A New Challenge to Disruption Theory (and a Better Idea for Dealing With New Technology) Controversy has erupted over an influential argument on what happens when incumbent companies are confronted by innovation.
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A few weeks ago an article appeared in The New Yorker that has shaken the very foundation on which much current startup philosophy depends. I tried and failed to do that more than 14 years ago but I am hoping that this article makes more progress.
Before getting into that, let's look at the idea, why it matters, how come Jill Lepore's New Yorker article is causing such a stir and what I think is a better notion about tech innovation.
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The big theory of disruption holds sway. The idea in question, about disruption, belongs to Clayton Christensen, a Harvard Business School professor who introduced it in his 1997 book, The Innovator's Dilemma.
Disruption happens when a new product comes along that offers mediocre quality at a much lower price than the incumbent product that most customers use. Big companies enjoy fat profit margins from an incumbent product so they ignore the disruptive one, rather than embrace it.
Eventually, the disruptive product gobbles up all the incumbent's customers. And that puts the incumbent out of business. Christensen's prescriptive for the incumbent was for it set up a separate subsidiary to develop disruptive technologies. He issued a warning to successful corporations: ''Lose at the low end today, lose at the high end tomorrow,'' he said in an interview, The New York Times noted in 1999. His prescription for escaping that fate: ''Create a separate subsidiary; free it to attack the parent."
A Harvard professor of history, Lepore explained in her June 23 New Yorker article, "The Disruption Machine," that this idea has taken on a cultlike following. She cited startup conferences where people will shout out the spelling of "disrupt" to become energized.
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Challenging the disruption model. Lepore then exposed Christensen's flawed scholarship and flimsy examples. For example, Christensen had discussed how a disk-drive company, Seagate, had failed to adapt to a disruptive technology. Lepore pointed out that Seagate is now alive and prospering while the disrupters cited by Christensen have perished.
Disclosure: Like Lepore, I used to work for Michael Porter, another Harvard Business School professor, and I chatted with her on the phone when trying to schedule meetings with him. Moreover, I met with Christensen in 1998 soon after my first book, The Technology Leaders, came out and he gave me a copy of The Innovator's Dilemma.
Two years after I met with Christensen I wrote an article that was a less-than-successful attempt to burst the disruption theory bubble, which has expanded exponentially. My January 2000 article for IDG's Industry Standard, "The Dilemma of the Innovator's Dilemma," was critical of the idea of creating a separate subsidiary to manage disruptive technologies.
Instead of setting up a separate subsidiary to manage disruptive technologies, I argued, CEOs should take charge of managing their company's transition to a new technology -- to create superior value for their customers -- and integrate the new tech component into their organization as one of its core strengths.
Christensen was livid about my article. One of my editors spent what seemed like an hour on the phone with Christensen and me, unsuccessfully trying to broker a truce.
And in reading Christensen's response in Bloomberg Businessweek to Lepore's article, I see that she has been subjected to an even hotter blast of his fury. (For his part, Christensen believes Lepore did not read all his work.)
And in this latest battle of words, I agree with Lepore. She criticized Christensen more for the examples he used to prove his case. She found his examples provided flimsy support and also cited his becoming involved with a failed investment fund whose strategy was to use his model to bet on stocks.
To be clear, I think disruption often happens but it does not always wipe out incumbents and disruption does not always come from startups. I agree with Lepore in that disruption is becoming an irrational war whoop issued by startups. But what the startups don't like to pound their chests about is that 99.99 percent of them fail. Therefore, their enthusiasm for disruption strikes me as a little desperate.
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Exploring Netflix's reinvention. Take a look at Netflix. A few years ago, its CEO, Reed Hastings, saw that consumers were spending more time watching videos on iPhones and other handheld devices. Netflix had already hastened the demise of retail video rental store chain, Blockbuster, by offering consumers a convenient and cheap DVD-by-mail service.
But Hastings realized that unless Netflix offered an online streaming service, it would meet the same fate as Blockbuster had. So Hastings moved forward with a plan – and in so doing, Netflix developed new corporate strengths – most notably the ability to create popular programs like House of Cards and Orange Is the New Black.
Christensen's theory predicts that Netflix could only have accomplished this by running the online streaming project in an isolated subsidiary. In fact, Netflix's success rested critically on Hastings' direct leadership of this transformation.
I hope Lepore is more effective than I was at bursting the disruption bubble. But I see no reason why managers can't follow the approach I advocated 14 years ago that Netflix exemplifies so well.