8/22/22, 7:29 PM What Is Disruptive Innovation?

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WHAT IS DISRUPTIVE INNOVATION?

03 SEP 2020

Catherine Cote Staff

D

isruptive Strategy,
Strategy

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Disruptive innovation is a term coined by Harvard Business School Professor Clayton Christensen, and
one that he believed to be widely misunderstood.

“Many use ‘disruptive innovation’ to describe any situation in which an industry is shaken up and
previously successful incumbents stumble,” Christensen writes in the Harvard Business Review. “But
that’s much too broad a usage.”

In fact, the process of disruptive innovation is far more nuanced than that.

DEFINING DISRUPTIVE INNOVATION

Disruptive innovation is the process by which a smaller company—usually with fewer resources—moves
upmarket and challenges larger, established businesses.

The process begins with a small company entering the low end of a market, or creating a new market
segment, claiming the least profitable portion of the market as its own. Because the established,
incumbent companies own the most profitable market segments, they most likely won’t fight the entrant
for that market share.

The entrant then improves its offerings and moves upmarket with increasing profitability. Once the
incumbents’ customers have widely adopted the entrant’s offerings in the mainstream market, disruption
has occurred.

Understanding this process can empower aspiring entrepreneurs to seek opportunities to disrupt
industries, and seasoned professionals to strategically avoid disruption.

Related: How to Identify an Underserved Need in the Market

TYPES OF DISRUPTIVE INNOVATION Hey there 👋 Can I help with your

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course research?
In the online course Disruptive Strategy, Christensen explains that there are two types of disruptive
innovation: low-end and new-market.

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Low-End Disruption

Low-end disruption is when a company uses a low-cost business model to enter at the bottom of an
existing market and claim a segment.

Because there’s no profitability incentive to fight for the bottom of the market, a low-end disruption
causes incumbent companies to focus their efforts on more profitable areas.

An example of a low-end disruption is the rise of retail medical clinics in the healthcare space. Large
medical centers handle everything from a sinus infection to open-heart surgery and employ specialists to
care for various injuries and ailments. Typically, the more serious the injury or illness, the more
expensive the cost to the patient.

As a result, along with the convenience of location and waiting times, many people with low-grade
injuries and illnesses opt to visit a retail medical clinic, such as CVS’s MinuteClinic, instead of going to
their doctor’s office or a medical center.

According to the RAND Corporation, roughly 90 percent of visits to retail clinics are due to 10 acute
conditions, including sore throat, ear infection, and conjunctivitis. Those same 10 conditions only
account for 18 percent of visits to doctors’ offices, and just 12 percent of emergency room visits.

RAND also found that the quality of care at retail clinics for three of the acute conditions is equal to the
quality of care received for those conditions at a doctor’s office. This enables retail clinics to own that
low-end market segment.

Because doctors’ offices and medical centers offer care and treatment for a wider range of conditions
than retail clinics do, and because many of those services are more lucrative than retail clinics’ services,
they’re not motivated to compete for the “acute condition” market segment.

Over time, retail medical clinics may evolve to offer more specialized services, causing medical centers
to back out of additional market segments. By continuing to claim increasingly specialized and profitable
market segments, retail medical clinics can disrupt the medical industry.

Related: 3 Examples of Disruptive Technology That Are Changing the Market

New-Market Disruption

The other type of disruptive innovation is new-market disruption, which is when a company creates a
new segment in an existing market with a low-cost version of a product.

The factor that sets new-market disruption apart from low-end disruption is its focus on an audience that
doesn’t yet exist in the market. Offering a more cost-effective, simple, or accessible product effectively
creates a new segment.

An example of a new-market disruption is the transistor radio. Starting in the 1920s, the radio market
was dominated by large, expensive stereo systems that families purchased for their homes. The consoles
were heavy, designed to be placed in the living room, and provided excellent sound quality.

Enter the portable transistor radio. Introduced to the market in 1954, Texas Instruments’ radio was small
and inexpensive, with crackly sound quality. Whereas larger radio consoles and high-fidelity systems
appealed to a wealthier audience who wished to sit and listen in their homes, transistor radios attracted
an audience that hadn’t previously had any radio options: teenagers, the less wealthy, and those who
worked jobs that required them to move around a lot.

The radio console boasted quality, but the transistor radio promised accessibility and freedom, creating a
new segment in the radio market.

The incumbent companies had no economic incentive to go after the new market segment created by
transistor radios, which were much cheaper and had a lower profit margin than radio consoles. Instead of
competing with Texas Instruments, the incumbents let the company own the new market segment.

As time went on, the quality of portable radios drastically increased with the birth of the Sony Walkman,
MP3 players, the Apple iPod, and smartphones. The demand for expensive, in-home radio consoles also
diminished. Texas Instruments disrupted the radio market from the bottom up, eventually displacing the
incumbent companies.

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Hey there 👋 Can I help with your
course research?

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THINKING LIKE AN INNOVATOR

Whether you’re an aspiring entrepreneur or a seasoned business professional, you should understand
both low-end and new-market disruption.

Using Christensen’s theory of disruptive innovation, you can break into new or existing markets and craft
business strategies with disruption opportunities in mind.

Are you eager to learn more about disruptive innovation? Explore our six-week online course Disruptive
Strategy to discover how Christensen’s theory can be applied to your organization.

About the Author

Catherine Cote is a marketing coordinator at Harvard Business School Online.

Prior to joining HBS Online, she worked at an early-stage SaaS startup where
she found her passion for writing content, and at a digital consulting agency,
where she specialized in SEO. Catherine holds a B.A. from Holy Cross, where
she studied psychology, education, and Mandarin Chinese. When not at work,
you can find her hiking, performing or watching theatre, or hunting for the
best burger in Boston.

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Hey there 👋 Can I help with your
course research?

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