achieving or defending product leadership, e.g. responding to price sensitivity (Varadarajan, 2009). Kanter emphasises that established firms make the mistake on focusing on the next blockbuster innovation, being too product centric and expecting immediate profits, while ignoring that incremental innovations can lead to substantial profits (Kanter, 2006).
However, products in the category of ‘disruptive innovation’ do not automatically generate profit, but it rather depends on the ability of the innovator to commercialise the product successfully. Teece shows that where products can be protected through patents or copyright or the nature of the product is such that it would be difficult for competitors to imitate, the innovator is likely to profit from the innovation (Teece, 1986). Therefore, barriers to entry play an important part in determining success of new entrants (Karakaya & Stahl, 1989). For instance, a way for established firms to maintain barriers to entry and remain leader in the market may be through proprietary software systems, e.g. Microsoft has a market lead due to the windows platform as a proprietary system.
Christensen also seems to overlook potentially disruptive technologies which did not succeed in the market (Daneels, 2004). Established companies also have survived to ignore the emergence of disruptive technologies without it having serious consequences for their business, e.g. Sony initially failed to develop a portable MP3 player despite its dominance in the market for the walkman (Kageyama, 2005). Equally, established companies have managed to successfully respond to disruptive innovations either through internal reorganisation or establishing other organisational entities, e.g. Motorola, IBM or Kodak (Macher & Richman, 2004).
Established companies usually have expertise in certain areas due to their firm - specific capacities and knowledge - base which, due to its often tacit nature, is difficult for competitors to imitate which may remain a distinct advantage for established companies.
King and Tucci show that companies with prior experience in hard disk drives were most likely to enter new market niches and contradict Christensen’s findings (King & Tucci, 1999, 2002), while Chesbrough comes to similar conclusions (Chesbrough, 2003). In addition, research also showed that established firms originating in other industries are diversifying and bring their resources and transferable knowledge when entering a new market (Helfat & Lieberman, 2002). It has also been shown that prior knowledge facilitates the learning of new knowledge, meaning potential indicators for a disruptive innovation may be better recognised and processed by an established firm with accumulated knowledge in a specific field. This absorptive capacity is a necessary prerequisite for firms to make sense of new knowledge (Cohen & Levinthal, 1990).
Companies which are producing disruptive technologies, products or business models will compete with the tangible and intangible resources an established company has available as soon as it enters the mass market, e.g. established firms often dominate supply chains, retail channels and other distribution networks or have other complementary assets or capabilities such as marketing or after-sales support (Teece, 1986).
In this case, established firms maintain their market position through joint ventures, strategic alliances or acquisitions of start-ups which provide access to the disruptive technology for established firms while at the same time providing market entrants with the vital resources (Rothaermel, 2001).
Therefore, it seems that some established companies may fail when faced with the emergence of disruptive innovations, products or business models, but certainly not all of them do. A recent study of breakthrough innovations in the pharmaceutical industry has shown that radical innovation is more likely to originate in established firms. These have greater financial, technological and market - related resources to manage the risk inherent in radical innovation (Sorescu et al., 2003). However, the pharmaceutical industry maintains high barriers to entry for new entrants due to the high degree of concentration, products are protected by patents and innovation involves a substantial amount of risk and requires large financial and technological resources. Therefore, these results cannot be generalised to apply to other industries.
A further study of radical innovations in the consumer durables and office products pointed to the weak empirical base of the disruptive innovation literature and emphasise that these have not used cross - sectional studies with a large sample of products. The study reveals that older innovations were indeed mainly introduced by new entrants, while recent innovations originated in established firms (Chandy & Tellis, 2000).
It seems that the evidence is rather inconclusive as to under which conditions firms failed when faced with disruptive innovation. Possible explanations range from the case of Polaroid and the unwillingness of senior management to embrace a potentially disruptive technology (Tripsas & Gavetti, 2000) to the role of routines and organisational inertia (Nelson & Winter, 1982).Therefore, Daneels points to the need to look at entire systems into which a firm is embedded as factors for explaining why some firms fail when faced with disruptive innovation (Daneels, 2004).
- Case studies
After reviewing the relevant literature and pointing to the limitations of ‘disruptive innovation’, this chapter will attempt to apply this concept to recent technological innovations. Rather than focusing on one particular innovation or organisation, this chapter compares three different innovations in order to derive useful conclusions regarding the validity of ‘disruptive innovation’. The cases of Skype, Nintendo Wii and Linux were selected on the basis that they are recent innovations in a product category different from those studied in the literature which makes them an interesting subject for enquiry.
2.1 Skype
Skype has combined two potentially disruptive technologies, P2P (peer - to - peer computing) and VoIP (Voice over Internet protocol) into a new business model and therefore radically transforming the way people communicate (Rao et al, 2004). It also added other features such as instant messaging and provides an easy - to use interface.
Skype can be downloaded for free and is compatible with all major operating systems. In addition, Skype is easy to install and does not require a configuration of gateways and firewalls (Tapio, 2005).
Skype was founded in 1993 and initially offered lower performance in contrast to communication via landlines or mobiles, is free and easy to use and aimed at a marginal segment of the market (Tapio, 2005). Skype - Out/In was added later as a feature to make / receive calls to other networks or landlines as a charged service (Rao et al. , 2004).
Skype changed the traditional marketing and revenue - based business model in the telecommunications sector by relying on a peer - to - peer based platform, free PC - to - PC telephony, its potential for scalability as well as viral marketing (Osterwalder at al., 2005). Delivery and sales channels differ substantially from conventional network providers as Skype operates entirely over the internet (Osterwalder at al., 2005).
It therefore fits into the concept of ‘disruptive innovation’ as proposed by Christensen (Christensen, 2003). Faced with the disruptive innovation with the emergence of Skype, existing network providers in the telecommunications sector may find it difficult to compete against Skype as their business model is entirely based on revenue generating processes through per - call charges (Osterwalder at al., 2005). Skype equally derives revenues from SkypeIn/Out as well as other available premium features. However, its business model is based on building up a large customer base followed by the introduction of further premium services, while basic services such as Skype - to Skype calls remain free of charge (Osterwalder at al., 2005).
While at first glance, Skype seems a perfect example of a ‘disruptive innovation’, the next step according to the concept of ‘disruptive innovation’ would be to replace older technologies, e.g. the revenue - based business models as per - call charges of the conventional mobile & landline operators would become obsolete over time and Skype would need to shift into the mass market.
As Skype was acquired by eBay, there might be possibilities to reach a mass market (Rao et al. 2004). eBay’s acquisition of Skype could lead to a potential disruption as for eBay, the partnership has the advantage of adding a free communications feature to online auctions and thereby accelerate trade, while PayPal, owned by eBay, can provide simple and secure billing for corporate customers of Skype (Rao et al 2004).
Another recent partnership with the 3 network may turn out to be another route to the mass market. The Skypephone in partnership with 3 was released in August 2008 and offers free PC - to mobile as well as free mobile - to - mobile calls (New Media Age, 2008). Network operator 3 tries to position itself in the market as a mobile media company by adding applications such as Skype, Facebook and Windows Live Messenger (New Media Age, 2008). Skype in turn could potentially reach a mass market in the conventional telecommunications sector by entering into partnerships with network operators (Rao et al 2004).