Disruptive innovation is the introduction of a product or service into an established industry that performs better and, generally, at a lower cost than existing offerings, thereby displacing the market leaders in that particular market space and transforming the industry.
The theory of disruptive innovation first appeared in the Harvard Business Review in 1995, with Harvard Business School professor Clayton Christensen coining the term in his research on the disk-drive industry and also in his 1997 book The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail.
Today, the term disruptive innovation is used broadly. It's often applied to any circumstance where a new technology ushers in significant business, industry or market changes and disrupts the status quo.
Disruptive innovation theory
As Christensen described it, disruption happens when a smaller company successfully challenges "established incumbent businesses" by first providing products or services that appeal to a niche part of the market; that niche could be overlooked by customers or customers new to the market.
Although the new product or service isn't always better than the incumbent at first, the smaller company continues to develop its offering and ends up selling something with better functionality at a lower price that appeals to a large number of customers. As such, the smaller company sees demand for its product or service expand beyond the initial niche customers to a large share of mainstream buyers.
Netflix is often cited as an example of a disruptive innovator. Launched in 1997 as a mail-order movie rental company, Netflix first focused on a niche group of consumers willing to wait for the mail to get the movie they wanted. The company's customer base broadened as it perfected its business model and then moved into a streaming service -- business moves that eventually brought down industry giant Blockbuster.
When does disruptive innovation occur?
According to Christensen's theory of disruptive innovation, incumbent businesses themselves help create the circumstances that allow disruption to occur. The established businesses focus on improving their products to meet the needs of their biggest (and most profitable) customers and, as a result, deliver products that do not match the needs of its other, smaller customers.
This provides an opportunity for newer companies to come into the space and gain market share that they can then build upon.
Christensen noted that disruptive innovation is a process. Disruption happens when the smaller company's product or service becomes the main choice, displacing the incumbent's product or service.
Broader meanings for disruptive innovation
Today, many in the business world use the term to describe innovations, particularly technological ones, that are being used to shake up the status quo.
But even here there are disagreements about what constitutes disruptive innovation. Some, for instance, apply the term disruptive technology to the technology only, but apply the term disruptive innovation to the use of that new technology. Moreover, they believe that to be disruptive, the technology needs to be new and not an incremental improvement on an existing technology.
Others define disruptive innovation as something that creates new value as it uproots an existing market by introducing new or improved products or services that were not widely anticipated by the incumbent competitors.
However, Christensen has written that the theory of disruptive innovation has been "widely misunderstood" and "applied too carelessly anytime a market newcomer shakes up well-established incumbents."
Why disruptive innovation is important
Business leaders see disruptive improvement as important for bringing benefits to customers and society, as the disruptive innovator produces a better offering (often at a lower price) while at the same time creating new value and spurring additional improvements beyond the early iterations of its product or service.
According to business thought leaders, the reasons executives must be aware of disruptive innovation and how it occurs are two-fold. Knowledge of how disruptive innovation works will help executives prepare their companies to anticipate innovations that could become competitors. It will also give executives a better sense of whether, when and where they should support investments into their own strategic development of potential disruptive innovations.