Update on Clayton Christensen’s theory of disruption

Clayton Christensen’s book The Innovators Dilemma, originally published in 1997, changed my understanding of innovation, the evolution of value chains and gave me a theory of disruption that has served me very well over the years. His theory of disruption states that large companies are most often disrupted by small competitors who release products which are cheaper and initially inferior but good enough to take the low end of the market, after which quality improves to the point where they take the whole market. Incumbents initially ignore the threat because they are happy to cede the low end of the market and because they make the mistake of thinking that inferior products can ever be a threat.

For startups the beauty of this theory is the simple instruction: targeting the low end of the market with a much cheaper product is a winning strategy. Successes with this strategy over the year have been numerous – Skype, MySQL (and nearly every open source company), and Salesforce spring to mind.

So when I saw that Vivek Wadwha had written a post titled Tech successes are disrupting disruption theory I clicked straight through.

His argument is that disruption no longer starts at the low end of the market. He cites Tesla and Uber as examples of a disruptive business that started at the high end and worked down and he makes the bigger point that for many incumbents the threat is not so much from startups attacking the low end as from other industries. Apple is disrupting the entertainment business, Uber’s UberEats and UberFresh are disrupting the takeaway food and grocery markets, and Tesla’s PowerWall battery technology will disrupt the home energy market. Meanwhile Google and Apple are both moving into healthcare and payments.

Wadwha is right. I’m still holding onto the idea that disrupting from the low end is a great strategy, but the key point for startups is that exponential improvements in technology are creating opportunities for 10x better products at the high end as well. Our portfolio companies Spoke (great fitting mens clothes) and Lost My Name (amazing personalised children’s books) are good examples.

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    Clay talked about underserved consumers as well as overserved in his original theory.

    whilst you can target underserved by providing a premium product, you have to do a lot to deliver value and the incumbents don’t relinquish that market share happily – both aspects make it a tough place for resource constrained startups to play in.

    that’s why Clay recommended coming in from underneath and slowly working up.

    the startups which started at the top end and moved down successfully are few and far between and i still think would prove a very risky strategy for startups to try and replicate.