Sustaining Vs. Disruptive Innovation

Dr. Christensen uses data from the computer hardware industry to illustrate the difference between sustaining and disruptive innovation. Sustaining innovations are those that improve existing products in ways existing customers want.

For hard drives, this meant increased capacity for the same footprint. So a 8-inch disk that holds more data (for customers buying 8-inch disks) is a sustaining innovation, one that is readily adopted by manufactures and purchased by existing customers. This sort of innovation is handled well by companies – they seek out improvements and provide them to customers.

Disruptive innovation is different. First, it often seems like something no one would want because it is lower-performing than existing products. This happened when the 5.25-inch hard drive was introduced. It held less data and was more expensive (on a byte per byte basis).

But as data storage technology continued to improve, the 5.25-inch drives took more and more market share, both in their newly created niche (mini-computers) and eventually in the traditional markets. The smaller drives were cheaper to make, and although they still could not store as much as the larger drives, the performance was now ‘good enough’. Manufacturers of the larger drives simply couldn’t compete based on cost any longer. They went out of business.

This same cycle repeated for the 3.5-inch and smaller drives as they came out, until they were wiped out by flash-drives.

Each in turn was an innovation that didn’t seem profitable to manufacturers of the next larger size. Each, in turn, came to dominate, first new markets (desktop computers and then laptops) and then took over traditional markets as well.

In every case, existing customers were consulted for feedback on the latest innovation. Customers didn’t want it. They were wrong.

We are told that businesses are run, not by their CEOs or managers, but by their customers. Customers decide, in the end, who survives and who doesn’t because they provide the revenue and resources. The customer is always right; except when they aren’t.

Disruptive innovations start out being rejected by current customers, and good managers reject them based on this response. But customers are concerned with today, and they measure product value based on current needs. The key questions they had for computer hard drives were: How much does it cost per Megabyte and how many Megabytes can it store? Smaller hard drives didn’t meet these demands and they were rejected.

The disruptive innovation didn’t gain market share with these high-end customers until it already had a foothold with new customers, customers whose needs were better met by the lower overall cost (not per-Megabyte) and durability. Without these new customers, the innovation would have died.

Why then, didn’t the established companies simply sell to this new market right from the beginning? Weren’t they aware of the potential? They were, in fact, aware of all these things. But it didn’t matter, because good managers need growth and profits, and those things exist up-market, not down.

Consider the problem of a successful company. They have to show growth and profitability. The more you grow, the larger you become. And the larger you become, the more you have to make to keep growing.

A million dollar company that grows 20% a year has to increase sales by $200,000. A billion dollar company, to show the same growth, has to get 200 million. This means they are unlikely to see a small, emerging market as generating enough in sales to be attractive. Their focus is to sell up-market, to those customers who generate the most profit. Further, they need to sell products with the highest margins.

A disruptive innovation isn’t attractive from an economic standpoint. It is usually cheaper, simpler, more convenient and has a much lower profit margin. Small markets and low profits are anathema for large companies. The push is to sell up-market instead. This strategy actually works for a time. It works until the disruptive innovation finally improves to the point that it can compete even in the high performance end of the spectrum. At that point, it is too late for the established company to compete.

Start-ups have two real advantages with disruptive innovation. The first is flexibility – they can modify their business to meet changes rapidly. This is key when no one knows where an innovation will lead. Customers as well as manufacturers are discovering uses and performance objectives simultaneously.

The second advantage is that up-market for them is very far down-market for larger companies in the industry. This protects them from competition; a battle they would lose because they lack resources.

So why can’t leading companies in an industry simply jump in when the market becomes attractive? Why can’t they just take over when ‘things get interesting’?

Because, by then, it is too late – all the reasons they became great become the reasons they fall…

As we have seen, the forces that keep leading companies at the top of their industries are the same forces which prevent them from surviving disruptive innovation. Becoming the best in one value structure means the entire company is shaped to meet the demands of the market as it is now. The only way to meet the challenges of what will become the market tomorrow is to emulate a start-up yourself.

Corporations have a value structure that mimics the needs of current customers. Divisions are built around current problems and seek to improve in a modular fashion. The subsystem A division focuses on their piece of the picture, while the subsystem B division pursues improvements in their area of concern. This structure, combined with growth needs for large companies, means it is impossible to simply change one style of business into another. Added to this, no one yet knows just what the new way of doing things is going to be.

By starting a completely separate business entity, one whose focus is on a smaller market with smaller goals, a new corporate culture that meets the new challenges is allowed to appear. And this entity is shaped, not by ‘the way we’ve always done things’ but by its own market forces and by different customers.

Avoiding this idea of new customers means established businesses, even if they adopt a new technology, will decrease profits and give up whatever market share they currently enjoy.

The primary advantage that keeps small business in business is our ability to be nimble. Not only do we compete against disruptive innovation, we are the source of disruptive innovation.

And so we need to strengthen that strength.

We need more profits held in reserve so we can jump on new opportunities.

To accomplish that we need to turn mature products into cash-cows to fund new investments.

We need to think strategically about the larger forces at work in our marketplace — what are the largest innovation trends and which are sustaining, and which are disruptive?

In the end, it comes down to showing up to work every day pushing the ball forward. You need to keep putting yourself in a position for a breakout success — something that disrupts the industry or marketplace you’re in.

If you keep trying, it could happen.