Why The “Disruptive” Label Matters

In a recent “Critical Path” episode, Horace Dediu discussed the definition of disruption (00:46:40). Basically he outlines the boundaries of disruption theory and sets 3 criteria for Disruption.

  1. Entrant product serves customers who are over served by current incumbent product, or serves non-consumers.
  2. Asymmetry of motivation. The incumbent is not motivated to directly compete with the entrant.
  3. There exists a “Technological Core” that enables the entrant to continually improve the product.

Now this is totally great. It is great that the criteria for a “Disruptive Innovation” is clearly laid out, and that we can now identify whether a certain upheaval in the market qualifies for the Christensen-ish definition of Disruption or not. I totally agree with the criteria, as should, I believe, anybody who has carefully read Christensen’s books.

The problem is, if you have three criteria that you can answer with yes/no, then you have 2 x 2 x 2 = 8 possible situations. Only one of these Christensen Disruption. What are the others?

Furthermore, it becomes important to understand what it means to be a “Disruptive Innovation”. Clearly, Christensen does not intend “Disruptive Innovation” to describe all situation where there has been a significant disturbance in the market. He only talks about one. Then the question is, what makes his single segment so important? More importantly, why are so many Venture Capitalists upset and why do they complain so much when a single academic declares that the companies that they are investing in do not fit his criteria of “Disruption”?

The key to this question is to understand what the power of “Disruptive Innovation” is. The companies that are “Disruptive” are the ones that can benefit from this power. The ones that do not qualify cannot.

In any market competition, the companies with the more resources generally win. The weaker companies typically lose. However, this isn’t much fun. Venture Capitalists looking for incredibly high returns, are instead betting on small and weak companies that will somehow accomplish something that much larger companies cannot. They are essentially betting on David beating Goliath.

Sometimes smaller companies will out-manoeuvre larger companies by being more nimble. Sometimes the willingness of smaller companies to experiment with crazy ideas will allow them to win. However, until Disruption Theory, there was no theoretical framework that could predict which smaller companies would have a high probability of success. And there still isn’t any other.

Disruption Theory is still the only well accepted business theory that has been demonstrated to be capable of identifying (probabilistically) the winners from the losers. It is the only theory that gives us a path that David could take to reliably beat Goliath. It is the only well known wave.

Companies that qualify as “Disruptive” in Christensen’s definitions are the ones that could benefit from “Disruptive” dynamics, and who can ride the waves to beat the most powerful incumbents. This means that they can make the most of the resources (capital) that investors pour into them.

On the other hand, companies that do not qualify must take a different path. Although each individual path has not been fully explored, weak entrants will typically not survive on these paths. There is not well identified wave to ride. There may be other waves, but we can’t reliably count on them.

I hope that this describes what not being “Disruptive” in the Christensen sense means. It means that if you are not “Disruptive”, you are not riding Christensen’s wave. If you are a battleship, then you are probably OK, but that means that there isn’t much fun for the investors who poured billions of dollars to build the battleship. Unless you ride the wave, you probably aren’t going to get insanely high returns.