Is disruptive innovation dead?

The notion of disruption lies at the heart of modern corporate strategy - but is the concept itself in need of the shock treatment, asks Andrew Saunders.

by Andrew Saunders
Last Updated: 13 May 2016

In the slick and stage-managed world of big-bucks business theory, AAA-rated schadenfreude is a commodity always in short supply. Yet earlier in the summer, students of management thought were rewarded with a big dollop of it, in the shape of a rare, public and highly entertaining stand-up scrap that forced one of the biggest names in the business to come out fighting for the legitimacy of a seminal idea.

When Jill Lepore - David Woods Kemper '41 professor of American history at Harvard University, no less - published a beautifully crafted takedown in The New Yorker entitled 'The disruption machine, what the gospel of innovation gets wrong', she was aiming at not only what is arguably the pre-eminent concept of modern corporate strategy - disruptive innovation - but also its highly esteemed author, Professor Clayton Christensen.

Since his 1997 smash-hit book, The Innovator's Dilemma, which neatly explained, via carefully observed case studies, how great companies can fail simply by continuing to do the very things that made them successful, the reserved and diligent Christensen has become the unlikely heir to the crown of Michael Porter as the world's leading business guru, topping the influential guide Thinkers 50 for two out of the past three years.

What's more, the attack seemed personal. That the pair were Harvard colleagues - one, stylish and lettered, hailing from the university, the other, more homespun, if perhaps more successful, 'merely' from the Business School - just made the brew more piquant.

Professional historian Lepore took particular exception to the notion that you can use isolated observations from the past to make predictions about the future. 'Disruptive innovation as a theory of change is meant to serve both as a chronicle of the past (this has happened) and as a model for the future (it will keep happening).

'The strength of a prediction made from a model depends on the quality of the historical evidence and on the reliability of the methods used to gather and interpret it. Historical analysis proceeds from certain conditions regarding proof. None of these conditions have been met,' she wrote.

In other words, truly disruptive innovations - those that threaten incumbents by giving customers something they don't even know they want, a classic example being Henry Ford's 'faster horse' - can only properly be identified after the fact. By which time, for those hoping to profit from a little lucrative disruption of their own, it is too late.

Henry Ford's Model T, which went on sale in 1908, was a classic disruptive innovation

Stung by Lepore's words, the normally super-polite Christensen was motivated to bite back. 'In order to discredit me, Jill had to break all of the rules of scholarship that she accused me of breaking - in just egregious ways, truly egregious ways,' he said in an interview with Bloomberg Businessweek in late June. Ooh! The only thing missing was popcorn and comfy seats from which to enjoy the spectacle.

So who won, and do such highbrow high-jinks matter to those toiling away rather nearer the commercial coalface?

If, as John Kay, commenting on the row in the FT, observed, the award is made based on a written examination alone, there is no contest. 'Few business books meet the style standards of The New Yorker, and Professor Christensen's works are not among them. If the test is cogency and readability, then Prof Lepore wins hands down.'

But take fieldwork into consideration, too, and it's not so straightforward. Why, for example, has disruption become one of the most prevalent and widely acted-on business notions of our time? 'Some new ideas are not really that new in the first place, but disruptive innovation was new,' says Julian Birkinshaw, professor of strategy and entrepreneurship at LBS. 'When I first read it, I thought: wow, that really helps. It's a very useful way of giving a sense of why some companies succeed and some fail. I still teach it.'

In the 1960s, goes Christensen's original theory, the excavator market was disrupted by hydraulic rather than cable-operated machines (who knew?). In the 1980s, the market for disk-drive data storage was serially disrupted as smaller, higher-capacity and ever-cheaper devices hit the market. Similarly, smaller, cheaper and more flexible mini-mills disrupted the giant steelmakers, and so on.

It's also helpful to remember the context of the times in which the ideas gestated. 'In the US in the 1980s, the Japanese were killing everybody, especially Toyota in cars and Sony in consumer electronics. US firms were being beaten in exactly the way that Christensen described,' says veteran consultant and MT contributor Andrew Wileman. No wonder the book struck a chord.

Disruptive innovation has since been turned into a doctrine and used by armies of consultants, if not always by Christensen himself, to explain the success of everything from discount supermarkets to Facebook.

This is one of the more substantive criticisms of disruption and, by implication, of Christensen himself. Boosters (many with vested interests) see disruption everywhere - all success is disruptive, and everything disruptive will succeed - to the point that its value becomes questionable.

'It's the duty of every professor with a big idea to milk it for all it's worth, of course. But disruption has become blandified - it's now a kind of elevator shorthand for change. And change certainly isn't a new idea: we were talking about that at Booz in the late 1970s,' says Wileman.

It's even made it as far as the script of BBC Radio 4 agri-soap The Archers, where an upstart new farm manager (whose boss is a shadowy private equity type, of course) uses dark talk of 'disruptive change' to justify shaking up Ambridge's bucolic status quo.

This kind of ubiquity hints at a deeper fundamental failing, but one not limited to disruptive innovation. Rather, it bedevils all attempts to apply the scientific method to messy observations gathered in the real world. Business is not physics, and people are not fundamental particles whizzing around inside the LHC, subject to largely immutable laws. If anything, business is governed by psychology, because everything depends on the unpredictable behaviour of human beings.

This has uncomfortable implications for anything touted as business 'law', because as such knowledge becomes more widespread, it also becomes less 'true' (or less useful) as people change their behaviour accordingly. 'Of course, we are not studying fundamental laws,' says Birkinshaw. 'We are just trying to understand the world a little better.'

But whether or not the famously mild-mannered Christensen could have done more to distance his ideas from overuse and misrepresentation, they do retain some value, says James Alexander, co-founder of peer-to-peer lender Zopa and now partner at consultants The Foundation. He has seen disruption from both ends of the telescope, and has no doubt that the management of big companies can use it to learn how to keep on their toes.

'Incumbents don't tend to spot the value offered by disruptors early enough. When we launched Zopa, some banks dismissed the idea, and others thought it was so small they could afford to ignore it.' But the code of disruption says: "Switch early, and switch hard." A brave bank could have adopted peer-to-peer at that point, and it could have cleaned up.'

Every organisation has its worldview, he says, and the object lesson of disruption is that you should question that worldview regularly because it may very well be wrong. 'If the customer values an innovation, what you think about it as the incumbent really doesn't matter. Look at the taxi drivers and Uber.'

Uber has challeged the comfortable status quo enjoyed by taxi drivers all over the world

Ah, yes, Uber. The low-cost, collaborative and customer-centric taxi app Uber is a poster child for the current crop of disruptive share-conomy start-ups, and has an $18bn valuation to prove it. It's also run by exactly the kind of socially detached Silicon Valley start-up elite with whom Lepore also takes issue.

Disruption, in this case, she says, has become a circular and self-justifying dogma that allows billionaire entrepreneurs to do pretty much as they please, regardless of the impact on others. Disruptees are like nation states: they play by the rules. But disruptors, she says, are stateless, the Al-Qaeda cells of the business world. 'Disruptive innovation is competitive strategy for an age seized by terror.'

Hmm. Seized by terror or not, those concerned about disruptive innovation are not just to be found in the USA. In Germany, the government is trying to ban Uber altogether, a reaction that perhaps tells you more about Chancellor Merkel's essentially planned- economy attitude to the customer, forged as it was in the old DDR, than anything else.

But these fears may, like so much to do with disruptive innovation, be overplayed. Not all markets are equally susceptible to disruption and by no means all disruptors succeed. The FMCG giants, for example, have created very deep-rooted and hard-to-shift brands, thanks to decades of huge adspend (and perhaps a paucity of genuine innovation). Own-brand upstarts may nibble away at the sales of soap powder and shampoo, but their impact remains limited.

Even ostensibly successful disruptors may end up losing out to an incumbent to which they have shown the way, or be themselves disrupted. Tesla (see review, page 58) has certainly doled out an abrupt lesson in making desirable, practical electric cars to BMW, Audi and Mercedes, but has it actually beaten them? No, and it may not.

And even in sectors where disruption does succeed, it tends to be much rarer than people think. 'If disruption is the holy grail,' says Alexander, 'then you need to be very cognisant that there aren't many truly disruptive innovations. They don't come along very often.'

Disruption makes a strange target for a takedown in other ways, not least because it is now pretty old hat. It is decades since Kodak was fatally disrupted by the digital camera, and it happened not because it didn't see it coming (it invented the thing), but because it failed to react appropriately. The other large global producer of 35mm film, Fuji, did respond, and is still around today.

'You can always find examples where management was stupid and didn't move fast enough,' says Chris Outram, founding partner of strategy consultants OC&C, 'but I don't think anyone can get away with claiming they don't know about impending changes in technology or new product entrants. Any company whose managers don't think regularly about how its competitors might take its knees off isn't doing a very good job.'

Even supporters recognise that there is not much juice left in disruption, at least not in the sense of knowing something no one else knows. 'There is no competitive advantage left in disruption - it's now a mature theory and part of the vernacular,' says LBS's Birkinshaw. 'It's a necessary but not sufficient condition for success.' In this respect, at least, it could be high time for a big new idea about new ideas.

So, disruption may be past its sell-by date and going whiffy. But before we consign it to the recycling bin of history, there is one final morsel of wisdom it can provide. As Wileman puts it: 'The underlying point of disruptive innovation is to remind us that, however much we might wish it were otherwise, nothing lasts forever, and there is no such thing as a sustainable competitive advantage.'

That thought may be lacking schadenfreude, but it's worth remembering all the same.

WHAT IS DISRUPTION?

What is disruptive innovation? Is Tesla disruptive? Is Airbnb? Is Apple? The 'commonsense' answer seems to be 'yes', but take a look at the textbook definition, and things aren't quite so simple.

By these lights, Apple and Tesla don't even make it past the first fence. The classic disruptive innovation comes from below, and involves customers on the edge of the market seen as being insufficiently profitable. You could hardly describe the punters of either firm as unprofitable (Tesla's are arguably on the edge of the market, but, with entry-level pricing of around £50,000, they are undeniably well heeled).

Even Prof Christensen couldn't make his mind up about Apple, initially opining that the iPhone was not disruptive, then rather tellingly changing his mind after it had sold a few million units in short order, apparently for fear that his acolytes would desert him if he couldn't explain such a phenomenal success.

That's the sort of behaviour that gives business thinking a bad name, says contrarian consultant Alastair Dryburgh. 'The general standards of academic rigour in business schools, as compared with the rest of the university network, makes the business schools look poor,' he says.

Disruptors also typically make use of new technology, which in turn allows them to develop a new and much cheaper business model. 'Giffgaff, for example, has no customer-service department, because 80% of what they would do is done by the network's members,' says The Foundation's James Alexander. 'Imagine how much money O2 could save if it could do that, too?'

The other key characteristic of disruption is that it happens fast. This is what most worries CEOs of large companies - 'overnight' disruption that occurs before they can do anything about it.

'I am convinced that disruption is a force of nature. Human beings are naturally inquisitive and always looking for new ways of doing things,' says Chris Outram at OC&C.

So, from our original three 'commonsense' disruptors, only Airbnb seems to pass all the tests. It originated with unprofitable customers who wouldn't or couldn't pay for a hotel room, its business model is predicated on new technology and it has gained what the VCs call traction very fast indeed, with a $10bn valuation after only six years.

On the other hand, you might think, why worry about the semantics of how many angels can dance on the head of the disruption pin, when you could be out there in the market, reaping the spoils of disruptive innovation for yourself?

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