Disruptive Innovation

For a long time the only explanation for a strong company collapsing in a few years was that it got complacent. Look at the records, though, and the companies that collapsed were mostly diligent. They built exactly what their biggest customers asked for, put more people on the highest-margin lines, and raised the numbers every quarter. There was no language for why a company that did everything by the book disappeared anyway.

Board rooms all played out the same way as a result. Someone would bring in material on a cheap new product, the people who had actually opened it would say it wasn't something their customers would ever use, and they were right — half the features were missing and it met none of the conditions large customers write into contracts. The item closed in three minutes. Three years later, when the same product came up again, half of new contracts had already gone to it.

Disruptive innovation is the term that filled that gap, and it explains failure backwards from the usual direction. The cause it points to is not laziness but accuracy. Listening to the customers who pay the most and investing where the margin is largest are individually correct decisions, and a pile of correct decisions is exactly what leaves a company unable to touch the cheap substitute climbing up from below.

Disruption starts at the bottom of a market and moves up. It doesn't take the incumbent head-on with a better product. The sequence has four stages.

1. The established product overshoots. It improves every year while the amount customers actually use does not. A document collaboration tool can accumulate 200 features and most teams will still use about ten of them. What was paid for the rest was paid for performance nobody touches.
2. A simpler product enters through that gap. Ten features, one-fifth the price. It looks like a toy to large customers, but people who couldn't afford anything at all pick it up first. Those first users are not early adopters taking a risk on something promising — they were outside the market entirely.
3. The incumbent ignores it, with good reason. The ground the new product stands on has small revenue per customer and thin margins, so putting the same headcount into the core market always wins the arithmetic. The meeting notes that say "no response needed" still read as airtight years later.
4. Performance catches up. The new product improves each year too, and it improves faster than customer requirements grow. In the year it crosses the line the core customers need, it becomes a product that is good enough and costs one-fifth as much. Customers don't gain a reason to switch so much as they lose their reason to stay.

What decides the outcome, then, isn't how good the new product is today but the slope of two lines. Draw the rate at which performance improves next to the rate at which customer requirements grow, and disruption only happens in markets where the first line is steeper.

The term gets used in three kinds of rooms.

1. Strategy meetings that decide whether to respond. A cheap competitor appears and the team has to choose between ignoring it and fighting it, and revenue alone always votes for ignoring. The concept moves the test from how much money has been lost to how fast the other product is improving.
2. Proposals for new business development, which means building a business in a different area from the existing one. For the first few years its revenue won't reach one percent of the core business, so the term does the work of explaining why small is expected rather than disqualifying.
3. Defending the third box in three horizons, the framework that manages current, expanding, and exploratory business separately. Exploratory work finishes last every time it is scored on profit, and the fact that products climbing from below always look last at first is the reason that box stays funded.

"This is coming up from underneath us. If we judge it on today's feature list we'll be late."

A push against the conclusion that a cheap competitor can be ignored, redirecting attention to how fast it is improving.

"The free tool is taking our entry-tier accounts. It's three percent of revenue, but more new signups are going there than to us."

The money lost is small, but the direction new users are flowing has already changed.

"That's not disruption, that's just a good feature. They built what our customers already wanted, only better."

Drawing the line between an entrant climbing from below and a rival competing on performance in the same market.

The term came up at Pagedeck last quarter. Ravi brought signup sources to the meeting: one lightweight free document tool had been taking new signups from teams of three or fewer for three months straight. It sat in the cheapest tier, about three percent of revenue, so nothing showed in the income statement.

Grace asked two questions instead of deciding. What can that tool do now that it couldn't a year ago, and at that rate, when does it satisfy a 45-person company? Mia pulled together its release history, and the answer was that permissions and an audit log would be enough to leave mid-tier customers with no reason to stay. An item that three percent would have closed became next quarter's work.

The most common error is calling any impressive new technology disruptive. The word is strong enough that it attaches easily to anything novel. But it describes where a product entered, not how advanced it is. Taking the top of the market with an expensive, higher-performing product is not disruption no matter how new it is. In a company where every competitor gets the label, nobody can pick out the one actually climbing from below, which is the only thing the concept was for.

Treating disruption as a goal is the other one. Read only the successful cases and it looks like those companies won by starting that way. But this is a name applied to an outcome, not a plan anyone can execute. Most products that launch with lower performance and a lower price never do catch up; they stay cheap products. What has to be secured is not the bottom slot but the rate of improvement, and whether that rate exists gets tested by shipping an MVP, the smallest product that can check the assumption. Using the word interchangeably with moonshot because both sound like changing the game is the same confusion. A moonshot is defined by the size of the goal; disruption is defined by the point of entry.