Disruptive Innovation in the Era of Big Tech

Welcome to HBR on Strategy, case studies and conversations with the world's top business and management experts, hand-selected to help you unlock new ways of doing business. In 1995, the late and legendary Harvard Business School professor Clayton Christensen introduced his theory of disruptive innovation right here in the pages of Harvard Business Review. The idea inspired a generation of entrepreneurs and businesses ranging from small startups to global corporations. Almost 3 decades later, debates have emerged around how the theory should be applied in the real world, especially within the tech startups that have driven so much economic growth. In this episode, Harvard Business Review editor Amy Bernstein and a panel of expert scholars discuss the legacy of disruptive innovation including what Christensen got wrong about it and how the common perception of disruption has drifted away from Christensen's initial idea in recent decades. The panel includes Derek Van Bever, a senior lecturer and director of the Forum for Growth and Innovation at Harvard Business School, Columbia Business School professor Rita McGrath, and Felix Oberholzer-Gee, a professor at Harvard Business School. This episode will give you a new perspective on what makes a strategy succeed in the long term. It originally aired on HBR IdeaCast in October 2022 as part of a special series called 4 Business Ideas That Changed the World. Here it is.

Welcome to 4 Business Ideas That Changed the World, a special series of the HBR IdeaCast. In the 1980s, Clayton Christensen was in his 30s, the business guy at a startup. The company was making ceramics out of advanced materials, and it was able to take over the market niche from DuPont and Alcoa. That experience left Christensen puzzled. How could a small company with few resources beat rich incumbents? The question led to his theory of disruptive innovation, introduced in the pages of Harvard Business Review in 1991. 1985 and popularized 2 years later in The Innovator's Dilemma. The idea has inspired a generation of entrepreneurs. It's reshaped R&D strategies at countless established firms seeking to disrupt themselves before somebody else does. And it's changed how investors place billions of dollars and how governments spend billions more, aiming to kickstart new industries and spark economic growth. But the idea has taken on a meaning well beyond what Christensen actually described. Think about how easily we use the word disruption to explain any sort of innovation, business success, or industry shakeup. It's also drawn fire. Some critics argue the theory lacks evidence. Others say it glosses over the social costs of bankrupted companies. And debate continues over the best way to put the idea to work. On this special series, we're exploring 4 business ideas that changed the world. Each week, we talk to scholars and experts on the most influential ideas of HBR's first 100 years. This week, disruptive innovation. With me to discuss it are Derek van Bever, Senior Lecturer and Director of the Forum for Growth and Innovation at Harvard Business School, Rita McGrath, Professor at Columbia Business School, and Felix Oberholzer-Gee, Professor at Harvard Business School. I'm Amy Bernstein, editor of Harvard Business Review and your host for this episode. Let's set some context. Rita, what was our understanding of innovation before Clay gave us disruptive innovation?

Yeah, so I think our common understanding of it was something that came out of R&D groups, right? So it was like big product, big materials, big physical things innovation. And so the classic would be like DuPont nylon, right? And they invented this thing that meant women didn't have to spend hundreds of thousands of dollars collectively on silk stockings and they had nylon riots. Literally, people were charging at these trucks with this revolutionary substance. And I think that's how a lot of people still thought about innovation is something that was very tech-heavy in the sense of not digital, but just technology that was coming out of R&D labs and so forth. So that was one pervasive thought. I think the next pervasive thought was that innovations that were successful added something. They were new and improved. And so you built a better mousetrap, you built a better nylon stocking, you made Kevlar and things became impermeable, and that it was always at the top of the market. And I think that was one of the things that Clay's work revealed, which was that innovation did not have to be new and improved or better on the existing dimension of merit, but that it could actually be worse on whatever it was we used to judge products by, but it did something else that was different.

And you mentioned technology. Was technology always a necessary component of innovation as understood then?

I think in our theory of innovation, it was. I think the idea of really business model innovation, to me, did not become a common topic of conversation really until the '90s. And prior to that, it was really product-centric, I would say, innovation. Peter Drucker and people like that talked a little bit about things like the advent of the knowledge worker and what the networked society was going to mean and that kind of thing. But that was really early days.

Felix, so help us understand Clay and what shaped his thinking. He was a co-founder of a technology company when he started to consider disruptive innovation. What shaped his thinking?

So we know Clay as a faculty member at Harvard Business School, of course, first and foremost. But actually, by the time he arrived and became a faculty member, He had done many different things already. He was a missionary in Korea. He studied in the US and in the UK. He had earned an MBA from HBS. And then in the 1980s, together with faculty members at MIT, he had started a company called Ceramics Process Systems. The one experience that he had as CEO of the company was quite dramatic and in part informed his thinking about disruptive innovation. So the basic technology that they had came out of an MIT lab. And it was exactly what Rita had alluded to. It was this idea, is there a way to make what we have today, is there a way to make it better, to improve on the quality? And in their case, they made ceramic substrate that could be used in microelectronics. So this is a very, very thin layer of ceramic that has excellent properties when it comes to conducting heat and power. And they had better ideas how to make that. The challenge was that the technology was it's not so easy to scale up. And they were about 14 months late or so, later than they had anticipated. By that time, a competitor had essentially duplicated or had a product that was very similar. And the price premium that they expected to earn had vanished. So in retrospect, I think looking back at this particular type of innovation, Clay would later found in his dissertation that if you Go directly against established incumbents, your chances of being successful are not all that great. He would say, well, maybe 5%, 6% of these attempts are successful, but mostly you shouldn't really get your hopes high up.

Derek, let me ask you about this idea that Felix just described. Had anyone ever noticed this before? Was it all that novel?

It was really remarkably new. Creative what he did. The question that consumed him was, why is it that sometimes a tiny little upstart can unseat a powerful industry-leading incumbent? So it was the sometimes that really intrigued him. He was looking for the causal driver, not merely correlation, but what was it that caused this phenomenon? And there were lots of descriptive explanations that had been advanced in the past, right? One was that industry leaders would become self-satisfied and complacent and not see the attacker coming. Another was that if you got attacked on too many fronts at once, sort of Xerox versus Canon, you couldn't respond adequately. What bothered Clay was that while these explanations were often true enough, there were also a lot of anomalies, instances where they didn't hold. So Clay used these anomalies as learning opportunities rather than exceptions. And what he realized was if you can approach an incumbent in a way that causes them to ignore you or to flee upmarket, you have the thing you need the most, which is time to build a foundation underneath your business. And then finally, he gave names to phenomena that were familiar, particularly to business people. So he called the trajectory of innovation that is far and away the most common— he called that sustaining innovation. Any company that wants to be in business for any length of time had better be really good at that. And he called that trajectory underneath the existing incumbents, he called that disruptive innovation. That's what's hard for incumbents to see because it typically presents as products that aren't as good, that aren't interesting to their best customers, and therefore are not something that they can allocate resource toward.

Or maybe if I can add a little twist to it, one of the things that I find most fascinating about the theory of disruption is that it describes the reasons why the incumbent is unlikely to respond. For instance, because you have amazing margins with your best customers and the incentive to serve a segment that doesn't look very profitable to begin with, those incentives are just really muted. Or you might have firm internal processes that make it really difficult to serve a new segment with much different demands in a way that seems both effective and eventually profitable. So even once you know about disruption, in part it's such a powerful idea because it speaks to the tendency not to respond, even though from the outside it looks like you have all the resources, you have all the talent, you have everything that it would take to be responsive.

Felix, you're reminding me, our colleague Chet Huber came into my office one day after I had been teaching in the course for a couple of years, and he sat down in front of my desk and he said, you do realize that this is a psychology course, right? And boy, was that true.

So Rita, Clay brought this idea to a much broader audience through HBR and through his book, The Innovator's Dilemma. Tell us how that was received.

Well, I think before we get to Innovator's Dilemma, let's talk about Disruptive Technologies Catching the Wave because that was the HBR article that preceded it. And everybody's forgotten this now, but he co-wrote that with Joe Bauer, Harvard's own Joe Bauer, who had written a whole series of books and articles and research drafts on how fundamental the resource allocation process is to corporate decision-making of all kinds. And so the original, original idea was to build on what Derek was saying. Companies allocate resources according to a logic, and that logic is sometimes not necessarily in their own best interest. So when the book came out, The Innovator's Dilemma, that was in 1997. And this is another thing we've all forgotten, which is it did not become a runaway bestseller right away. It took a couple of years. And if memory serves me, it was a picture of Clay with Andy Grove of Intel on the front cover of a business magazine. And I think it was Forbes, the two of them on the front cover and Grove basically saying, I am changing the entire direction of my company because of Christensen's theory. And that's when it hit the masses.

That's exactly when I remember becoming familiar with it for the first time. And I had forgotten that. Thank you for that. Felix, why do you think the idea struck a chord? Why did the book finally take off, the idea finally take off? What was happening at that time?

So when we think about the late 1990s today, of course, what we think of most commonly is the dot-com bust when the bubble burst. But of course, before the bubble burst, there was a dot-com boom. There was a deep sense that technology would change things in really radical fashion. And it's not a coincidence that that Andy Grove and companies like Intel were under the impression that the future could look radically different from the way the past had looked and that past success didn't really guarantee much when it came to predicting future success. Part of that I think is interlinked with the way the new technologies created network effects. So the idea that as my technology scales, as I get lots of customers, as I get broad adoption, the value of technology increases correspondingly. So the personal computer, the early beginnings of the internet, everything spoke to technology and network effects in particular would become dominant features of the business landscape. Now, one thing that is true if you operate in environments with very strong network effects, on the one hand, they're a real formidable barrier to entry. But just like they fuel growth and they can make you very successful in a short period of time, if successfully challenged, you can and then also lose everything in a very short period of time. And so Andy Grove's famous management mantra that instructed everyone to be really paranoid had in part to do with how technology changed and how technology gave rise to business network effects that created stability and instability at one and the same time. And so that was obviously fertile ground for a thinker who came along and said, well, it looks like you're doing really well today, but actually your success today may hide, in some sense, the undoing of your business in the future.

So Derek, was that sort of paranoia that Andy Grove was pushing? Is that what made the idea so relevant to business people? Or what was it that made it resonate?

Well, first, unlike many academics, Clay was himself a businessperson earlier in his career. And so he instinctively understood the relevance of his work to business leaders. He kind of understood the angle at which a businessperson would approach a question And in fact, he was answering the question he had had when he left business to come to academia. He was also careful never to pretend that he knew more than his audience about their business. In that famous encounter he had with Andy Grove, in which Andy Grove kept asking him to say, what does disruption mean for Intel? And Clay said, I'll explain the theory of disruption to you, but you know your business better than I do. So you're the one who's got to figure out what the implication is for Intel. And he famously said, I would have been killed if I had tried to out Andy Grove Andy Grove on what the implication of disruption was for Intel strategy.

Rita, who was the first to embrace it? We know about Andy Grove, of course, but what industries? Where did the uptake happen?

I think the uptake happened in industries that were being challenged. So automotive, for example. The advent of really inexpensive but super high-quality smaller cars in the '70s and '80s had completely freaked that industry out. And they kind of glommed onto this theory as, oh, they were low-featured. They weren't as good on the dimensions of merit that we'd previously competed on. But the disruption theory kind of gave the incumbent Big Three carmakers an out. So I think those kinds of industries— steel, automotive— where they felt that there were these things happening at the low ends of the market. I think the other thing that made it popular at the time was, and we've forgotten this now, but there was a time like in American business where entrepreneurship meant you couldn't get a real job. Right? I mean, it was not the kind of glam cool thing. The guy you wanted to be was the guy in the gray flannel suit. And so I would say beginning in the Reagan administration, mid-'80s, and then leading up to the dot-com boom, that was really when entrepreneurship, the whole idea of startups, started to be something people took seriously. Before that, if you weren't Ford or 3M or something, people didn't really think about you as a force for change in the economy. And I think that move towards entrepreneurship, and I would sort of put it to the rise of companies like Microsoft, where briefly Bill Gates was the most valuable man in the world, and it sort of legitimated that whole field, right? And then following closely on the heels of that was this idea of corporate entrepreneurship, which is we need to be able to create new businesses from within. And then we need to be doing this continuously. Like, we can't just have one great idea and live on it for decades. No more.

Did everyone embrace this theory when it finally took off, or were there some who said, no, that's not making sense? Were there critics?

Oh, there always are. There always are. There's always people that say, are you kidding? I'm, you know, insert name of company, Gillette in razor blades, or, you know, Pepsi or Coke or these big franchises. And there's always people that say, don't be ridiculous. There's no way some little fly on the wall company is going to be able to attack us in any meaningful way. So there was a whole chunk of people who just didn't buy it. What I would say, and I want to build on what Derek was saying and to some extent Felix, it gave managers an explanation. It gave them an out. It sort of said, you're not a bad manager because you're attending to your best customers and you're trying to go upmarket and you're trying to increase your margins. And you're trying to do all these things that all the business textbook at the time said was the right thing to do. It doesn't mean you're a bad manager, but you can still find yourself in trouble. And I think it was that combination of providing an explanation for a phenomenon that had not gotten a lot of attention up to that point, but also giving people an out, kind of saying, "Oh, I was hit by the innovator's dilemma. Nobody could have seen that coming." Right?

Right.

But did it explain anything else, Felix? Were there any kind of— puzzling business behaviors or phenomena that this theory helped explain other than the one that Rita just described?

I think what Rita described is really the core of what was appealing. And it often came across as a puzzle ex post. So once you see that Netflix has successfully disrupted Blockbuster, then the big question is, of course, is, oh my god, if Netflix saw this opportunity, why didn't Blockbuster in the beginning have a DVD shipping service? Why didn't they see the promise of the internet. And in some sense, the most popular version of the theory that often, oh, we couldn't see it because no one knew that it would be so big. And, you know, there's 15 ideas around the corner that go nowhere. How am I to pick the one that I should really pay attention to? That sort of explanation is much more disquieting, I think, and hard to live with because it doesn't really tell you what you can and what you cannot do. It replaced that with an explanation that said, yes, of course, it's bad luck. Someone else had a really promising idea. But your incentives were actually not to respond in the first place. That's exactly why disruption is something really powerful because your systems are set up in a way, your incentives are set up in a way that in the moment, a company that seems to have all the resources, that seems to have all the capabilities to do something that the disruptor often does, typically not at great quality, why the incumbent wouldn't really do that successfully.

Derek, let's get into the criticism that the theory has drawn. There have been a few critics, Jill Lepore, the Harvard historian most notably, who said that there really wasn't enough evidence to justify the theory. Well, first of all, what's your view of that? And you worked very closely with Clay. How did he respond to that criticism?

Anyone who knows, who knew Clay knows that he had a sign, a handmade sign in his office that said, "Anomalies wanted." And it's true. I mean, one of the things that made him so such a powerful thinker was that he was so humble and so open to criticism. So it wasn't as if you spot something that the theory doesn't cover and say the theory therefore is discredited. I mean, for Clay, that was for him a building block. Now we get to dig in and make it better. So that disruption theory was still under construction, absolutely fit Clay's worldview. It wasn't so much that business people criticized the theory. I think the academy had a really hard time with it, in part for the reason that Felix is mentioning, that people would say, sure, ex post, you can spot disruption, but can you spot it ex ante? Can you spot the areas where disruption prospectively is going to be operative? Work has been done on that, but that was very much out there. And then also, disruption is not built on a quantitative model, which is the coin of the realm today, of course. And so it's really hard to determine the boundary conditions. You know, anybody who's done research on growth, you have to define what success and failure are. And there is no, you know, objective standard. You've got to figure out, okay, what are, what's the structure of the experiment and then run it. And I will always remember, I went to Clay once with what I thought was a really smart question. I said, Clay, how can you tell when a disruptor becomes an incumbent? And he looked at me kind of indulgently and he said, Derek, you do realize these are just constructs, right? And it was— he had this revolutionary idea, but he also realized he'd given names to forces and there was still so much to be discovered.

Yeah, and I'll jump in on this. Very famously, he was wrong, by the way, about some of the top-of-the-line innovations. He very famously predicted that the iPhone would fail. One of the most profound critics of the theory of disruption is Safi Bahcall, who wrote book called Loonshots. He's biotech CEO. He's a trained physicist, da-da-da-da-da. And in his work, what he's looking at are these unloved, crazy ideas that some passionate person is pushing. So something like MNRA virus chains and discovery, all kinds of discoveries. And he called them loonshots because it wasn't obvious that they were economically viable. But his argument would be very often what turns into a disruptive technology is actually a bunch of people pursuing what they think is a sustaining technology, and it ends up through the twists and turns that discovery takes, it ends up actually being completely disruptive. And an example of that would be the invention of the microprocessor. The people that came up with that stuff were actually looking for better vacuum tubes. So they thought they were doing sustaining innovation, and it turned out to take them in a completely different direction. So I think there is a nuance to this, which is separating out the intent of the people making these discoveries from the actual market consequences.

Felix, any thoughts?

I always liked Clay's distinction in the article that he wrote for Harvard Business Review in 2015, where he explains why Uber is not a disruptor in his view. First, the theory is not really built to explain which of the disruptors is going to be successful. So even if you expose, see the patterns, say, oh my God, that's amazing what they did because they went in at the low end and they had a really great idea. Ultimately built an amazing business. There's nothing in the theory that out of the hundreds of people that try to do this, who's going to be successful and who's not going to be successful. And then the second point that he makes in that article that I've always found very important, and often among the critics I think poorly understood, is that there is a sense of when is it going to happen fast and when is it going to take a long time. But ultimately there's very little in the theory that would describe end states. That is, if you see a company, a big, large incumbent that gets disrupted, can you say anything about the eventual size of that organization? Can you say anything about the return on invested capital of that company? And the answer is by and large no. It might be that the segment that they hold on to, perhaps it's a sliver at the very high end of quality where you have customers with a very high willingness to pay, and you can maintain perhaps a smaller but financially super, super successful business. And so the idea of being disrupted is not so much the disruptor has to, I don't know, go bankrupt, or it's like it's only really disruption if it looks like Kodak.

Right.

Rita, what was it about the way that Clay communicated that helped spread his ideas?

Oh, that is such a good question because I have had so many conversations with my fellow innovation professors over the years who would say things like, I came up with the concept of Fill it in. Ambidextrous innovation, the attacker's advantage. There's a whole list of things. And they're very miffed that, "Well, I came up with that. Nobody paid any attention, and Clay talks about it, and everybody thinks it's the best thing since the miracle of man." I think I'd point to 3 things. Master storyteller, absolutely masterful storyteller. When Clay illustrated a phenomenon, he used relatable examples. He used an interesting story. He used a twist, and people could see themselves in that story. Second thing he did was he kind of took ordinary things and made them really interesting. So I'll go back to one of his most famous sort of parables ever, the parable of the milkshake, right? What's the job a milkshake has to do for you? And people would be listening to that going, "You know, you're right. Like at lunchtime, I have a different job I need to be done than when I'm picking my kids up from school. Yes, I see that now." So he had that way of making the ordinary seem really extraordinary. And then I think the third thing was he was genuinely interested in your response to what he had to say. So many professors— I won't name names— but many professors are much more interested in you hearing what they have to say than being interested in what you have to say. And I think with Clay, it was always the other way around.

Coming up after the break, we're going to explore how the common perception of disruption has drifted from its original meaning. What lessons are there for us today? Stay with us. Welcome back to Four Business Ideas That Changed the World, Disruptive Innovation. I'm Amy Bernstein. So Felix, let's pull the camera back a little bit. How has Clay Christensen's theory of disruption changed the way we think about strategy and competition?

Well, in a way, the idea is almost a victim of its own success. So disruption is anywhere, and in fact, the way most people use the word disruption these days has very little to do with Clayton's idea. You know, we come up with a new flavor for yogurt, and people say, oh my God, the market for yogurt has been disrupted. And so despite that, I think it has done two things. The first is what Rita mentioned earlier. It's sort of given entrepreneurship a prominence. It's gone to a point now when I tell my MBA students that most of the time, most innovation comes from large established organizations, they look at me in complete disbelief. They actually don't really think that large incumbent organizations do anything that is all that innovative. It's almost like the flip of what Rita described earlier, where we thought that, oh, if you're an entrepreneur, you must be a loser. Now we're giving, I think, generally speaking, not enough credit to large companies and all the pretty amazing things that they do. One of the consequences of using disruption completely indiscriminately is that it's now become synonymous with success. So we look at Uber, and they seem successful. And we say, oh, the market for taxi services has been disrupted. Success described in these very, very general terms, I think, is actually not very useful for setting strategy.

So that's interesting if we now equate disruption with success. What about the other side of that, Rita? Can the theory of disruption be blamed for business failure? Can we say it's brought down some companies, some firms?

I don't know that the theory has done that. I think it is possible to have badly managed firms in just about any circumstance. And I think this builds on what Felix was saying. When the stories get told after the fact, we miss so much of what actually happened. So what actually happened at Blockbuster was not what the common mythology, right? The common mythology is Netflix emerged out of scorched earth and took the world by storm with CDs that you could mail in a red envelope. That is not true. Netflix, in desperation, went to Blockbuster to try to be acquired. They wanted to be Blockbuster's online arm, and Blockbuster laughed at them. Literally laughed at them and said, "Get out of my office. What are you people? You're a 4-person dingbat operation and we're supposed to take you seriously?" But so that's one of those stories that gets misunderstood. Kodak's another one, right? The guy that sank Kodak had been running the printing business at HP, lost out on the CEO race to run things at HP, and steered that company right over the cliff that was printing at home just at the moment that screens became possible to be good enough to show pictures. And so a lot of this stuff doesn't really get remembered when we recall the stories. So I don't think the theory brings companies down. What I think brings companies down is the following: a failure to adequately balance today's investments versus tomorrow's, an unwillingness to make the financial and personnel commitments to little new things. And I see this all the time. You know, you've got your core business and it's trundling along like an 8-line highway, and you've got something with 4 people and, you know, a passionate advocate in charge of it, and it looks completely insignificant in the early stages. And so when you think about why established companies get undone, it's not because they didn't make big courageous moves. It's because they didn't allow the flourishing of lots of small, low-cost moves.

I completely agree with Ritu. You can't blame a theory for being explanatory. And in fact, there has been research to try to validate the proposition that what disruption actually does through targeting non-consumption is to expand markets. So it may be that the providers of products and services change, revolve over time, but consumers benefit because there are more and more people who are available to consume products that are less expensive, more convenient, et cetera.

So how has the theory evolved since it debuted, Felix?

One of the really big addition was to distinguish between different types of disruption. So we just talked earlier about the sort of the low-end entry, the low-end foothold that I think was very much on Clay's mind when he first wrote about disruption. Toyota's entry into the car market being one of the prominent examples. And there wasn't all that much in his ideas regarding competing against non-consumption. The idea Do you want to be that lower quality, lower priced version of something that we're familiar with? Or are you really competing for a segment that is not in the market at all? Those differences turn out to be super, super important. So in that sense, the, the theory has become richer. And I think there's also a little more of a sense that it's not really a recipe. So it's not as though, oh, I follow this particular recipe and then I know I'm going to be successful. We just know that the chances of entrepreneurs being successful are pretty low to begin with, just like the probability of being disrupted if you're a large and successful business are probably not all that large.

Could I add one thing to that? I completely agree with Felix that if you go back to Dilemma, Clay was really describing one flavor of disruption at that time, not new market disruption. But also, I think over time, you could see a shift in his language from talking about a disruptive technology to a disruptive positioning, that it was really the creation of a new business model in all of its attributes. What's the value proposition? What's the profit formula, the capabilities and priorities in that model? In fact, a technology can be shaped to be sustaining or disruptive. What is the model that's being brought to market to compete with incumbents?

So for the businesses that are trying to avoid being disrupted, Rita, what's the best advice out there? For them?

Well, you lift the lid off of any corporate portfolio and it's horrifying what you see in there. It's somebody's pet bunny from 3 CEOs ago and nobody said, "Why are we still doing that?" Or you've got these mission-critical, absolutely important projects that half an intern is working on, right? So you have this real disconnect.

These are the scars of a veteran, for sure.

I have been around the block on this. Anyway, and then the last thing is your your reward system, right? What do people believe they're going to get rewarded for around here? And so one of the things that companies need to do if they're going to avoid getting disrupted, you have to be in the game and you have to be willing to support small initiatives. There's got to be some slack resource. There's got to be the willingness to fund it. And I mean, the number of times I have seen companies say, "Oh, we're not going to be disrupted. We have this thing going on over here." No assumptions tested, no low-cost commitment tests, big project teams with all the money in the world on the assumption that they know what they're doing and they don't, right? And so there's a real need for organizations that want to behave this way to be willing to put some money behind what I call options. The idea of making a small investment today that could, not that will, but that could give you the right to create future choices. And companies that are going to be successful are going to get a lot smarter about that.

Let's look at it from the other side, Derek. What's the best advice for entrepreneurs or upstarts who want to take advantage of disruptive innovation?

Yep.

Pretty simple advice. Uh, keep your cost structure low so that you're able to exploit opportunities that are uninteresting to incumbents, too small, too remote, and target non-consumption. Don't go after customers that they value, but rather go after segments that they've dismissed. And, and the brass ring is if you can go after a segment that they've dismissed and they look at you and they go, oh, You know, they just don't understand this business. And they let you grow a little bit and you get some success and they look back at you and they, a little bit later, and they go, oh, those poor dears. They, they just are not going to learn, are they? And then they completely ignore you. And that gives you the opportunity then to build from the bottom unmolested.

And, and Felix, where does applying this theory most often go off the rails? Where are the difficulties in applying it?

One difficulty for entrepreneurs is that it's pretty difficult to distinguish non-consumption that actually has the promise from situations where there's just no interest. You're probably familiar with SimpliSafe, the home security company, I think is a beautiful example. So Eleanor Lawrence, one of the co-founders, she sits in Clay's class. And she literally goes out and tries to apply the theory, thinking, Why is there no home security for renters? How is it that leading company back then, now ADT, is serving homeowners, but renters are afraid maybe or have a willingness to invest in home security as well? And so they built the company, literally built on the principles that she learned in the classroom in that, yes, it's a little less convenient. You don't have someone who comes by your house and installs the equipment. You have to do that yourself, and so on and so on. And then it turns out renters were just not really all that interested. And the fact that SimpliSafe is a very successful company today is just because a large fraction of homeowners actually found the value proposition of the company quite attractive. And so distinguishing instances when you look at non-customers and what I tend to call near customers, customers whose willingness to pay is sort of in a useful vicinity, that turns out to be really difficult. And then for incumbent firms, I think one of the main difficulties is even if you're successful at recognizing potential for disruption, and even if, as Rita suggested, you sort of follow Clay's advice and you set up a small group, and typically, you know, you take it out of the regular bureaucratic procedures and you set it up as a separate entity and they don't have to worry about funding for a little while. We have lots and lots of examples where companies have done this successfully where they build a shadow operation. So think Walmart, its online operations that get established a million miles away, at least mentally, from Bentonville in Silicon Valley, of course. And then there's just no real way to bring that small agile organization back and attach it to the supertanker. So you build something sort of interesting, sort of successful, but given the scale of the incumbent, it's pretty meaningless. And so I think incubating new ideas, that's what many incumbents are quite good at. But marrying these ideas back to the supertanker that has been on a set course for a long period of time, I think that remains extraordinarily challenging with not that many examples of companies that have done this successfully.

Felix, you're reminding me, Clay, when he was in the classroom, he would take that big index finger of his and he would go, where do you stick it? And his frustration was that companies would always try to stick it underneath the division that it is effectively disrupting. You know how that story ends, right?

Yes.

Where it's, oh, we'll take care of this. Don't worry. We'll make sure that this grows just as fast as it should. And that's often the last that you hear from it.

Yeah. But then his view that simple organizational separation will lead to long-term success, That I think has not really been true for many companies either, right? So I think that's a really important question. And then the second, if you see disruption, if you think it's going to happen, how good are you going to be? What are the chances that that's a game that you can play successfully? So think of the large energy companies right now. Most of them are making some investment investments in renewables. And we already see quite interesting dividing lines, some of them being good at it and some of them basically wasting money that doesn't seem to have much of a payoff. And so disruption itself implies that it's almost costless to respond. But in the end, there's capital, there's talent, there's attention that is required if in fact you want to be building something successful. And so I tend, in an environment where entrepreneurship and the opportunity costs of trying new things are typically downplayed or are seen as very low, I tend to remind my students that the opportunity costs of trying to play yet another game, they can be quite sizable.

So let me throw out a question to the whole group here. Where do you all think our understanding of disruptive innovation is headed? What future are we looking at? And I'll go around the horn here. So I'll start with you, Rita.

[Speaker:RITA_MCCARTHY] Sure. What I'm encouraged by is when Clay and I were working together in the '90s, and we never actually wrote a paper together. We co-presented a lot of stuff, but not co-authored. But anyway, we were talking about this in the '90s. And we would be the only people in the room talking about these phenomena. And people would look at us as though we had two heads. It's like, or four heads, I guess, between the two of us. Because I was talking about, well, you need to plan differently when you don't have data. And Clay was talking about, well, this little upstart could cause you problems if the right circumstances prevailed. And I think what's happened in the intervening decades is people are now aware. People are now willing to say older models of strategy don't apply, that newer models really make a difference. That is a far cry from being able to put that awareness into systemic action. So I think what we've made a lot of progress on is the conversations are different. There's a lot more knowledge that there's more to life than just sustaining innovations, that there are these phenomena we need to pay attention to. So I think awareness is where we are. I think the next big chasm to be crossed is how do we now put that in practice in the management structures that we use to run large complex corporations? And there is so much knowledge about how you build innovation capability, how you build disruptive potential, how you actually make these things happen, and yet most managers aren't taught it. So if you think about the life cycle of a competitive advantage, it has to come from somewhere. So it has to come from an innovation or an invention or an idea or something Then you have to scale it, which is getting it into the business. Then you have this delightful period of exploitation where you get to enjoy the fruits of your labor. That's what we teach people. We don't also teach them about what happens when the shoe has turned, the thing's gone obsolete, your 386 microprocessor is no longer the state of the art. How do you now reconfigure your company to take advantage of the next new thing? And those are skills we're not yet mainstream.

Derek?

Yeah.

Going back to an aside I made a while ago, that when Chet said, you know, this is a psychology course, right? It is interesting that 27 years after the publication of that book, we're still bound to get caught up in this phenomenon. To pick up on what Rita said, I think we're going to understand more about how to respond to the phenomenon of disruption as incumbent companies. We'll understand the different rate at which it works its way through industries, you know, 50 years in steel, seemingly overnight in education. And we'll understand more the importance of the performance metrics that we honor. What would have happened if US Steel had measured not gross margin, but net profit dollars per ton? Would they have abandoned such a huge swath of the steel market and imagined that they were doing the right thing. So I think we'll get better at continuing to tease out this puzzle of how do we confront our own cognitive weaknesses and blind spots and respond with more alacrity, more quickly and more effectively.

And last word to you, Felix.

So I think to me, one of the really big big changes in technology in the economy today is the ease with which companies can produce high-quality services and products at incredibly low cost. Remember, part of the dilemma for the incumbent comes from the fact that you're serving customers who have very high demands, and the implications was, and you as a result have very high cost, and that makes it basically possible for you to respond. Now today we see so many companies that have amazing quality and a cost advantage at one and the same time. This old notion in strategy of being stuck in the middle when you try to be both high quality and low cost, and then, you know, you end up being not really high quality because you're thinking about cost and you end up not being really low cost because you're thinking about quality as well. This notion of stuck in the middle to the extent that it doesn't really apply frees up incumbents to respond in a much more flexible manner to serious threats of disruptors. And then it struck me as interesting even in today's conversation, and I know I'm guilty of it myself, how many of our examples are product-related. Well, what about services? In services, it's almost true by definition that you get fabulous service from engaged employees. And the moment you have highly productive, highly engaged employees, you have this interesting combination of having a potential cost advantage that comes from high productivity. The very same ingredient that produces your cost advantage now produces your ability to satisfy even the most demanding customers. That to me is a change that doesn't say, oh, if I'm an entrepreneur, I shouldn't use disruptive innovation. As my guideposts where to enter, how to develop my business. But it says that the balance of who's going to be successful and how easy it will be to disrupt large organizations, that balance is going to change over time in favor of large incumbents and the very formidable difficulties of disrupting their businesses.

You just heard Derek Van Bever, Rita McGrath, and Felix Oberholzer-Gee in conversation with Harvard Business Review editor Amy Bernstein on HBR IdeaCast. Derek Van Bever is senior lecturer and director of the Forum for Growth and Innovation at Harvard Business School. Rita McGrath is a professor at Columbia Business School, and Felix Oberholzer-Gee is a professor at Harvard Business School. We'll be back next Wednesday with another handpicked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books, and videos with the world's top business and management experts? Find it all at hbr.org. This episode was produced by Curt Nickisch, Anne Saini, and me, Hannah Bates. Ian Fox is our editor. And special thanks to Maureen Houck, Nicole Smith, Erica Truxler, Ramsey Cabaz, Anne Bartholomew, and you, our listener. See you next week.