Do disruptive technologies really overturn market leadership?

While “disruption” is a word often abused and certainly given a virtue that it does not seem to deserve, the phrase “disruptive technologies” that started it all was actually more precise. Clay Christensen wrote that:

Generally, disruptive innovations were technologically straightforward, consisting of off-the-shelf components put together in a product architecture that was often simpler than prior approaches. They offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from, and unimportant to, the mainstream.

So such technologies have the characteristic that they perform worse on an important metric (or metrics) than current market leading technologies. Of course, if that were it, then the technologies could hardly be called disruptive and would be confined, at best, to niche uses.

The second critical property of such technologies is that while they start behind on key metrics, they improve relatively rapidly and eventually come to outperform existing technologies on many metrics. It is there that disruptive technologies have their bite. Initially, they are poor performers and established firms would not want to integrate them into their products as they would disappoint their customers who happen to be most of the current market. However, when performance improves, the current technologies are displaced and established firms want to get in on the game. The problem is that they may be too late. In other words, Christensen’s prediction was that established firms would have legitimate “blind spots” with regard to disruptive technologies leaving room open for new entrants to come in, adopt those technologies and, ultimately, displace the established firms as market leaders.

The problem with Christensen’s theory, however, is that it misses a couple of steps. First of all, it is important to realise why blind spots arise. If every claimed potentially disruptive technology was, in fact, disruptive, incumbents would realise this and adopt them before they are displaced. But, instead, the vast majority of new technologies are not disruptive. They perform worse on key dimensions and will continue to do so. However, because they perform worse, it is costly for incumbents to experiment with them in their product offering. By contrast, new entrants with nothing else to lose, find it cheaper to perform market and then technical experiments to see whether a technology is really disruptive or not.

Second, given this process of experimentation — that it is easier for entrants than incumbents — the outcome of the experimentation may be a visible or verifiable market test. Following that, there is no more blind spot for the incumbent and there is an opportunity for the incumbent and entrant alike to cooperate. In other words, while uncertainty may cause an entrant to pursue a path of competition with incumbents initially, the resolution of that uncertainty offers potential for cooperation. Cooperation gives several advantages including minimising competition — which is no friend of incumbent or entrant — and also saving on investment in assets to bring a new technology to scale. And both of these things are more likely the faster is the expected speed of improvement of the disruptive technology on traditional metrics. In other words, a disruptive technology that is defined by being relatively costly for incumbents to experiment with initially but demonstrates a speedy improvement path would not give rise to competitive displacement of incumbents but instead a period of competition followed by a pivot to cooperation. The outcome of that is sustained market leadership for the incumbent firms.

That’s the complete theory as outlined in a recent paper by myself, Matt Marx and David Hsu. But the paper goes further and tests the theory using almost six decades of entry and cooperate/compete commercialisation decisions in the speech recognition industry. Because we can identify ex post which technologies had the two disruptive characteristics outlined above, we can then compare the commercialisation paths of different technologies. The paper finds that disruptive technologies were, indeed, associated with the compete then cooperate path the theory identified while others were not.

The moral of the story is that disruptive technologies remain a very interesting type of technology to investigate. However, their potential for disruption of market leadership should not be over-stated. There are nuances to the process that a more complete theoretical treatment exposes.