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strategy and business
 / Summer 2005 / Issue 39(originally published by Booz & Company)


Top-Down Disruption

As Clayton Christensen warns, look out for the underdog — but also beware the leader of the pack.

Illustration by Lars Leetaru
They’re the stuff of entrepreneurs’ dreams and CEOs’ nightmares. They made Andy Grove paranoid and Bill Gates rich. They’re what propelled Wal-Mart past Sears and what spurred the rise — and subsequent collapse — of the Digital Equipment Corporation. They’re what we’ve come to call disruptive innovations.

Our understanding of these epoch-making technologies, products, and business models has been shaped largely by the works of Harvard professor Clayton Christensen, particularly his 1997 book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press). Professor Christensen draws an important distinction between innovations that sustain the competitive status quo of a market (by enhancing existing products according to the traditional measures of performance known to be valued by customers) and those that upset the status quo (by fundamentally altering the way customers think about product performance). Whereas sustaining innovations are often pioneered by established companies, disruptive ones usually come from newcomers — and thus can pose a mortal threat to even the most dominant of industry leaders.

Professor Christensen also offers a model for what a disruptive innovation looks like. He argues that, when initially introduced, a disruptive product or service generally “underperform[s] established products in mainstream markets,” “almost always takes root in a very undemanding application,” and “sells for less money” than current offerings. It tends to be ignored by the majority of buyers, who view it as falling short of their needs, and shunned by traditional suppliers, who see little to gain by selling a cheap product to a niche market. Because of these characteristics, the innovation initially gains a foothold in the lower reaches of the market, among less discriminating customers. Then, as its performance steadily improves, it rises to redefine the entire market, displacing industry incumbents in the process.

A good example, cited by Professor Christensen, is the triumph of steel minimills over integrated producers during the 1970s and 1980s. To create steel products, minimills melt scrap steel in relatively small electric ovens, a much simpler and cheaper process than the traditional method of melting iron ore and other ingredients in enormous blast furnaces. When minimills first emerged, the quality of their output was inconsistent, limiting them to producing the cheap rebar used to reinforce concrete — a low-margin market that the big steel makers were more than happy to abandon. But as the minimills improved their processes and product quality, their intrinsic cost advantage enabled them to trounce the integrated producers in ever more demanding markets, from structural beams to sheet steel. The minimills, like the other innovations in The Innovator’s Dilemma model, spread disruption from the bottom up.

That model has been extremely valuable to managers. It explains the real reason that many big, successful companies fail to survive major technological or other market shifts. But in its single-minded focus on bottom-up disruptions, the model is also potentially dangerous. It may lead managers to overlook a very different sort of disruption — one that emerges not at the bottom of the market but at the top.

In stark contrast to the bottom-up variety, top-down disruptive innovations actually outperform existing products when they’re introduced, and they sell for a premium price rather than at a discount. They’re initially purchased by the most discriminating and least price-sensitive buyers, and then they move steadily downward, into the mainstream, to recast the entire market in their own image. A top-down disruption is as revolutionary as a bottom-up one. But the good news for incumbents is that they have a much better chance of surviving, or even spearheading, the former than the latter.

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