MIT_Sloan_Management_Review_-_Spring_2020

(WallPaper) #1

SLOANREVIEW.MIT.EDU SPRING 2020 MIT SLOAN MANAGEMENT REVIEW 29


The Classic Theory of Disruption
Before we look at how things have evolved, let’s briefly
review why Christensen’s theory proved so influen-
tial and, indeed, disruptive to existing ideas of
competitive advantage.^1 Traditional strategy had
been anchored on the notion of “generic strategies”
in which a company could compete at the high end
by differentiating, at the low end by pursuing cost
leadership, or focus on serving a specific niche excep-
tionally well.^2 Christensen illustrated a way for new
entrants to cheerfully ignore these basic strategy dy-
namics. He showed how a new kind of dangerous
competitor could wreak havoc by entering at the low
end of a market, where margins are thin and custom-
ers are reluctant to pay for anything they don’t need.
The new entrant comes in with a product or ser-
vice that’s cheaper and more convenient but that
doesn’t offer the same level of performance on the
dominant criteria that most customers expect from
incumbents that have been working on the tech-
nology for years. The incumbents feel they can
ignore the newcomer. Not only are its products in-
ferior, but its margins are lower and its customers
less loyal. Incumbents choose instead to focus on
sustaining innovation — making improvements to
the features that have been of most value to their
high-end customers.
Christensen showed the downside of ignoring
the newcomers. Eventually, as these upstarts im-
prove, they become pretty good at the old dominant
criteria. They also develop such solid innovations
at the low end that they bring new customers into
the market. Having doubled down on what has
always worked, the incumbents fail to notice two
things. First, they miss out on the meaningful value
of the low-end innovations developed by newcom-
ers. Second, they are late to recognize that their own
customers are less willing to pay more for more of
the old attributes. Their key product has been com-
moditized, supplanted by a new technology that
better suits the changed needs of customers.
A prime example of this process occurred at
Intel. The chipmaker enjoyed decades of high mar-
gins by selling high-end, powerful, and fast
computer chips for laptops, desktop computers,
and servers that allowed users to get the most out of
increasingly power-hungry software. The company
(and its customers) didn’t care much about power


consumption because personal computers were ei-
ther permanently plugged into a power source or
had sufficiently large batteries to go hours between
charges. Dominant to the point of near-monopoly,
Intel dismissed and largely ignored a new set of less
powerful, albeit less power-hungry, chips based on
the ARM architecture (created by a once-obscure
British company).
The smartphone revolution of the late 2000s
exposed the fatal flaw in Intel’s offerings. The compa-
ny’s chips were power-hungry, but now users wanted
light mobile devices that could last all day. Chips based
on the ARM design were far more efficient — the new
differentiating quality. Intel managers had been
focused on making its core microprocessors better
at what had always seemed to matter most. So the
company missed the potential of mobile device chips,
which more than made up for their lower margins
by finding their way into billions — not millions —
of devices.
Intel’s struggles with chips for mobile devices
illustrate two dimensions of the disruption de-
scribed by Christensen. The first is the market entry
of a new competitor whose offerings are not good
enough to meet the needs of established customers
(PC owners). The second is the moment when that
entrant creates a market by selling solutions to users
who were never customers before, like smartphone
manufacturers.^3
Christensen’s theory also highlighted the powerful
way that management metrics and incentive struc-
tures reinforce this pattern. In his view, many of these
combine to discourage executives from investing in
innovation. Financials expressed as ratios, account-
ing-driven depreciation schedules, conventional
business plans, and stock- or time-based rewards to
managers all detract from a leader’s willingness to
pursue uncertain (though potentially high-payoff )
innovations. This has all been exacerbated by outsize
rewards to executives and investors in the short run,
which undermine investment for the long run.

The Rise of the Cheap, Convenient,
and High-Quality Startup
Today’s direct-to-consumer (DTC) disrupters illus-
trate a next evolution in the theory of disruption.
These disrupters target the very core of incumbents’
existing businesses by using today’s broad array of
Free download pdf