Spend any time in or near the Silicon Valley Zeitgeist, and you’ll hear a lot about “disruption.” Our new startup is disrupting Big Pharma! We’re hiring top talent to disrupt the long haul trucking industry!

I had always heard the verb “disrupt” in those sentences to mean basically “change.” We’re going to change the way people buy drugs, or we’re going to change the way people drive trucks, or something. But I think this term has particular meaning that I just wasn’t paying attention to, and I think an important source for that meaning is the book The Innovator’s Dilemma. I recommend the book - it’s a great, quick read, and having read it I feel much more able to understand what all the Silicon Vallye venture heads are talking about.

The book outlines the interactions between two types of firms, let’s call them incumbents and disruptors. Typically, incumbents have a large, established market, and are successful. They’ve captured a meaningful share of a profitable market, and reliably turn out products that their established customers actually want. Disruptors, on the other hand, are small firms, without established markets, who are built up around their ability to deliver in some untested market. With these terms in mind, let me tell you what I learned from the book.

Disruptive technologies seem unappealing to big firms

Articles sometimes characterize incumbers and big, dumb, and complacent. Christensen argues that, in reality, incumbents are often highly competitive and innovative companies, but are too focused on an existing market to capture the benefits of the disruptive technology. He cites examples like DEC, a prominent maker of mini-computers, missing the advent of desktop computers. There are a few reasons for misses like this:

1. The incumbents are huge firms who need huge sales to satisfy goals and investors. Emerging markets are, by definition, not (yet) huge.
2. The incumbents are typically great at executing against a set of customer needs that are not met by the disruptive products (yet). For example, mini-computers were much more powerful machines than the first desktop computers, so to DEC they just seemed like worse computers (because they were).
3. The incumbents usually have processes (R&D techniques, sales pipelines, whatever) that are tailored to the existing market, and ill-suited to the disruptive market. For example, mini-computers contain fewer 3rd party parts and release new models slower than desktop computers.

So when DEC, which was a fantastic and innovative developer of mini-computers, looks at desktop computers, they see poor performance, low-margin hobbyist machines of doubtful utility, and rationally decide to invest in helping their current customers. By the time desktop computers are fast enough to compete with mini-computers, it is too late for them to enter the market, so their rational rejection of worse, lower margin technologies was fatal in retrospect, but focusing on existing customers in a higher margin market was a rational decision at the time it was made.

One example I would add if I were writing that book today is the classic story of Blockbuster turning down an early offer from Netflix to work with them. At this time, Blockbuster was realy, really good at making people drive to their stores and spend money on video rental, popcorn, late fees, etc. At the same time, Netflix was loosing money. Mailing things to people is expensive, buying and licesning DVDs is expensive, and a subscription service has no opportunity to sell you high markup popcorn on the way out the door. So when Blockbuster executives turned down buying Netflix, they were sticking with a profitable, higher-margin market and avoiding a smaller, apparently loosing one. That was, from their perspective, a good decision.

Firms are likely to be disrupted when their ability to deliver exceeds real need

All you get is more cupholders
– my friend Peter, on buying higher-end cars

Markets that are ready to be disrupted have reached a point where top firms can all exceed what customers actually want. Outside special applications, laptops are mostly fast enough, hard drives are mostly big enough, cars are mostly reliable enough. In these markets, firms cannot easily compete by increasing performance specs, and so must compete on convenience or price. This makes the market ready for a disruptor, that is, for some firm who can find a different basis for competition.

One reason I think electric cars are such a hot topic at the moment is that the gasoline passenger car market is so clearly past the point where all serious firms can exceed what people want. My dad is driving an old Honda Civic. You know what? It’s fine. It starts every day without fail, rides pretty smooth, has working heat and air conditioning, and comfortable seats. If he went out and bought a Mercedes, all of that would still be true. There would be seat warmers, extra features like lane keeping warnings and turn signals on the ends of the side view mirrors, and of course, more cupholders. But who cares? Gasoline passenger cars are at the point where a 10-year-old commodity commuter car exceeds the hard requirements of a typical customer. That means firms need a different way to distinguish their products, which means the market is disruptable.

One thing that’s fascinating about this book is that, published in 1997, it made exactly the same observation about gasoline powered passenger cars. But they are still a vast majority.

Anyway, I enjoyed the book, and now if people say something like, “I’m founding a startup to disrupt Big Kale” I have some idea of what they’re talking about, which is nice.

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