Tuesday, June 11, 2013

The Best Description I Have Seen of 'Disruptive Innovation'

Joshua Steimle writes:
Clayton Christensen is a professor at the Harvard Business School and author of the wildly popular books The Innovator’s Dilemma and its sequels. Christensen introduced the concept of disruptive innovation, a process by which small companies with inferior products have disrupted industries and eliminated competitors by targeting non-consumption. The smaller company with the inferior product survives because it is of no immediate threat to the larger, more established corporation. In fact, the larger competitor will sometimes gladly give its least profitable customers to the smaller company, glad to move upstream and focus on bigger customers and markets with larger margins. But over time the inferior product improves, and one day its quality and convenience surpasses that provided by the larger company, and suddenly the larger company is out of business. Think about what the home PC did to the supercomputer, and what Netflix did to Blockbuster. The graph below illustrates this concept.

Think about Blockbuster and Netflix. Netflix entered the market as a “low-quality” product compared to Blockbuster. You had to wait days to get your DVDs instead of being able to pick them up immediately. It also wasn’t very profitable compared to Blockbuster’s business model. But Netflix improved. Eventually the quality of the product surpassed the quality of Blockbuster’s, at a much lower price, and it was game over for Blockbuster. By the time Blockbuster reacted it was too little, too late.

Note: Disruptive technology is one type of entrepreneurship, but there are other types, such as leveraged buy outs. LBOs are almost the opposite of disruptive technology entrepreneurship. In an LBO, an entrepreneur (or entrepreneurial group) takes over an established firm and strips it of its unproductive parts, so that it can continue to operate in an established area more efficiently. They should both be considered both be considered entrepreneurial subsets, along with many other forms of entrepreneurship.


  1. I think there is a problem with the blockbuster/netflix example. Netflix was not inferior even when it first arrived. Waiting a day or two for your DVD was fine, when you factored in the convenience of having it delivered to your home. Pricewise: having an unlimited amount of DVDs shipped to your house each month for a flat fee, versus paying 4-5$ per movie, plus gas money to drive to the blockbuster? I'd argue the Netflix model was superior in convenience and price.

  2. LBO is regulatory arbitrage that are subsidized by the government. Without the tax deductibility of interest payments on corporate debt, these LBOs do not provide returns commensurate with the risk

  3. It just reminds me not to forget to take my Viagra tonight, but I really resent the "the smaller company with the inferior product" crack...