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Did the Critique of Disruptive Innovation Apply the Right Test?

By Martin J. Bienenstock

Having specialized in reorganizing companies in financial distress for 38 years, I have had a ringside seat to the causes and consequences of business failure. I use that experience to counsel boards of directors about formulating corporate governance to promote growth and avoid failure. It is vital to help boards detect and understand their companies’ problems when those problems can still be solved outside bankruptcy — and when the companies can still grow profits for shareholders.

In my experience, the cause of business distress that is most detectable, but often undetected or disregarded until material damage is done, is a disruptive innovation as defined by Harvard Business School professor Clayton M. Christensen. In his theory of disruptive innovation, Christensen has explained how and why industry-leading companies that pay attention to their best customers and improve products for them are susceptible to failure stemming from competitors’ products or services that are initially inferior and only attract a different market or the lower end of the leading company’s market. Of all the many different types of advice I give boards, the means of detecting disruptive innovations has been one of the most critical staples.

In their article, “How Useful Is the Theory of Disruptive Innovation?” in the fall 2015 issue of MIT Sloan Management Review, Andrew A. King and Baljir Baatartogtokh acknowledge that Christensen’s disruptive innovation theory “has gripped the business consciousness like few other ideas.” But they incorrectly conclude that the theory simply “provides a useful reminder of the importance of testing assumptions, seeking outside information, and other means of reducing myopic thinking.” That overlooks what Christensen discovered and vastly underestimates the importance of Christensen’s insights to executives and corporate directors.

When Christensen studied successful companies whose fortunes declined, he discovered one category of companies that failed or suffered diminished success when overtaken by companies that had initially offered inferior products appealing to customers who either could not afford the successful companies’ products or were the least profitable for the successful companies. More often than not, the market leaders were capable of offering the cheaper product. But, for seemingly valid business reasons, they declined to do so.

It is critical that boards of directors and senior management understand when following accepted principles of good management (such as paying attention to your best customers and focusing investments where you can increase profit margins) leads to failure. Christensen demonstrated that those accepted management principles are only situationally appropriate. That insight can be used not only to avoid failure but also to go on offense to displace competitors. Identifying and harnessing disruptive innovations to avoid failure and to grow shareholder value became far more attainable once Christensen identified the essential elements of a disruptive innovation — a phenomenon previously unnoticed.

The tests to identify a potentially disruptive innovation that Christensen and his coauthor, Michael E. Raynor, include in their book The Innovator’s Solution form a critical aspect of the theory for executives. The first test is to ask whether an idea or product will appeal to a large population of potential users who have gone without it or who have had to go to an inconvenient location to use it. If so, then there is a potential new market to be exploited.

The second test is to ask whether there are already customers at the low end of the market who would purchase an inferior, but still sufficient, product at a discount price that would enable a disrupter to earn a sufficient profit. If so, then there is a low-end market to be exploited. Finally, if either or both of the first two tests are passed, the final question is whether the disruptive idea is disruptive to all significant incumbent companies in the industry. If not (in other words, if the disruptive product is a sustaining innovation to a leading player’s product that that player can also improve), an entrant will likely fail with the idea, because an incumbent will have the advantage.

King and Baatartogtokh’s article did not test whether Christensen’s formula to identify a disruptive innovation that could take a leader’s market share holds up. Rather, they tested whether each of four variables they selected are present in each of 77 examples of disruptive innovation that Christensen and Raynor identified.

The bottom line is that Christensen’s theory is invaluable to business executives. He showed the power of a disruptive innovation to infiltrate a new market or low-end market with a product inferior to an incumbent’s product. He explained that disruptive products often improve and displace the incumbent’s products because the organizational cultures of incumbents usually cause them to avoid inferior products offering lower profit margins, which initially do not appeal to their best customers. This explains the problems and declines of countless once-successful companies — and is detectable and avoidable. King and Baatartogtokh’s article does not recognize this value of the disruptive innovation theory. Using Christensen’s theory has helped companies such as Intel Corp. and Johnson & Johnson identify and formulate innovative products. Simultaneously, the theory helps incumbents spot disruptions so they can deal with them without being overtaken.

Many incumbents end up floundering as a result of a disruptive innovation, while some extraordinarily well-capitalized incumbents do not. In some cases, for example, the incumbent ends up purchasing the disruptive innovator. Accordingly, King and Baatartogtokh’s assertion that 38% of the 77 cases from Christensen’s books resulted in an outcome other than the incumbent floundering does not undermine Christensen’s warning to incumbents about the potential threat from disruptive innovation. The point is that if incumbents do not identify and respond correctly to disruptive innovations at the outset, they can pay dearly by losing market share. Moreover, some of the 77 cases took place after publication of Christensen’s first book, The Innovator’s Dilemma, in 1997. Given the enormous influence and popularity of that book, it would be surprising if some of the incumbents in the 77 cases did not benefit from Christensen’s insights. Similarly, King and Baatartogtokh’s finding that in 31% of the 77 cases the disrupter competed with a product for which there had been no significant trajectory of sustaining innovation does not detract from Christensen’s discovery of the power of a disruptive innovation to infiltrate new markets and then go up-market to displace the leader.

Christensen has done what businesspeople wish all advisors would do. He extracted from his research a key reason why so many dominant companies fall. He explained it in understandable and compelling terms. He articulated simple tests to identify potentially disruptive innovations to help companies avoid failure and grow profits. Indeed, every board of directors anxious to carry out its fiduciary duties of care and loyalty wants to understand what makes successful companies lose dominance or fail. Christensen’s disruptive innovation theory addresses one of the most vexing and unsolved problems of decades of successful companies that faltered, failed, or simply stopped growing. Disruptive innovation theory thus rightfully earned its honored place on the board agenda.

Martin J. Bienenstock is chair of the business solutions, governance, reorganization, and bankruptcy group at the law firm Proskauer Rose LLP; he is also a lecturer at both Harvard Law School and the University of Michigan Law School.

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