Living Economics

Disruptive Technology
Christensen, C. M.
Dominant companies' preoccupation with pleasing high-end customers for higher profit margin inadvertently creates niches at the low-end of the market for start-ups to invade.

In the '60s, Sears was so well run that the company's executives were viewed as deities of management. Today, its dominant power has been taken away by discount retailing stores, such as Wal-Mart and Kmart. Sears' management team was not the only one who underestimated discount retailing. All of the country's other department stores missed the trend.

How could the once powerful, dominant organizations have let the new comers overtake them without any counter moves? The leading companies usually are engaged with sustaining innovations that enable them to address more sophisticated and profitable customers. However, these innovations often increase the performance and cost of products and services beyond what low-end customers would be willing to pay for. This inadvertently creates market niches for companies with cheaper, simpler products or services to enter the low-end of the market. Because technology that appeals to the low end of the market disrupts the dominant players' preoccupation with sustaining their revenues from high-end customers, it is usually ignored until their market share in the industry is reduced to only serving the narrow high-end market.

Sony, for example, introduced battery-powered transistor radios in the mid-'50s. Those radios were very low-quality products compared to vacuum tube-based tabletop radios, but they enabled its use in new applications; for instance, teenagers could listen to music out of earshot of their parents. As Sony improved the radios and moved steadily up market, it overthrew all of the prior industry leaders. Sony applied the same strategy in other targeted markets over and over again and finally achieved its successful, powerful leadership in the consumer electronic industry.

References:
  • Christensen, Clayton M. The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press, June 1997.
  • Christensen, Clayton M. "Disruptive Technology," Bloomberg Personal Finance, October 1999.
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