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When a disruptive_innovation_is_disruptive Document Transcript

  • 1. J PROD INNOV MANAG 2008;25:347–369 r 2008 Product Development & Management Association When Is a Disruptive Innovation Disruptive?Ã Glen M. Schmidt and Cheryl T. Druehl A disruptive innovation (i.e., one that dramatically disrupts the current market) is not necessarily a disruptive innovation (as Clayton Christensen defines this term). To aid in understanding why some innovations are more (or less) disruptive to the long-term health of incumbents, this article offers terminology and a framework complementary to Christensen’s work, focusing on the diffusion pattern of the new product. The framework and model presented herein suggest that when an innova- tion diffuses from the low end upward toward the high end, a pattern called low-end encroachment, the incumbent may be tempted to overlook its potential impact. Three possible types of low-end encroachment are illustrated: the fringe-market, detached-market, and immediate scenarios. Conversely, when the pattern is one of high-end encroachment, the impact on the current market is immediate and striking. A three-step framework is identified to assess the potential diffusion pattern and impact of an innovation, thereby helping a firm determine the threat or opportunity that an innovation represents. Introduction with regard to the primary performance dimension most appreciated by mainstream customers of the old F ew terms in the recent literature on innova- product. However, the new product may perform bet- tion management have been as widely used as ter on an alternate dimension and thus open up a new the phrase disruptive innovation, as coined by market (or may simply be easier to use or of lower Clayton Christensen in his seminal and path-breaking cost). Then over time the disruptive innovation im- works, The Innovator’s Dilemma (Christensen, 1997), proves on the primary dimension to the extent that it The Innovators Solution (Christensen and Raynor, eventually appeals to the very mainstream customers 2003), and Seeing What’s Next (Christensen, Antho- that initially shunned it. ny, and Roth, 2004) (see Graziano, 1998 for a review Christensen and Raynor (2003) and Christensen et of Christensen, 1997 and Deck, 2005 for reviews of al. (2004) contend that incumbent firms often fail to Christensen and Raynor, 2003 and Christensen et al., recognize the threat posed by a disruptive innovation. 2004). In these works, the essence of a disruptive in- That is, when incumbents are ‘‘overthrown,’’ it is gen- novation is described as follows. The new product (the erally by disruptive innovation. Thus, it is critically disruptive innovation) is de-rated (it underperforms) important that managers be able to recognize a dis- ruptive innovation when they see one. These works go Address correspondence to: Glen M. Schmidt, David Eccles School on to suggest that to succeed with a disruptive inno- of Business, University of Utah, Salt Lake City, UT 84112. Tel.: (801) vation, an incumbent should pursue it in a separate 585-3160. E-mail: glen.schmidt@business.utah.edu. Ã The contributions of previous coauthors Evan Porteus and Jan business unit. Again, this points to the need for Van Mieghem were vital in helping develop this line of work. Journal clear recognition—a firm must be able to clearly de- editors Vish Krishnan, Christoph Loch, and Karl Ulrich provided valuable feedback on related articles as did anonymous reviewers and lineate between what is a disruptive innovation and participants at the University of Utah’s annual conference on product what Christensen and Raynor (2003) and Christensen and service innovation, including Bill Moore, Kamalini Ramdas, and Bo van der Rhee. The reviews of Professor Anthony Di Benedetto and et al. (2004) define as its converse: a sustaining inno- the anonymous referees led to significant improvements in this article. vation.
  • 2. 348 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 Table 1. Mapping of the Type of Innovation to the Type of Diffusion Type of Diffusion Type of Innovation to which It Maps Description Example Sustaining Innovation High-end The new product first encroaches on the high Pentium IV relative to encroachment end of the existing market and then diffuses Pentium III downward. Disruptive Innovation Low-end The new product first encroaches on the low encroachment end of the existing market and then diffuses upward. New-Market Disruption Fringe-market low- Before encroachment begins, the new product 5.25 inch disk drive relative to end encroachment opens up a fringe market (where customer 8 inch drive needs are incrementally differenta from those of current low-end customers). Detached-market Before encroachment begins, the new product Cell phone relative to land low-end opens up a detached market (where customer line encroachment needs are dramatically differenta from those of current low-end customers). Low-End Disruption Immediate low-end Low-end encroachment begins immediately Discount relative to encroachment upon introduction of the new product. department stores à The distinctions between fringe and detached markets and between incrementally and dramatically different preferences are illustrated in the disk- drive examples provided herein. In spite of the ubiquity of the term, managers often innovation’s diffusion process is actually less disrup- have a hard time identifying a disruptive innovation. tive initially to an incumbent than that of a sustaining This is true even if they have some familiarity with innovation. Said loosely, a disruptive innovation (in Christensen’s work, such as having been assigned to that it disrupts the current market) is not necessarily a read Bower and Christensen (1995), listed by Harvard disruptive innovation (as Christensen defines it). Business School Publishing as one of the most popu- In preparation for formalizing the terminology lar articles for executive education. Scott Anthony, a found in Table 1, Figure 1 illustrates two distinctly partner at Innosight (the consulting firm founded by different diffusion patterns. First, consider the impact Christensen), also implies the term is often misunder- of a new generation of Pentium processor, as illus- stood: ‘‘The word disruption . . . has become loaded trated in the left frame of Figure 1. When the Pentium with meanings and connotations at odds with the III (P-3) was introduced in the last quarter of 1998, concept’’ (Anthony, 2005a, p. 3, italics in original). sales of the Pentium II (P-2) began to drop and Further emphasizing the need for additional research dropped precipitously as the sales of the P-3 gained with regard to disruptive innovation are Danneels ground. Likewise, sales of the P-3 peaked at the point (2004) and Christensen (2006), for example. the Pentium IV (P-4) was introduced and dropped Because the term disruptive can be so easily mis- dramatically as the sales of the P-4 ramped up. This is construed, this article offers alternate terminology a familiar pattern: A new faster generation of micro- and a complementary framework. This terminology processor quickly cannibalizes the old, starting at the is based on the finding that new products diffuse high end of the market and diffusing downward to the through the market in different ways: A disruptive low end. The new generation has a disruptive impact on sales of the previous generation. Yet, in spite of this rapid cannibalization, Christensen, Anthony, and BIOGRAPHICAL SKETCHES Roth (2004) does not refer to a new generation of Dr. Glen Schmidt is associate professor in the David Eccles School of Business at the University of Utah. His Ph.D. is from the Grad- microprocessor as a disruptive innovation. Rather, it uate School of Business at Stanford University in the area of op- is a sustaining innovation. erations, information, and technology. Prior to his academic career It is important to recognize that even though the P- he worked in industry for 15 years. 2, P-3, and P-4 were all introduced by the same firm Dr. Cheryl Druehl is assistant professor in the School of Manage- (Intel), this is not the reason that a newer faster mi- ment at George Mason University. Her Ph.D. is from the Graduate School of Business at Stanford University, and her industry expe- croprocessor is sustaining rather than disruptive. rience includes engineering and consulting. Even if the P-4 would have been introduced by a competitor to Intel such as AMD, it would still be a
  • 3. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 349 2008;25:347–369 Units sold per quarter, millions Units sold per year , millions 25 12 (in 100,000 for the 8-inch drive) 20 ” 15 8 P-4 P-3 ch h in inc 10 5 P- P-2 2 5. 3. 5 5 4 8 inch 0 1st Qtr. 1st Qtr. 1st Qtr. 1st Qtr. 1st Qtr. 0 1998 1999 2000 2001 2002 1980 1982 1984 1986 1988 1 Figure 1. Sales of Successive Generations of Microprocessors and Disk Drives (Microprocessor data are from Dataquest, Inc., 2003, and disk-drive data are from Christensen, 1992) sustaining innovation. (Recall the definition of a dis- pared with the way the P-3 disrupted the P-2, the 5.25 ruptive innovation given at the outset: The classifica- inch drive wasn’t initially very disruptive to the pre- tion itself has to do with the characteristics of the vious 8 inch generation. Similarly, sales of the 5.25 innovation and nothing to do with which firm intro- inch drive continued to ramp even as sales of the new- duces it.) Indeed, a key point of Christensen’s work is er 3.5 inch drive accelerated. Again, compared with to get incumbents to introduce disruptive innovations, the way the P-4 disrupted the P-3, the 3.5 inch drive instead of focusing primarily on the sustaining type. wasn’t at the outset very disruptive to the 5.25 inch Although historically it may be the case that sustain- generation. Yet the disk-drive example is Christen- ing innovations have more often been associated with sen’s (1997) classic example of a disruptive innovation. incumbents and disruptive innovations with entrants, Thus, the microprocessor example represents an they are not linked this way by definition. The Intel innovation that is disruptive to sales of the old prod- example is used only because it is so well known and is uct right from the outset but is not a disruptive inno- unarguably a sustaining innovation. For an example vation (per Christensen’s (1997) definition, as of a sustaining innovation introduced by an entrant, discussed on p. 347), whereas the disk-drive example consider Apple’s first iPod, introduced in late 2001, represents an innovation that is not very disruptive several years after Rio and Creative Technologies in- initially but is in fact a disruptive innovation, con- troduced more primitive players. The iPod was an ex- tributing to the confusion surrounding the term. A pensive $399 high-end product, giving customers reason that it took longer for the new 5.25 inch drive more of the key performance attribute that they to encroach on the old 8 inch drive market is that it craved—memory—via the innovation of a tiny disk first opened up a new low-end market for desktop drive instead of flash memory (in addition to offering computers before diffusing up-market to higher-end superior industrial design). Thus, the iPod fits the de- products such as midrange and mainframe computers. scription of a sustaining innovation yet was intro- It is inferred from Christensen’s work that it is in duced by an entrant that subsequently encroached on part because of the nondisruptive nature of a disrup- competitive products to grow its market share to tive innovation in the short run that an incumbent 80%. For an example of a disruptive innovation in- may fail to take action and may therefore end up be- troduced by an incumbent, consider Intel’s Celeron. ing disrupted catastrophically in the long run. His Contrast the microprocessor experience with the work is groundbreaking and seminal—an incremental data shown in the right frame of Figure 1 for succes- contribution of the framework presented herein is that sive generations of computer disk drives, which are it offers the alternate terminology of low-end en- hard drives contained inside computers where infor- croachment and high-end encroachment and outlines mation is stored. Subsequent generations of disk the steps a firm can take to determine the potential drives were physically smaller and smaller: the 8 market impact of a new innovation. inch drive was superseded by the 5.25 inch drive, The term encroachment denotes that the new prod- which in turn was followed by the 3.5 inch drive. Note uct takes sales away from the old product. Cannibal- how sales of the 8 inch drive continued to grow even ization is a special form of encroachment where both as the sales of the 5.25 inch drive ramped up. Com- products are sold by the same firm. Low-end
  • 4. 350 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 encroachment describes the scenario where the new Mapping Type of Innovation to High-End product first displaces the old product in the low end Encroachment versus Low-End Encroachment of the old product market and then diffuses upward (the new product may open up a new market before Table 1 provides a mapping between the terminology encroachment begins). The low end of a product’s of the encroachment framework and the theory of market is defined to consist of those customers with disruptive innovation. As described earlier, the new lowest willingness to pay for the product (they have microprocessor generation (a sustaining innovation) the lowest demand for the product’s key performance and the smaller disk drive (a disruptive innovation) attributes). Similarly, the high end of the market is differed in the way they diffused through the market. composed of customers with the highest willingness to The microprocessor is an example where the first buy- pay. As suggested by the previous disk-drive example, ers are high-end customers: They have high willing- disruptive innovation maps to low-end encroachment. ness to pay, and their appetite for faster processing High-end encroachment progresses in reverse fashion, speed and more computing power is nearly insatiable. starting at the high end of the old-product market. A The laggards in adopting the new microprocessor are sustaining innovation diffuses via high-end encroach- lower-end customers who are less demanding (whose ment, as indicated by the previous microprocessor ex- willingness to pay is lower). Thus, a new generation of ample. microprocessor diffuses via a pattern of high-end en- While in the previous examples encroachment pro- croachment: The new product first displaces the old gressed to the point where the new product fully sub- product at the high end, followed later by diffusion stituted for the old, this may not always be the case down toward the low end. The low-end customers are under either form of encroachment. Encroachment the last to adopt the new product. A north wind is so implies that the new product has some impact on the named because it blows from the north to the south; old but does not define the extent of that impact; sim- similarly, high-end encroachment progresses from the ilarly, a disruptive innovation ultimately has at least high end of the old market toward the low end. some impact on an existing market but need not nec- In contrast, in the case of disk drives, the high-end essarily totally displace the market. customers (i.e., mainframe users) were the laggards In the current article three types of low-end en- rather than the first to buy. The new drive had much croachment are defined and related to Christensen less storage capacity, and thus these high-end custom- and Raynor’s (2003) findings. The encroachment ers, having an insatiable appetite for capacity, did not framework presented herein helps managers relative- initially even consider the new smaller drive. Instead, ly quickly grasp the impact of a potential new product a new market segment began purchasing the drives— and thus helps them more readily recognize whether when the 5.25 inch drive began displacing the 8 inch an innovation is disruptive or not. A key contribution drive in the mid 1980s, the new market segment was of this article is to cohesively map the theory of dis- the desktop computer. Only as the new smaller drive’s ruptive innovation to the encroachment framework. capacity was upgraded over time did it begin to en- The encroachment framework is based on an eco- croach on (i.e., to displace) the old larger drive. This nomic model referred to as a linear reservation price encroachment first occurred at the low end of the old model. This model is formally developed in Schmidt drive’s market (for the 8 inch drive in the mid 1980s, and Porteus (2000), Schmidt and Druehl (2005), and this was the mid-range computer market), where cus- Druehl and Schmidt (2006): A key contribution of this tomers were more price sensitive and were less driven article is to use basic elements of the linear reservation by a need for capacity as compared with the high-end price model to develop a three-step process that a firm market (i.e., mainframes). Accordingly, this pattern of can follow to assess whether a potential innovation diffusion is called low-end encroachment: The new will diffuse via low-end or high-end encroachment. product encroaches on the old product from the low Another key contribution of this article is to cri- end upward toward the high end, with the low-end tique the encroachment framework against Christen- customers the first to switch and the high-end cus- sen and Raynor (2003) and Christensen et al.’s (2004) tomers being the last to switch (if ever). definitions and to further validate the framework by The terminology of high-end and low-end en- considering more than 70 innovations as classified by croachment was first presented in Schmidt and Porte- Christensen and Raynor (2003). Discussion and man- us (2000). Subsequently, Christensen and Raynor agerial recommendations are also offered. (2003) divided disruptive technologies into two types:
  • 5. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 351 2008;25:347–369 new-market disruptions and low-end disruptions. The business office segment. At the low end of the spec- disk-drive example is a new-market disruption, be- trum were second lines in homes (e.g., ‘‘teen lines’’). cause the new smaller generation of drive first attract- The cell phone started out as a very expensive product ed buyers in a new fringe-market segment as opposed that initially sold to mobile business users such as to immediately selling to customers previously asso- building contractors, who had dramatically different ciated with the existing (older) generation. For exam- willingness to pay (rather than incrementally different ple, as mentioned, the 5.25 inch generation of disk preferences) as compared with the low-end fringe of drives opened up the desktop computer market seg- the current market: In this sense the early new market ment. But when the new product did eventually begin was ‘‘detached’’ from the low end of the current one. stealing the older generation’s customers it did so However, the first major group of users to drop the from the low end upward. Thus a new-market dis- old product (the land line) in favor of the innovation ruption results in low-end encroachment. (the cell phone) was the land line’s low-end market: With a low-end disruption (as Christensen and Almost every office still has a land line, and most Raynor, 2003 are understood to define it), there may homes still have their primary line—but many stu- be little or no market expansion: The first sales of the dents and apartment dwellers now exclusively use the new product are to customers who would have oth- cell phone. erwise purchased the old product, as opposed to buy- The detached-market version of low-end encroach- ers in a new market segment. The low-end disruption ment helps explain a conundrum generated by Chris- also encroaches from the low end upward, first selling tensen and Raynor (2003) and Christensen et al. to price-sensitive low-end customers. In other words, (2004). While they continually emphasize that disrup- both new-market and low-end disruptions result in a tive innovations are low priced, they proceed to list diffusion process called low-end encroachment, the exceptions, such as the cell phone. The current article only difference being whether the encroachment starts shows how a product can encroach from the low end immediately (as in the case of a low-end disruption) or even if it starts out as expensive. Digital cameras are after the new product has opened up a new market another exception. and subsequently improved enough to become attrac- As Christensen and Raynor (2003) point out and as tive to the low-end customers of the older product (as the framework herein will support, when an entrant in the case of a new-market disruption). firm introduces a new product that has the potential To distinguish between these scenarios, low-end to encroach from the low end, the incumbent firm encroachment is further broken down into three types may have reason to view the new product as non- (Table 1). When the innovation immediately sells to threatening. Indeed, as seen in the case of the smaller the existing low-end market it is called immediate low- disk drive, the new product initially takes no sales end encroachment. If it opens up a new market, one away from the old product but rather may sell to a possibility is that the new market is on the fringe of new market segment. Even if some sales are impacted, the old market, in which case the diffusion pattern is the new product sells to low-end customers who are one of fringe-market low-end encroachment. A new not that highly valued anyway, since they have such market is defined to be on the fringe of the old market low willingness to pay. When Toyota first encroached if buyers in this new market would have bought the on the U.S. car market, it did so with economy cars current (old) product if only the old product were a that garnered low margins. General Motors and other little less expensive. In other words, the preferences of U.S. manufacturers readily gave up this low-end mar- the new fringe market are only incrementally different ket because the bulk of their profit was made on high- from those on the low end of the current market. er-end cars. Of course, over time, Toyota encroached Alternately, the new market may be ‘‘detached’’ upward into more lucrative midsize cars, eventually from the old market: Preferences in this new market producing the best-selling Camry, and ultimately en- are so divergent (detached) from the current market croached upward into the luxury car market with the that reducing the price of the current product a bit Lexus. would not have enticed the detached market to buy it. If the entrant introduces a new product that en- For example, consider the innovation of the cell croaches from the high end, the incumbent tends to phone, classified by Christensen and Raynor (2003) defend its market quickly and vigorously, because in and Christensen et al. (2004) as disruptive. The high- the model presented herein, the incumbent is losing its end market for land lines (the old product) was the best customers (those with highest willingness to pay).
  • 6. 352 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 Its potential to reap high margins is dissipated. Thus, new. And with continual upgrading, the new product the incumbent may be more likely to introduce its eventually becomes acceptable even to the high-end own new product to encroach from the high end, even customers of the old product, who then also switch if it means cannibalizing its own product, as Intel does from buying the old product to buying the new. Note with a new generation of microprocessor. The point is that this is a description of a low-end encroachment not that high-end encroachment is necessarily a bad process: The new product diffuses through the strategy and low-end encroachment a good strategy, market from the low end upward toward the high or vice versa. Rather, the point is that both incum- end (possibly after first selling only to a new market bents and entrants must be aware of and make use of segment). the strategy (or strategies) that offer maximum ben- This confirms the basic mapping of a disruptive efit. innovation to low-end encroachment. If the new prod- uct opens up a new-market segment, these new customers may have only incrementally different pref- Is the Encroachment Model Consistent with erences as compared with the old product’s low-end the Theory of Disruptive Innovation? market (this new market is called a fringe market) or can have diverse preferences (this is referred to as a Druehl and Schmidt (2008) formally establish the detached market). In some cases the new product may mapping shown in Table 1. To describe briefly why sell immediately to existing low-end customers with- the Christensen and Raynor (2003) and Christensen et out opening up a new segment (this corresponds to the al. (2004) terminology maps to ours as shown in Table ‘‘immediate’’ type of low-end encroachment). 1, one can ‘‘go back to basics.’’ Christensen’s theory is In other words, by going back to the source of based on a ‘‘trajectory chart’’ developed from the Christensen’s theory (the trajectory curve), the map- disk-drive industry. Such trajectory charts are given in ping between his terminology and ours becomes ap- Christensen (1997, pp. xvi, 16), Christensen and Ray- parent. The encroachment terminology offers an nor 2003, pp. 33, 44), and Christensen et al. (2004, p. alternate means of describing the impact of an inno- xvi). Their basic premise is that in trying to please vation, and the framework presented herein offers high-end customers with regard to a key performance insights beyond those illustrated by the trajectory dimension, an incumbent eventually develops a prod- chart. Specifically, the three-step process presented uct that ‘‘overshoots’’ the performance needs of mid in this article is a way to qualitatively or quantitatively to low-end customers along that key dimension. Then assess a potential new product’s impact over time, in along comes a new product (a disruptive innovation) terms of prices, quantities, profits, and market seg- that falls short of the needs of most (if not all) current ments. This article further shows that characteristics customers along this first performance dimension but of a new product determine whether it will encroach that is lower cost or performs better along a second from the high or low end, and if it is the latter, wheth- dimension. While existing high-end customers dislike er the product is of the fringe-market, detached-mar- the new product (they despise its poor performance ket, or immediate low-end encroachment variety. along the first dimension), a new market segment (or the existing low-end segment) gladly accepts the de- rated performance along the first dimension in favor A Framework to Help Recognize a Low-End of lower cost or the enhanced performance along the Encroachment Threat (or Opportunity) second dimension. In the disk-drive example of the 1980s, this was the desktop computer market segment. As discussed previously, the terminology and insights Over time, however, the new competitive product is presented herein stem from a linear reservation price continually and incrementally upgraded, particularly model. This section of the article goes on to offer with regard to that first performance dimension where insight into how a firm can begin to assess how a new it was initially woefully inferior to the old product. product might impact the market. The linear reserva- Gradually, because of this continual upgrading, the tion price model further provides a mechanism to as- new product eventually becomes acceptable to the sess the seriousness of a low-end encroachment threat low-end customers of the old product (assuming it and possibly to turn such a threat into an opportuni- first sold only to a new market segment), who then ty. Of course, high-end encroachment offers its own switch from buying the old product in favor of the opportunities and threats.
  • 7. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 353 2008;25:347–369 The framework is developed assuming there is an would likely accept an even deeper trade-off with re- incumbent firm (or set of firms) selling an existing, gard to capacity. And even further detached from the well-established product. Analysis is pursued from the current market was the possibility of handheld data perspective of the incumbent, but an entrant firm loggers. Memory requirements would be even more could use a similar process. The disk-drive example minimal for this device compared with a laptop or is used here because it is a classic example familiar to a desktop computer. But the requirement for compact- large audience. Also, by using this one example all the ness would be even greater. Of course, today these different types of encroachment can be illustrated types of devices are known as, for example, personal (high end plus the three types of low end): The sce- digital assistants (PDAs) and MP3 players. nario that actually materializes depends on the char- acteristics of the product actually introduced into the Step 2: Assess Each Market Segment’s Willingness to market. Pay for Each Attribute The next step is to plot each of the current and po- tential market segment’s willingness to pay for each of Step 1: Identify Market Segments and Primary Attri- the attributes identified to this point, both the key at- butes of the Product tributes of the current product and the alternative at- The first step is to formally identify the various mar- tributes preferred by fringe markets. These plots are ket segments that currently use the incumbent’s cur- given in Figures 2 and 3 for the two key disk-drive rent product and to put them in order from high end attributes: capacity and compactness (physical size). to low end. In 1985 when the 8 inch disk drive was the The plots qualitatively reflect the relative preferences mainstream product, the key market segments were of the mainframe, midrange, desktop, and laptop seg- mainframe and midrange computers (workstations). ments as given by Christensen (1992), but the exact The key performance attribute for disk drives was ca- shapes of these plots (as will be further described la- pacity (MB). Mainframe users represented the high- ter) are hypothetical. The relative position of the spe- end segment, demanding the highest capacity and cialty segment is inferred from market conditions. offering the highest willingness to pay for this key Thus, the plots are based only in part on actual data: parameter. A second performance parameter, that of They are hypothetical, but plausible. physical size of the disk drive (i.e., compactness), was Note in Figure 2 that the market segments are or- not a real consideration for the mainframe users be- dered along the x-axis in terms of customer willing- cause these computers were housed in a separate large ness to pay, from highest to lowest. The width of each room or even a basement where it made virtually no segment indicates the number of potential users in difference whether the drive was 8 inches or a more that segment. That is, each point along the x-axis compact 5.25 inches or a very compact 3.5 inches. effectively represents one customer—realistically the But the analysis must not stop with current users. It x-axis should show discrete points, but for mathemat- must also consider new market segments that might materialize if the product were de-rated to reduce Hig price or if alternate features were improved. In the her cap disk-drive market of the mid 1980s, desktop comput- Cu ac ity rre ers were on the drawing board but not yet widely nt c Low a pac marketed. An essential component that facilitated the er capa ity Willingness city development of the personal computer (PC) was a to pay for smaller disk drive, one compact enough such that a capacity Lowest ca paci ty desktop computer could actually fit on a desktop. Also, this market required a disk drive that was cheap enough such that the finished product would be Main- Mid- Desktop Laptop Specialty affordable by home users. Early users were willing frame range to accept a de-rated disk drive (with much less capac- Current Applications Potential Applications ity) if it instead met the size and price requirements. Even further on the fringe was the possibility of a Total number of potential customers notebook computer. Such computers would need Figure 2. Willingness to Pay for Capacity as a Function of Mar- drives that were even more compact, but buyers ket Segment
  • 8. 354 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 ical convenience it is shown as a continuous line. The new drive of smallest size and lowest capacity; and (4) large ‘‘dots’’ in each graph denote the average will- a drive of the existing size and capacity, but without ingness to pay within each market segment: The line sales support. through each set of dots suggests that even within each market segment there is some variation in will- Product 1: A new drive of current size but with a thin- ingness to pay. Further, the plots suggest that the film head that facilitates higher capacity (high-end en- market segments ‘‘come together’’ at the boundaries croachment). First, consider the case where the new between segments; for example, the mainframe cus- disk drive is of current size but with some new tech- tomer with the lowest willingness to pay for capacity nology, such as a thin-film head, that facilitates pack- in Figure 2 has roughly the same willingness to pay as ing more capacity into the drive. An analogous the midrange customer with the highest value. This is, example would be that of Intel upgrading the Pent- of course, an approximation, and such an assumption ium processor from say, the P-3 to the P-4; the new may not precisely hold (i.e., the curves may not always processor offers more of what the high-end customers be linear as shown here). want—processing power. A customer’s total willing- The desktop computer market is said to represent ness to pay for the new drive (called the customer’s the fringe segment because preferences in this market reservation price for the new drive) is calculated as the are closest to the preferences of the current (1985) customer’s willingness to pay for the new drive’s ca- low-end market (midrange) segment. The specialty pacity plus his or her willingness to pay for its size. In segment is ‘‘detached’’ (preferences are quite disparate other words, since the new drive is of higher capacity from the current low-end segment). and current physical size, the plot of all customers’ Note from Figures 2 and 3 that that the stronger the reservation prices is obtained by adding the line for customer’s preference for capacity, the weaker his or ‘‘higher capacity’’ in Figure 2 to the line for ‘‘current her preference for compactness, and vice versa. That physical size’’ in Figure 3. This results in the line la- is, the strength of preference for capacity is negatively beled ‘‘new’’ (for new product) in the left frame of correlated with the strength of preference for com- Figure 4. This line represents the new product’s res- pactness, as shown by Christensen (1992). These im- ervation price curve. Analogously, the line for ‘‘current plications are discussed in a later section. capacity’’ in Figure 2 is added to the line for ‘‘current physical size’’ in Figure 3 to find the reservation price size curve for the current (old) product. Figure 4 no longer ical p hys plots the ‘‘dots’’ or averages for each market segment llest Sma but simply plots the two resulting reservation price Willingness curves, one for the current (old) product and one for to pay for ical size Smaller phys the new product. compactness For purposes of gaining insight, it is assumed that Current physical size part-worth curves are always linear (thus, no matter Main- Mid- Desktop Laptop Specialty how many attributes the reservation price curves will frame range also be linear), and it is assumed there are exactly two products in the market: the current (old) product and Current Applications Potential Applications the innovation (the new product). While real-life Total number of potential customers problems may often be more complex, possibly in- Figure 3. Willingness to Pay for Compactness as a Function of cluding, for example, more than two key performance Market Segment attributes, the objective here is to broadly determine what influences diffusion patterns rather than to gen- erate precise numbers. Using an example of bicycle Step 3: Assess which Segments Will Buy a Given New pumps, for which there are four attributes—inflation Product over Time time, ease of use, size, and durability—Schmidt and Four innovations that could be introduced into the Porteus (2000) show data that suggest the assumption market just described are considered: (1) a new drive of linearity is an approximation but is not necessarily equal in size to the current drive but with higher ca- an unreasonable one. pacity resulting from new thin-film head technology; There are two possible scenarios: Either both res- (2) a new drive of smaller size and lower capacity; (3) a ervation price curves slope downward (if both slope
  • 9. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 355 2008;25:347–369 At introduction After several years After a few more years Ne Ne w Ne w Reservation price w Reservation price Reservation price Ol d Ol d Ol d Sales of old Sales of new Sales Sales Sales Sales of of of of old new old new Main- Mid- Desktop Laptop Specialty Main- Mid- Desktop Laptop Specialty Main- Mid- Desktop Laptop Specialty frame range frame range frame range Actual or Potential Market Segments Actual or Potential Market Segments Actual or Potential Market Segments (width of segment indicates number of customers) (width of segment indicates number of customers) (width of segment indicates number of customers) Figure 4. Product 1 First Sells to High-End Customers and Then Encroaches Downward, Representing High-End Encroachment upward, reorder the x-axis so they slope downward), Note in the left frame of Figure 4 that mainframe or they are opposite sloping (one downward, one up- customers have the strongest preference for the new ward). As Figure 4 verifies, new product 1 yields the drive as compared with the current drive (the differ- downward-sloping case. ence between the two reservation price curves is great- If the production costs of the old and new products est for mainframe customers). The new drive’s are also known (in addition to the reservation price reservation price curve has a steeper slope than that curves), then each product’s selling price can be of the old drive, and per Characteristic 1, mainframe found, which in turn determines each product’s sales customers will be the first to buy it. quantity and its profit. If the two products are sold by For purposes of illustration, it is assumed that all competitors, then prices are found using the concept of the hypothetical new products discussed herein are of a Nash equilibrium, whereas if sold by the same introduced by a competitor and that each new prod- firm it is assumed that the firm maximizes profits. uct eventually fully displaces the old product. But vir- Each customer is assumed to buy either the old prod- tually all successful innovations take time to realize uct or the new product or nothing—a customer buys their success—when the new product is first intro- the product that offers him or her the most surplus, duced, it starts with minimal sales, and over time its where surplus is the difference between the product’s sales grow as it diffuses through the market. The actual selling price minus the customer’s reservation product under current consideration is no exception— price—if each product’s selling price is greater than the leftmost frame of Figure 4 illustrates that when the the customer’s reservation price, then that customer new disk drive of current size but with higher capacity buys nothing. For further technical details, refer to is first introduced, it achieves minimal sales that, per Schmidt and Porteus (2000) for the downward-slop- Characteristic 1, are derived from the high-end mar- ing case, and refer to Druehl and Schmidt (2008) for ket. The width of the darkened rectangle labeled the opposite-sloping case. ‘‘Sales of new’’ indicates the number of units sold The linear reservation price framework just de- for that drive, whereas the height of the rectangle in- scribed exhibits several notable characteristics. Char- dicates selling price, such that the area of the rectangle acteristic 1 follows directly from Theorem 1 of equals sales revenues. A similar interpretation applies Schmidt and Porteus (2000). to the rectangle labeled ‘‘Sales of old.’’ Note that the rectangle representing the sales of the old product in- Characteristic 1 (applies to the downward-sloping sce- tersects the reservation price curve for the old product nario): The product whose reservation price curve has a at the upper right corner of the rectangle. No cus- shallower slope sells to the low end of the market, and tomers to the right of that point will buy the old the product with the steeper slope sells to the high end, product because their willingness to pay is less than assuming both generate positive sales. the product’s selling price. At the boundary between
  • 10. 356 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 the two rectangles (the one representing the sales of The firm selling the old product reacts to this trend the old product and the one representing the sales of in reservation price curves and costs, as does the firm the new) the surpluses for the two products are equal. selling the new product. Specifically, it is assumed that To the left of that boundary, surpluses are higher for each firm reacts by resetting its price to maximize its the new product, so customers buy the new. To the profit, given the other firm’s price. This is the Nash right of that boundary, surpluses are higher for the equilibrium. Of course, when a firm resets its price, old product. The prices of the two products determine this impacts the volume sold, which the firm takes into the exact position of that boundary. account in setting price. Christensen and Raynor (2003) suggests that diffu- Effectively, the described trends in reservation sion and substitution of the new product for the old price curves and costs push more buyers toward the may in some cases be primarily due to improvements new product, as shown qualitatively in the progres- over time in the new product’s attributes and costs sion from the left frame to the middle frame and (Schmidt and Druehl, 2005). Thus, for a firm to pro- eventually to the right frame in Figure 4—the out- ject how encroachment might progress, it is impera- come in each frame is a Nash equilibrium based on tive that the firm make projections of how product the hypothetical but plausible reservation prices attributes and costs will change over time and to iden- shown and a set of assumed costs. Per Characteristic tify how these changes in performance and cost may 1, the new drive maintains the high-end market, which impact customer preferences over time. continually grows, and thus the encroachment starts An innovation such as the P-4 might be introduced from the high end and progresses down market. In the at a speed of, say, 500 MHz. Then over time, it will be rightmost frame of Figure 4, high-end encroachment upgraded to 600 MHz, 700 MHz, and eventually to 1 has progressed to the point where the new product has GHz or more. Similarly, if a new drive of current size the bulk of the volume and the current drive is rele- and a new thin-film head is introduced, this new high- gated to selling to a small low-end market. end new disk drive might be expected to be further While this is illustrated in the context of a new disk upgraded with even more capacity over time (in fact, drive (for the reasons explained earlier), the pattern the thin-film head might be introduced precisely to described for this type of new disk drive mimics what allow for such further upgrades). Christensen (1992) has been (and continues to be) experienced with a new shows this trend in the actual disk-drive data. This generation of microprocessor. The new microproces- continual upgrading would tend to push the new sor encroaches from the high end for reasons analo- product’s reservation price curve upward over time gous to those just described. as shown in the progression in the three frames of Note that although a reduction in the price of a Figure 4 (the new drive’s curve becomes a bit steeper new product such as a new Pentium microprocessor over time—since the high-end customers have a large may over time contribute to high-end encroachment, appetite for capacity, they appreciate the capacity en- the encroachment framework is not based on any as- hancements more than the lower-end customers). sumption of a price trend per se. Rather, it is based on Over time the old product looks more and more an assumption that product performance changes inferior because it can’t keep up with customer over time (as do customer valuations of that perfor- appetites—its reservation price curve degrades over mance), which is precisely the notion conveyed by time. Christensen’s trajectory curves. The framework pre- Simultaneously, empirical observation has verified sented herein adds richness by allowing for possible that costs in the electronics industry continually de- cost changes due to learning effects and further con- crease over time. For example, the cost of a transistor siders the trade-off that customers make between per- has decreased by roughly 30% per year, as shown in formance and price; recall that each customer buys Schmidt and Wood (1999). This type of learning and the product that offers not the lowest price, but the cost reduction contribute to Moore’s Law, for exam- highest surplus, where surplus is the difference be- ple. These cost decreases are often more dramatic for tween the customer’s reservation price and the firm’s the new product; learning theory says that cost goes actual selling price. High-end encroachment occurs down by some percentage for every doubling of out- when high-end customers are the first to buy and low- put and that the output of a new growth product er-end customers, over time, view the price of the new doubles quickly while for a more mature product it product as less and less excessive, until eventually they takes longer. consider it to be a better value than the old product.
  • 11. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 357 2008;25:347–369 At introduction Ol After several years After a few more years d Ol Ol d d N ew Reservation price Reservation price Reservation price New New Sales Sales Sales of old Sales of of Sales of new of old new old Sales of new Main- Mid- Desktop Laptop Specialty Main- Mid- Desktop Laptop Specialty Main- Mid- Desktop Laptop Specialty frame range frame range frame range Actual or Potential Market Segments Actual or Potential Market Segments Actual or Potential Market Segments (width of segment suggests number of customers) (width of segment suggests number of customers) (width of segment suggests number of customers) Figure 5. Product 2 Initially Sells to Fringe Low-End Customers and Then Encroaches Upward, Representing Low-End Encroachment of the Fringe-Market Type This change in customer valuation may progress due concomitant decrease in price) can be attributed to to any combination of price decrease, performance learning effects and pricing strategies. The increase in improvement, and customer perception. capacity makes the disk drive more attractive to all customers, but particularly to high-end customers. Product 2: A new drive of smaller size and lower ca- The drive is no longer so deficient in the eyes of pacity (low-end encroachment of the fringe-market high-end users. With regard to low-end users, it type). Next consider what would be projected to hap- wasn’t all that deficient to begin with, so the increase pen if the new drive were instead of smaller size and in willingness to pay is relatively smaller for them. lower capacity. The left frame of Figure 5 shows the Thus, the reservation price curve for the new drive reservation price curves. Again, these are determined shifts upward over time, as shown in the middle and as the sum of the relevant part-worth curves shown in far right frames of Figure 5. The slope actually be- Figures 2 and 3. Note that now the new product’s comes steeper but is still shallower than that of the old reservation price curve has the shallower of the two larger drive. The enhanced reservation prices of the slopes. new drive, along with its reduced cost, make it a more Per Characteristic 1, in this case the first buyers of formidable product compared with the old drive such the new disk drive are customers on the low-end fringe that over time more buyers are attracted to it. of the existing market (continue to refer to the left Per Characteristic 1, the old drive continues to sell frame of Figure 5). Specifically, they are at the high to the high end of the market, but in continually end (left edge) of the desktop computer market seg- smaller quantities. This time, the result of the de- ment. Note that even the desktop computer segment scribed incremental changes is that the market for the might be willing to pay more for the old drive than the new drive diffuses upward, from the low end toward new drive (in this region the reservation price curve the high end. As the capacity of the new smaller drive for the old drive lies above that of the new drive); increases, midrange and mainframe computer users however, note that the old product prices itself out of view it more favorably, increasing their willingness to this market. As suggested earlier, the selling price of pay for this drive relative to the old drive. In the right each product is indicated by the height of its sales frame of Figure 5, encroachment has progressed to rectangle. The new product is priced low enough to the point where the new product has the bulk of the capture just a sliver of the desktop market. Its selling volume, but this time the last vestige of sales for the price is lower than the reservation price for just a current product lies at the high (left) end of the overall small segment of the desktop market; that segment market. Also note in this case that there has been a adjacent to the midrange market. good degree of market expansion compared with the Over time, the capacity of the new drive would be first scenario. expected to increase, and cost per MB would drop This pattern mimics what was actually experienced precipitously. Again, performance cost changes (and a in the disk-drive market: The new generation was
  • 12. 358 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 indeed a smaller drive with lesser capacity; the drive drive is of the smallest size, with the lowest capacity first sold to users in a new desktop market segment; level. The left graph in Figure 6 shows the resulting and the laggards in converting to the smaller drive reservation price curves—each curve is again obtained were mainframe customers. The number of drives sold by adding the two pertinent lines for willingness to increased dramatically. Since the new drive first sells pay from Figures 2 and 3. to customers who were previously on the fringe of buying, this represents low-end encroachment of the Characteristic 2 (applies to the opposite-sloping sce- fringe-market type. nario): Unless all market segments are served, each Using this linear reservation price framework, Sch- product sells to one end of the market, isolated from midt and Van Mieghem (2005) assign values to the any impact from the other product (sales prices and costs and reservation price curves. Using these num- volumes are not affected by the presence of the other bers they determine the Nash equilibrium market product). prices, which in turn determine market volumes. In their example, upon introduction of the new drive, the Per Characteristic 2, which follows directly from incumbent’s market actually expands because the en- Theorems 1 and 2 of Druehl and Schmidt (2006), in trant’s innovation has motivated the incumbent to this scenario the first buyers would be the specialty slightly reduce price (by 3%). The incumbent’s profit users, as shown by the narrow rectangle on the right drops by only 6%. In this analysis it is assumed the side of the left frame of Figure 6: The drive would incumbent starts as a monopolist. Under an assump- have too little capacity to be of much use for anyone tion of competition in the market for the old product, else. Effectively, the current and new products would the innovation might initially have even relatively initially sell to the two opposite ends of the market, lesser impact on the old product. After three years, and in this sense the markets for the two products the two drives are sold in equal volumes, but the in- would be ‘‘detached’’ from one another. Interestingly, cumbent still retains 70% of the industry profits and both products would be priced high, as indicated by has had to reduce price by only 4%. But after six years the somewhat comparable heights of the rectangles the innovation has swept through the market, and the labeled ‘‘Sales of old’’ and ‘‘Sales of new’’ in the left total market is much greater than previously. They do frame of Figure 6. not claim the absolute values of these numbers dupli- Over time, capacity would be expected to increase cate actual market experience, but qualitatively these and cost per MB would decrease. Referring back to calculated outcomes mimic the actual outcomes in the Figure 6, this would make the new drive begin to look market. more favorable to higher-end users of the old drive, making the reservation price curve steeper. Eventual- Product 3: A new drive of smallest size and lowest ly, laptop users and then desktop users would adopt capacity (low-end encroachment of the detached-mar- the new drive (sales of the new drive would expand as ket type). A third possible outcome is that the new shown in the progression from the left to the middle to At introduction After several years After a few more years Old Ol New d New w Ne Ol d Reservation price Reservation price Reservation price Sales of new Sales of old Sales of old Sales of old Sales of new Sales of new Main- Mid- Desktop Laptop Specialty Main- Mid- Desktop Laptop Specialty Main- Mid- Desktop Laptop Specialty frame range frame range frame range Actual or potential market segments Actual or potential market segments Actual or potential market segments (width of the segment indicates number of customers) (width of the segment indicates number of customers) (width of the segment indicates number of customers) Figure 6. Product 3 Initially Sells to a Detached Market and Encroaches from the Low End Upward, Representing Low-End En- croachment of the Detached-Market Type
  • 13. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 359 2008;25:347–369 the right frames in Figure 6). As suggested by the 200 righthand frame in Figure 6, the mainframe users Land lines Millions of subscriptions would be the last to buy, after the market had swept 150 through the laptop, desktop, and midrange markets: Even at the lower price of the smaller drive the main- 100 frame users would hold out until the small drive had enough capacity to become attractive at its lower price Cell phones point. 50 Note in the left frame of Figure 6 that the new drive first sells to customers in a segment that is ‘‘detached’’ 0 from the old market segments (along the x-axis, the 1985 1990 1995 2000 2005 new drive sells to the far right, and the old drive to the Figure 7. Subscriptions of Cell Phones and Land Lines (Cell left). Thus, this is called the detached-market type of phone data from CTIA, 2003, and land-line data from FCC, 2004) low-end encroachment. The scenario just described was technically infeasi- ble, as well as being undesirable from a strategic and marketing perspective. It was not possible to cost- end encroachment is possible even when the new effectively make such a small drive, and the market product starts out as being high priced, if the new was not ready for PDAs at that point. It was strate- product opens up a new market segment that is in es- gically more favorable for an entrant to instead en- sence detached from the existing market. The new croach by decreasing size and capacity less market segment so highly values the alternate attrib- dramatically. As previously suggested, the second sce- ute that it is willing to pay a high price for it, even if it nario (involving the smaller drive with lower capacity) means the new product is severely de-rated with re- is the one that actually materialized. gard to the performance parameter that current cus- As discussed earlier, cell phones exhibit the char- tomers most highly value. acteristics of this type of encroachment. Cell phone sales grew for roughly 25 years before beginning to Product 4: An innovation where sales support is encroach on land lines (Figure 7). Early cell phone dropped (low-end encroachment of the immediate subscriptions were expensive. However, early users type). A fourth possible innovation simply involves did not give up their land lines in offices and homes eliminating sales support (the drive’s physical size and because cell phone coverage was initially unreliable: capacity do not change). Under the assumption that Remember the TV commercial that continually asked, high-end customers more highly value this support ‘‘Can you hear me now?’’ (Note that one person can than low-end customers, this innovation is similar to simultaneously represent multiple customers if that what Christensen and Raynor (2003) identify as a person is in the market for multiple products at the ‘‘low-end disruption.’’ Their classic example involves same time.) As cell phones became a little less bulky familiar brand-name goods, which were historically and less costly and as coverage improved, the first sold in full-service department stores. K-Mart, Wal- significant direct encroachment on the land-line mar- Mart, and other discounters innovated by offering ket was with lower-end land-line users such as college these goods without the support that the department students and second lines in homes. Cell phones con- store sales personnel offered. By simply offering tinue to encroach up-market: For example, apartment goods at lower prices with less service, they immedi- owners are now dropping their land lines. However, ately encroached on the low end of the department most homes still have a land-line subscription, and store market (as opposed to first opening up a new virtually all offices still have a land line. In other fringe or detached market). words, the office segment, which represents the high- It seems plausible that the loss of sales support end segment of the market, would be expected to be impacts the high-end customers most significantly. the last to switch to the cell phone innovation (if they The logic would be that high-end customers ever do so). expect ‘‘name brand’’ service, and a loss of such This points to another key insight. There are ex- support significantly degrades their willingness to ceptions to Christensen et al.’s (2004) rule that dis- pay, at least relative to the low-end customers. Con- ruptive new-market innovations are low priced: Low- versely, the low-end customers may not be as sensitive
  • 14. 360 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 to spending their own time as a replacement for the 2003). Thus, what Christensen calls low-end disrup- sales support. With regard to the disk-drive example, tion maps to the ‘‘immediate’’ form of low-end en- this could be because the high-end users must hire croachment. highly paid technicians to work on mainframe com- puters. Under this reasoning, the reservation price curve Critique of the Encroachment Framework for new product 4 would lie below the curve for the against Three Definitions of Disruptive current product as shown in the leftmost frame of Innovation Figure 8, and the slope of the new product’s curve would be shallower than for the current product. This The model herein suggests the following succinct defi- would result in the innovation first achieving sales at nition captures the essence of a disruptive innovation: the low end, per Characteristic 1. It encroaches on the market from the low end upward. Over time, however, customers presumably become Such an innovation may first open up a fringe market more informed about the product, such that the loss or a detached market or may encroach immediately of sales support is less of a factor for everyone. For upon introduction. Conversely, the essence of a sus- example, after having gone through several purchase taining technology is that it encroaches on the market cycles, customers may become comfortable in buying from the high end downward. As discussed herein, the a disk drive without having to first be informed of its mapping shown in Table 1 can be attained by ana- capabilities by sales support personnel. As a conse- lyzing the trajectory charts in Christensen and Raynor quence, less value is presumably ascribed to sales sup- (2003) and Christensen et al. (2004), which are the port over time. basis for the theory of disruptive innovation. We next In the setting of the model presented herein, this critique the encroachment framework against several would suggest that over time the reservation price of their textual definitions. curves become nearly coincident. Given the curves Christensen et al. (2004, p. 293) define a disruptive shown in the progression of frames shown in Figure 8, innovation as ‘‘an innovation that cannot be used by this means that the new product overtakes the market customers in mainstream markets. It defines a new in low-end encroachment fashion. Since there is no performance trajectory by defining new dimensions of market expansion due to improved product attributes performance compared to existing innovations. Dis- along any dimension, the encroachment (on the low ruptive innovations either create new markets by end) is immediate, reflecting the case of immediate bringing new features to nonconsumers or offer low-end encroachment. Theoretically, the elimination more convenience or lower prices to customers at of sales support could lead to a bit of market expan- the low end of an existing market.’’ sion due to reduced prices, but for purposes of expo- Our succinct definition is consistent with the first sition this effect is ignored (Christensen and Raynor, sentence: ‘‘Mainstream markets’’ are interpreted to At introduction After several years After a few more years Old Old Old Reservation price Reservation price Reservation price Ne Ne Ne w w w Sales of new Sales of old Sales Sales Sales Sales of of of of old old new new Main- Mid- Desktop Laptop Specialty Main- Mid- Desktop Laptop Specialty Main- Mid- Desktop Laptop Specialty frame range frame range frame range Actual or Potential Market Segments Actual or Potential Market Segments Actual or Potential Market Segments (width of the segment indicates number of customers) (width of the segment indicates number of customers) (width of the segment indicates number of customers) Figure 8. Product 4 Immediately Steals Customers at the Low End and Then Encroaches Upward, Representing Low-End Encroach- ment of the Immediate Type
  • 15. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 361 2008;25:347–369 mean non-low-end customers—in low-end encroach- that it is not the high-end customers that appreciate ment, the innovation sells to low-end markets. It is this new target, so it must be the low-end customers. consistent with the second sentence: One part-worth Thus, low-end encroachment, where the low-end cus- was shown for the old performance dimension and tomers are the first to appreciate the innovation, is one for the new one—for disk drives, the old dimen- consistent with the first and fourth criteria. With re- sion happened to be capacity and the new one size. In gard to the third criterion, if performance is not im- this setting, low-end encroachment was shown to en- proved on the dimensions valued by mainstream sue when the new drive was of a size more favorable to customers, then their reservation prices diminish (or the nonmainstream customers. And the definition at least do not increase). Again, this is consistent with herein is consistent with the third sentence: Low-end the low-end encroachment scenario. Next, the second encroachment can ensue either via the fringe-market criterion is addressed regarding margin. type or the detached-market scenario—both of which Characteristic 3 (applies to the downward-sloping sce- create new markets by bringing new features to non- nario): If the new product sells to the low end of the consumers—or via the immediate type, by immedi- market and achieves x% market share, its absolute ately selling to customers at the low end of an existing margin relative to that of the competitive old product is market. less than if it had instead sold to the high end of the Anthony (2005a, p. 4) associates the following market and achieved the same x% market share. words with a disruptive innovation: Simpler, Lower- priced, Good-enough performance, Great leap down- Characteristic 3 (see Appendix A for the proof) is ward, Simple. The word simpler is interpreted to mean consistent with the second criterion of Christensen et that the innovation is de-rated, if you will, with regard al. (2000). A competitive new high-end product will to the primary performance dimensions valued by de- achieve a higher relative absolute margin than if it had manding high-end customers. This would be consis- been a low-end product. This may help explain why tent with the encroachment framework. The term incumbents aggressively fight off competitive high- lower-priced is not fully consistent because the de- end products, and seemingly let competitive low-end tached-market scenario allows for higher price. This is products begin to encroach. Recall that in the disk- a desirable feature of the model presented herein, drive example exhibiting low-end encroachment of the since Christensen and Raynor (2003) list some excep- fringe-market type, when the low-end and high-end tions to this rule. The term good-enough performance products sold in equal volumes the low-end product again implies de-rating of the primary performance received only 30% of the profits (the high-end product attribute valued by high-end customers. The phrase garnered 70%). great leap downward implies a move down-market or, Similarly, the high-end encroachment scenario is in the encroachment terminology, to the low end. consistent with the characteristics of a sustaining in- Christensen, Johnston, and Barragree (2000, p.) novation. Per Christensen et al. (2000), its key char- state that the key characteristics of a disruptive inno- acteristics are that it (1) targets customers most vation are that it ‘‘(1) targets customers in new ways, profitable to the firm; (2) improves gross margins; (2) generally lowers gross margins, (3) generally does (3) improves performance along a trajectory tradi- not improve performance along a trajectory tradition- tionally valued by industry’s mainstream customers; ally valued by mainstream customers, and (4) intro- and (4) can be incremental or radical in nature. Per duces a new performance trajectory and improves the previous discussion, it similarly follows that high- performance along parameters different from those end encroachment is consistent with his criteria for a traditionally valued by mainstream customers.’’ sustaining innovation. The first criterion of targeting customers in new In summary, there is general consistency, and these ways suggests that a disruptive innovation emphasizes authors are not aware of any instances where the en- a different product attribute compared with the cur- croachment framework and terminology are inconsis- rent product. This leads to a change in the reservation tent in a substantive way with the work of Christensen price curve of the innovation compared with the cur- and his coauthors. Several features of the model pre- rent product. Theoretically, it could be the high-end sented herein are as follows. First, it provides a rich customers who appreciate being targeted in a new setting where one can analytically calculate and por- way, or it could be the low-end customers who ap- tray prices, sales volumes, and market shares and can preciate this. But the fourth criterion listed indicates further split out the market segments to which each
  • 16. 362 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 product sells over time. Second, it offers further in- examples of high-end encroachment. Hewlett-Pack- sight such as distinguishing between fringe-market ard introduced the first calculator intended to be a and detached-market encroachment. Third, the replacement for the slide rule, and it did exactly what framework offers terminology that, per experience the old product did: It made calculations; only it made with practitioners, seems far less likely to lead to mis- them faster and with more accuracy than the slide interpretation. And fourth, the encroachment frame- rule. It really did not do anything substantively more, work facilitates greater clarity and more detail in and arguably it wasn’t dramatically easier to use (re- areas such as the sequence in which market segments member ‘‘reverse Polish notation?’’). The calculator’s are expected to adopt. attributes were exactly what high-end customers (those with high willingness to pay) wanted, and these high-end customers were the first to buy. As calcula- Testing the Validity of the Encroachment tor prices came down, calculators relatively quickly Terminology with Regard to 75 Innovations diffused down-market to those customers with lower willingness to pay. This is a classic story of high-end In this section the encroachment framework is encroachment. checked for its consistency against the 75 innovations Similarly, fuel injection did exactly what carburet- that Christensen and Raynor (2003) classify as being ion did: It generated a fuel–air mixture. Only it did it disruptive innovations in Table 2.2, pp. 56–65. better. But it really did not do anything substantively Southwest Airlines is one of their examples. In the more. Fuel injection was first applied in high-end cars airline industry in the early 1970s, the incumbents and then diffused downward into lower-end vehicles. were firms such as TWA, United Airlines, and Delta. This is another classic case of high-end encroachment. Their high-end users were business travelers, and low- Christensen (2006) confirms that these are not disrup- end users were typical vacationers. High-end users tive innovations. highly valued a full-service airline, which meant a full portfolio of destinations, in-flight meals, and options for first-class accommodations and seat assignments. Southwest innovated in this market by offering no- Discussion and Managerial Recommendations frills service. If one were to compare reservation price curves for the full-service airlines with Southwest, one Anthony (2005b), coauthor of Christensen et al. would expect Southwest’s curve to have a shallower (2004), highlights the value of having a common lan- slope, similar to the scenario exhibited in Figure 5. guage with which to formulate and execute corporate The fringe market that Southwest opened up involved strategy. The theory of disruptive innovation offers low-end customers who would otherwise have driven. this opportunity, but Anthony’s (2005a) title ‘‘Do Southwest then encroached upward. Again, the point You Really Know What You’re Talking About?’’ here is simply to illustrate how the encroachment suggests the language is not universally understood. framework is in alignment with the explanations pre- The encroachment terminology aids this under- sented in Christensen and Raynor (2003) and Chris- standing. The framework presented herein comple- tensen et al. (2004). In a much abbreviated manner, ments the work of Christensen and helps managers Appendix B links each of the other 74 examples to the readily grasp what is meant by a disruptive innova- low-end encroachment terminology. tion: It is an innovation that encroaches on the old Another test of the consistency of the encroach- product from the low end upward. Further, there are ment framework with the theory of disruptive inno- three possible scenarios under which this low-end en- vation, and possibly the most severe test, is to examine croachment can be initiated. The ‘‘immediate’’ form products that might otherwise be hard to categorize. of low-end encroachment is associated with what For example, was the calculator a disruptive innova- Christensen and Raynor (2003) call low-end disrup- tion relative to the slide rule? Was fuel injection a tion—in this scenario, the innovation does not open disruptive innovation relative to carburetors? In both up a new market but simply first sells to existing low- cases, a number of incumbent firms were ‘‘disrupted’’ end customers before diffusing up market. The fringe- in that they were forced out of that business. But in market and detached-market forms are associated both cases, the encroachment framework would sug- with what Christensen and Raynor (2003) call new- gest these innovations were not disruptive. These were market disruption.
  • 17. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 363 2008;25:347–369 In the fringe-market scenario the innovation first tached (they are separated by the desktop and laptop opens up a new fringe market, where customer needs segments). Further, if the willingness to pay for the are only incrementally different from those of existing midrange segment is compared with that of the spe- low-end customers, before encroaching on the low cialty segment, the differences are found to be much end of the old product market and diffusing upward more than incremental—there is a discontinuity in the toward the high end (such as Southwest Airlines did preferences between the midrange and specialty seg- by first catering to customers who otherwise would ments. That is, the specialty segment has a dramati- have driven). In the detached-market scenario the in- cally lower willingness to pay for capacity, along with novation first opens up a new detached market, where a dramatically higher preference for compactness. In customer needs are dramatically different from those Figure 6, as in Figures 2 and 3, the midrange and of existing low-end customers. However, the new specialty market segments are detached (i.e., separat- product still ultimately first encroaches on the low ed by the desktop and laptop segments). That is why end of the old product market before diffusing up- this represents the ‘‘detached-market’’ type of low-end ward toward the high end. An example is cell phones, encroachment, where preferences of the first new cus- which first sold at exorbitantly high prices but ulti- tomers are dramatically different than those of the mately first displaced land lines in low-end segments current low-end customers. such as students and apartment dwellers. This article provides a three-step process whereby The disk-drive example was used to illustrate how the firm can assess the ‘‘disruptability’’ of its market— fringe-market and detached-market low-end en- or for that matter its ‘‘sustainability.’’ From this croachment differ (and to illustrate what is meant framework a number of managerial insights and rec- by customer needs that are incrementally different ommendations are derived, a few of which are high- versus those that are dramatically different). Recall lighted as follows. that Figures 2 and 3 show how customer preferences in the desktop segment are only incrementally differ- 1. The firm should comprehensively consider all four ent from those in the midrange segment (these seg- of the encroachment alternatives (high-end and the ments are adjacent to one another). In fact, as three low-end scenarios). As shown herein, for any suggested earlier, the willingness to pay for the low- given product the firm may have all four potential est-end midrange customer is only infinitesimally strategies available for pursuit, and these may not different from the willingness to pay for the highest- be mutually exclusive. For example, Intel en- end desktop customer. Thus, if the low end of the old croaches on multiple fronts: the high end with a market is the midrange segment, and if the desktop new generation of Pentium and the low end with segment is the new product market, as it is in the left the Celeron. frame of Figure 5, then the new market is on the fringe 2. A sensitivity analysis should be performed on the of the old market. And per Figures 2 and 3, customer results from analyses such as the three-step pro- preferences in this new fringe (desktop) market seg- cess. This process dictates that the firm make pro- ment are only incrementally different from those at jections well out into the future with regard to the low end of the old market (the midrange segment). reservation price curves and costs. Naturally, there Thus, the fringe-market type of low-end encroach- is uncertainty in these performance and cost tra- ment (illustrated in Figure 5) is associated with the jectories. Going back to the disk-drive example of case where the new product first opens up a fringe 1985, who could have predicted that in the early market where customer preferences are only incre- 2000s there would be huge demand for a 1.8 inch mentally different from those of current low-end cus- disk drive stemming from the iPod MP3? Who tomers. could have guaranteed that it would be technolog- Contrast this with the case illustrated in Figure 6, ically feasible to produce a disk drive this small where the first segment to buy the new product is the with that much capacity? To account for both specialty segment (here, as before, the low-end seg- market risks and technological risks such as these, ment of the old market is the midrange segment). the firm should run profitability analyses under al- Compare the preferences of the specialty segment with ternate scenarios and should assess the likelihood those of the old midrange market segment as shown in of each scenario. Figures 2 and 3. In this case the specialty and mid- 3. Managers should look for situations where the range market segments are not adjacent but are de- preferences of various segments are negatively
  • 18. 364 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 correlated across attributes (or sets of attributes). achievable. Thus, every opportunity must be as- As suggested by the disk-drive example, these sit- sessed carefully. uations are ripe for disruption (i.e., low-end en- 6. When preferences are positively rather than croachment): Though the old product is strongly negatively correlated across all key dimensions preferred by existing customers because it excels of performance, or when there is only one along the primary performance dimensions, a new dimension of performance, managers should product can target a new segment, one that strong- look for low-cost opportunities or for further ly prefers the alternate attribute set (the new prod- high-end improvements if customer performance uct can be de-rated along the first dimension and needs have not yet been saturated. In these situa- excel on the alternate one). The old product’s high- tions there do not appear to be significant oppor- end segment will be reluctant to switch to the new tunities for fringe-market or detached-market product because this segment only weakly values growth. the alternate attribute (they will wait to switch until 7. Managers should realistically assess the degree to the new product brings its performance up along which encroachment is expected to progress and the primary dimension, assuming this can be the speed at which it will do so. Not all encroach- done). ment threats (or opportunities) progress to the ex- 4. Managers should look for settings where local end tent illustrated in Figures 4–6 and 8. For example, users are willing to trade quality for convenience. Intel’s Celeron did not encroach to fully displace This recommendations stems from the observation the Pentium line of processors. Southwest Airlines that a number of the cases of low-end encroach- has grown to be a major player, and many of its ment described in Appendix B are situations practices have been adopted by other airlines but where the old high-quality product was used in a have not diffused throughout the market. Discount centralized location and a ‘‘low-quality’’ new stores have not eliminated all department stores. product was targeted directly toward more local While Markides (2006) and Christensen (2006) end users. In effect these represent situations touch on this issue, more research is needed to ex- where preferences are negatively correlated as de- plain what causes some substitution processes to scribed in item 3. For example, consider the case stall and others to progress to the point of full re- of Xerox encroaching on offset printing. With placement. offset printing, the technician was expected to 8. Firms should be careful about pigeonholing spe- produce copies of a quality that met the tastes of cific customers as ‘‘innovators’’ or ‘‘laggards.’’ In the most demanding job. But when Xerox intro- the earlier examples, if product 1 had been intro- duced a copier that could be installed more locally duced then the mainframe customer would have at a corporate site, the local users readily accepted been an innovator (Figure 4), whereas if product 2, copies of much lower quality in favor of conve- 3, or 4 had been introduced then the mainframe nience. customer would have been a laggard. The implica- 5. In situations where there is negative correlation tion is that the marketing approach must mesh between the preferences of various market seg- with the encroachment strategy. ments, as discussed in items 3 and 4, the firm should look for the opportunity to offer not only Innosight (2005), the consulting firm founded by an incrementally different product but also a dra- Christensen, suggests that the essence of a disruptive matically divergent product. To understand what innovation is that it is ‘‘simpler, more convenient, and this means, refer back to the previous sections that lower cost.’’ These are the characteristics of the en- outline the outcomes given product 2 (Figure 5) croachment framework presented in this article: The and product 3 (Figure 6) and compare. The de- encroachment framework may represent a de-rated tached-market scenario resulting from product 3 version of the full theory of disruptive innovation as (Figure 6) is particularly lucrative in that it offers described in numerous books and articles, but it in the opportunity to achieve relatively high prices some ways it is simpler (the terminology directly con- and potentially higher margins: The new product veys the meaning), more convenient to use in discus- sells in a detached market instead of a fringe mar- sions with managers, and of lower cost (e.g., the case ket. Of course, such opportunities may be riskier study of Schmidt and Van Mieghem, 2005 is freely and technologically more challenging, if even downloadable).
  • 19. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? J PROD INNOV MANAG 365 2008;25:347–369 References Danneels, E. (2004). Disruptive Technology Reconsidered: A Critique and Research Agenda. Journal of Product Innovation Management Anthony, S.D. (2005a). Do You Really Know What You’re Talking 21(4):246–258. About? Strategy & Innovation May–June. Harvard Business School Dataquest, Inc. (2003). A unit of Gartner, Inc., Personal Computers Publishing Corp, Product #S0505A. Worldwide Quarterly Shipments Report. Anthony, S.D. (2005b). Lessons from the Trenches. Strategy & Inno- Deck, M.J. (2005). Book Reviews: The Innovator’s Solution and Seeing vation July–August. Harvard Business School Publishing Corp, What’s Next. Journal of Product Innovation Management 22:213– Product S0507A. 214. Bower, J. and Christensen, C.M. (1995). Disruptive Technologies: Catching the Wave. Harvard Business Review 73(1):43–53. Druehl, C.T. and Schmidt, G.M. (2008). A Strategy for Opening a New Market and Encroaching on the Lower End of the Existing Market. Cellular Telecommunications & Internet Association (CTIA) (2003). Production and Operations Management 17(1):44–60. Semi-annual Wireless Industry Survey. Available at: http://files. ctia.org/pdf/CTIA-Semiannual_Survey_YE2003.pdf. Federal Communications Commission (FCC) (2004). Trends in Telephone Service. Industry Analysis and Technology Division, Christensen, C.M. (1992). The Innovator’s Challenge: Understanding Wireline Competition Bureau. http://www.fcc.gov/Bureaus/Com the Influence of Market Environment on Processes of Techno- mon-Carrier/Reports/FCC-State_Link/IAD/trend504.pdf. logy Development in the Rigid Disk Drive Industry. Un- published doctoral dissertation, Harvard Business School, Graziano, K. (1998). Book Reviews: The Innovator’s Dilemma. Journal Cambridge, MA. of Product Innovation Management 15:95–97. Christensen, C.M. (1997). The Innovator’s Dilemma. Boston: Harvard Innosight (2005). Disruptive Innovation Primer. Available at: http:// Business School Press. www.innosight.com/documents/diprimer.pdf. Christensen, C.M. (2006). The Ongoing Process of Building a Theory Markides, C. (2006). Disruptive Innovation: In Need of Better Theory. of Disruption. Journal of Product Innovation Management 23(1):39– Journal of Product Innovation Management 23(1):19–25. 55. Schmidt, G.M. and Druehl, C.T. (2005). Changes in Product Attri- Christensen, C.M., Anthony, S.D., and Roth, E.A. (2004). Seeing butes and Costs as Drivers of New Product Diffusion and Substi- What’s Next. Boston: Harvard Business School Press. tution. Production and Operations Management 14(3):272–285. Christensen, C.M. and Bower, J.L. (1996). Customer Power, Strategic Schmidt, G.M. and Porteus, E.L. (2000). The Impact of an Integrated Investment, and the Failure of Leading Firms. Strategic Manage- Marketing and Manufacturing Innovation. Manufacturing and Ser- ment Journal 17:197–218. vice Operations Management 2(4):317–336. Christensen, C.M., Johnston, C., and Barragree, A. (2000). After Schmidt, G.M. and Van Mieghem, J.A. (2005). Seagate-Quantum: En- the Gold Rush: Patterns of Success and Failure on the Internet. croachment Strategies—Case Article. INFORMS Transactions on Innosight, LLC. Available at: http://www.innosight.com/ Education 5(2). Available at: http://ite.pubs.informs.org/Vol5No2/ documents/After%20the%20Goldrush.PDF (accessed 19 March SchmidtVanMieghem/. 2008). Schmidt, G.M. and Wood, S. (1999). The Growth of Intel, and the Christensen, C.M. and Raynor, M. (2003). The Innovator’s Solution. Learning Curve. Case Study S-OIT-27, Stanford University Grad- Boston: Harvard Business School Press. uate School of Business. Appendix A: Proof of Characteristic 3 For the low-end product, let qB 5 sales quantity, pB 5 price, cB 5 cost, mB 5 pB À cB 5 absolute margin, and pB 5 mB qB 5 total profit. Similarly, for the high-end product, let qN 5 sales quantity, pN 5 price, cN 5 cost, mN 5 pN À cN 5 absolute margin, and pN 5 mN qN 5 total profit. Let k denote the slope of the low-end product’s reservation price curve relative to that of the high-end product’s curve, such that 0 o k o 1 (recall that by Characteristic 1, the low-end product is associated with the shallower slope). From Schmidt and Porteus (2000, p. 327), pB/pN 5 k(qB/qN)2 , which can be rewritten as mB =mN ¼ kðqB =qN Þ: ð1Þ If the new product is low end with market share x 5 qB/(qB þ qN), then r  x/(1 À x) 5 qB/qN and by (1) the new product’s absolute margin relative to the old product is mB/mN 5 kr o r. If the new product is instead high end with market share x 5 qN/(qB þ qN), then r  x/(1 À x) 5 qN/qB and by (1) its absolute margin relative to the old product is mN/mB 5 r/k4r.
  • 20. 366 J PROD INNOV MANAG G.M. SCHMIDT AND C.T. DRUEHL 2008;25:347–369 Appendix B: Link between Products in Christensen and Raynor (2003, Table 2.2) and Low-End Encroachment To further validate the mapping between disruptive innovation and low-end encroachment as shown in Table 1, the 75 examples in Christensen and Raynor (2003, Table 2.2) are linked to the encroachment terminology. In Table A.1, the column ‘‘Link to low-end encroachment’’ provides a brief account of how each disruptive in- novation encroached on the old product market from the low end upward, possibly after opening up a new market. Innovations that would be classified as the detached-market form of low-end encroachment are prod- ucts 1, 5, 61, and 74. Christensen and Raynor already effectively distinguish whether the others are the imme- diate or fringe-market form—in their Figure 2-4 they identify which, in their terminology, are low-end disruptions and which are new-market disruptions (low-end disruptions are associated with the immediate form of low-end encroachment).
  • 21. Table B.1: Examples of Disruptive Products and How Each Encroached from the Low End Product Abbreviated Description from Christensen and Raynor (2003) Link to Low-End Encroachment 1 802.11 Wireless protocol. Signals can’t travel long distances. Less bandwidth than cable but offers mobility. Similarities to cell phone. 2 Amazon.com Relative to bookstores. Targets low end, willing to give up full service for price, convenience. 3 Barnes & Noble First sold overstocked surplus books. Became dominant in-print Surplus books implies starting even lower end than in-print discounter. discount. 4 Beef Processing Slaughterhouses transported beef by refrigerated railcar. The ‘‘de-assembly line’’: an immediate low-end encroachment. 5 Bell Telephone Early signals had three-mile range; Western Union’s telegraphy Initially expensive, first appealed to ‘‘detached’’ market valuing was long distance. voice transmission but willing to sacrifice distance. 6 Black & Decker Introduced plastic-encased tools for do-it-yourselfers. Do-it-yourselfers are low end relative to the professionals. 7 Blended Plastics Inexpensive plastic blends are displacing engineered plastics. Described as starting in a market where needs are less demanding. 8 Bloomberg L.P. Gradually improved its offerings to move into financial news. Implication of starting with low quality (i.e., starting at low end). 9 Boxed Beef Rather than ship sides of beef, make final cuts and then ship. First appeals to lower-end market that isn’t willing to pay for special cuts. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? 10 Canon Photocopiers Early countertop copiers were slow and of poor resolution; didn’t Lower-end customers are the ones to accept these quality trade- enlarge or reduce or collate. offs. 11 Catalog Retailing Didn’t offer the service of a bricks-and-mortar retailer. Lower-end customers are typically the ones willing to sacrifice service. 12 Charles Schwab Started as discount broker. Attracted lower-end individual investors. 13 Circuit City, Best Buy Disrupted full-service and discount dept. stores. –––a 14 Cisco Uses packet switching, good enough for data but not voice (until Data are low end relative to voice transmission. recently). 15 Community Colleges Less expensive than four-year state colleges, which are becoming Note the encroachment of the community colleges into what has providers of upper-division courses. typically been higher-end education. 16 Concord School of Law Students don’t typically enroll to become lawyers. The school didn’t start by targeting high-end customers. 17 Credit Scoring Used initially for in-store credit cards; then improvements allowed Note the progression to the higher ends of the market. expansion to auto, mortgage, and small business. 18 Dell Computer Started as a low-cost alternative with a poor-quality reputation. Described by Christensen and Raynor as the perfect computer for the low-end consumer. 19 Department Stores Salespeople much less knowledgeable, started at simplest end of High-end customers typically are willing to pay for service; low mix. end likes self-service (to save money). 20 Digital Animation Enables far more companies to compete (due to reduction in cost). Disney maintained its high-end artists, but others competed at lower cost. 21 Digital Printing Relative to offset printing, allows local printing at ever-improving Typically, lower-end customers would be the only ones to accept speeds and quality. the implied poorer speed and quality. 22 Discount Department Stores Salespeople much less knowledgeable, started at simplest end, Note the phrase moved up-market. moved up-market. 2008;25:347–369 23 eBay Enabled sales of items no longer needed. Started as a nationwide ‘‘garage sale’’; later attracted some higher- end items. 24 Electronic Communication Allow exchanges of equities over a computer. The product is a fraction of the cost of the one it replaced. J PROD INNOV MANAG Networks (ECNs) 25 E-Mail Relative to postal service. Users first e-mailed ‘‘fringe’’ messages that previously went unsent and then e-mailed files previously mailed. 26 Embraer and Canadair Regional Capacity of their jets has stretched from 30 to 50, 70, and now 106. Note the move up to higher capacities. Jets 367
  • 22. 368 Table B.1. (Contd.) Product Abbreviated Description from Christensen and Raynor (2003) Link to Low-End Encroachment 27 Endoscopic Surgery Could only address the simplest procedures but has improved. Has moved up-market into complicated (high-end) surgeries. 28 Fidelity Management Created self-service personal financial management. High-end customers typically are willing to pay for service; low end likes self-service (to save money). 29 Flat-Panel Displays Quoting Christensen and Raynor: ‘‘Haven’t they come from the Christensen and Raynor says they didn’t come from the high end.b high end? Actually, no’’ (p.60). 2008;25:347–369 30 Ford Model T was so inexpensive it sold to the masses. The Model T opened up a new low-end market relative to what existed. 31 Galanz Started by making ovens cheap enough for Chinese market before Note the start at the very low end of the world market. moving up-market to rest of world. J PROD INNOV MANAG 32 GE Capital Low-end disruptive strategies. Note the phrase low end. 33 Google Relative to directories such as the Yellow Pages. ‘‘Free’’ search appeals to low-end customers. 34 Honda Motorcycles Took root as an off-road motorized bicycle. Do motorized bicycles sound like high-end products? 35 Ink-Jet Printers Relative to laser jets, they were low cost, slow and fuzzy, sold to Do students sound like high-end customers? students. 36 Intel Microprocessors These went into personal computers. See entry on personal computers. 37 Intuit’s QuickBooks Instead of producing sophisticated reports for analytical purposes, Less sophisticated implies lower end. it simply helped keep track of cash. 38 Intuit’s TurboTax PC-based accounting software is displacing personal tax High-end customers typically are willing to pay for service; the low preparation. end likes self-service as it saves money. 39 Japanese Steel Makers Began by exporting very low quality. Accelerated their up-market Note the phrase up-market trajectory. trajectory. 40 JetBlue Low-end disruption. Note the phrase low end. 41 Kodak Before Kodak’s Brownie, only professionals could take pictures. The Brownie targeted lower-end customers (not higher-end pros.) 42 Kodak Funsaver Sold to people would didn’t have a camera. Sales are to very low end. 43 Korean Autos (Hyundai, Kia) Gains have come in lowest-profit portion of market. Similar to Toyota, these firms are starting at the low end. 44 Linux Positioned beneath high-end UNIX but has gained share against Implication is that it is gaining share at low end of the UNIX UNIX. market. 45 MBNA Credit scoring deployed in high-volume, low-cost business models. Note the attractiveness to low-cost business models. 46 McDonald’s Has taken fast food up-market. Expensive restaurants still thrive The phrases imply a move up-market, with the high end remaining at the high end. untouched. 47 MCI, Sprint Relative to AT&T’s high long-distance rates. Implication of low price. 48 Merrill Lynch Made it inexpensive to invest, and then moved up-market. Note the phrase then moved up-market. 49 Microsoft The operating system was inadequate for mainframes, but Note the phrase ‘‘taking the firm up-market.’’ migration is taking the firm up-market. 50 Mini-computers Relative simplicity and low price. Low-end customers are associated with simplicity and low price. 51 Online stockbrokers Disruptive relative to full-service brokers. Lower-cost online trading is not associated with high-end customers. 52 Online travel agencies Allowed airlines to dramatically cut commissions to agents. High-end customers typically are willing to pay for service; the low end likes self-service as it saves money. 53 Oracle Customizable software; disruptive relative to financial software. Financial software seems to represent the high end. 54 Palm Pilot, RIM Blackberry Relative to notebook computers. Seem to be detached-market products that have not yet encroached on notebooks. 55 Personal Computers Sold in unique value network before capturing sales from higher- Note the phrase before capturing sales from higher end. end professional computers. 56 Plastics Quality was inferior to wood/steel but had low cost and ease of Inferior quality and low cost are generally associated with low end. shaping. G.M. SCHMIDT AND C.T. DRUEHL
  • 23. Table B.1. (Contd.) Product Abbreviated Description from Christensen and Raynor (2003) Link to Low-End Encroachment 57 Portable Diabetes Blood Glucose Enabled patients to monitor their own glucose levels. High-end customers typically are willing to pay for service; the low Meters end likes self-service as it saves money. 58 Salesforce.com Inexpensive, simple customer relationship management software. Low-end customers are most attracted to inexpensive/simple. 59 Seiko Watches Started as cheap, throw-away plastic watches. Low-end customers are most attracted to cheap/throw-away. 60 Sonosite Inexpensive handheld ultrasound device. Targeted local low-end users, not centralized high-end professionals. 61 Sony Made radios and TVs portable via transistors. Initially expensive, first sold to ‘‘detached’’ customers valuing portability (as in cell phone example). 62 Southwest Airlines Competed with driving and took business with low prices. Low-end customers were attracted first; now it’s moving up- market. 63 SQL Database Software Forced Oracle to move up-market. Implication is that SQL took the low end of the competitor’s market. 64 Staples Disrupted small stationary stores and commercial office supplies –––a distributors. WHEN IS A DISRUPTIVE INNOVATION DISRUPTIVE? 65 Steel Minimills Started with rebar; moved up-market to structural and sheet. Rebar is low-end product. 66 Sun Microsystems Built around reduced instruction set computer (RISC) RISC was a low-cost initiative; Sun also promoted open microprocessors. architecture. 67 Toyota First sold cheap subcompacts in United States; now makes Lexus. Cheap subcompacts are low-end product. 68 Toys ’R Us Disrupted toy department of full-service and discount department –––a stores. 69 Ultrasound Started with imaging of soft tissues; moved to displace x-ray. Imaging of soft tissues represented low end of market relative to x- ray. 70 University of Phoenix Began by providing nondegree training. Low end relative to prestigious degree-granting institutions. 71 Unmanned Aircraft Began as drones, and then moved up-market into surveillance. Note the phrase then moved up-market. 72 Vanguard Relative to managed mutual funds, they have low fees. Lower cost, arguably similar performance (immediate low-end encroachment). 73 Veritas and Network Appliance Data are stored locally rather than centrally. Targeted local low-end users, not centralized high-end professionals. 74 Wireless Telephony Initial units were large car phones with spotty efficacy. See the discussion regarding cell phones in the text. 75 Xerox Relative to offset printing, copying could be done locally. Targeted local low-end users, not centralized high-end professionals. a Here Christensen and Raynor seem to use the term disrupt to mean that the entrant displaced the incumbent to one degree or another (this is an inconsistent use of the term disruptive as compared with their use of the term elsewhere). For products 13, 64, and 68, the new product encroached on the low end (was a disruptive innovation) relative to the full service (or small) stores but encroached on the high end (was a sustaining innovation) relative to the discount stores (or distributors). b Flat panels fit the characteristics of high-end encroachment in their application in TVs. 2008;25:347–369 J PROD INNOV MANAG 369