11 Disruptive Innovation Examples (And Why Uber and Tesla Don’t Make the Cut)
Editor’s Note: This is a guest post by Ryan Moore, Director of Executive Search at Peak Sales Recruiting.
If you spend much time in the startup and tech ecosystem, you’ve probably heard the term “disruptive innovation” more times than you can count. Our culture is fascinated with underdogs and overnight successes— companies, products, or services that seem to rise out of nowhere and completely change their respective industries.
But not all companies that are commonly known as disrupters actually fit the traditional definition of disruptive innovation. We’ll examine the term’s origins, look at true disruptive innovations from past and present and examine why Uber and Tesla are mislabeled as disrupters.
- What is disruption?
- Innovations are mischaracterized as disruptive
- Potential disruption
What Is Disruptive Innovation?
When Clayton M. Christensen coined the term “disruptive innovation” in a 1995 paper for Harvard Business School, he wasn’t just speaking of breakthrough innovations that make good products better.
Innovations are constantly occurring in every industry, but to be truly disruptive an innovation must entirely transform a product or solution that historically was so complicated only a few people with a lot of money and skills had access to it. A disruptive innovation is often a much more simple, low-grade solution that’s more affordable and accessible to a larger population, which opens it to an entirely new market. This often upturns established industries and overthrows existing market leaders.
Disruptive innovations typically take hold at the bottom of the market, meeting the same needs as high-market solutions in a simple and relatively cheap way. They are usually underrated at first, and tend to be seen as “low-class.” But due to their low costs and other advantages, they move quickly up the market and eventually become more appealing than their sophisticated competitors.
Christensen noticed that big, powerful companies at the peak of their power aren’t asleep at the wheel as they are driven out by disrupters. They’re usually innovating away themselves. But these established companies drive what’s called “sustaining innovations,” which are modifications and improvements on existing services. They make their top-tier products better and better to serve their most sophisticated and demanding customers, which can seem like a smart business move considering that serving the top of the market increases their profit margins the most. They aren’t bothered by disrupters taking hold at the bottom of the market, because it appears too low-tier and low-gross-margin to warrant attention.
But this oversight creates space for new players to get a foothold at the bottom, eventually creeping their way upmarket to topple the incumbent.
There are several markers that distinguish true disruptive innovators:
- They are low-cost and highly accessible.
- They have lower gross margins than their contemporaries or the incumbent.
- They serve a smaller low-end target market at first, before expanding to a vast market due to their accessibility.
- They’re hard to see coming and aren’t taken seriously. They quietly, slowly “climb the ladder” and can take years or decades to gain traction before they dramatically upend competitors.
In the last five years, usage of the terms “disruptive innovation” and “disruptive technologies” has soared. The concept has truly elbowed its way into the lexicon, appearing in newspapers, books, and debates around the world—but how many of those uses are actually correct?
Let’s take a look at a few examples of true disruption, starting with one of the most widely known and studied: mini mills and the way they disrupted traditional American steel mills in the 20th century.
True Disruptive Innovation Examples
1. Steel mini mills
“Mini mills” dramatically disrupted the steel industry once dominated by the great integrated steel companies of the 20th century. Traditional steel companies at the time manufactured a wide range of steel qualities. They made low margins on cheap rebar, but also produced sheet steel and thicker structural steel used to make cars and equipment, which they then sold at a much higher margin.
Then came the mini mill. Small companies found a way to melt down scrap metal recycled from cars and manufacturing waste, which was up to 20% cheaper than what the integrated mills were spending. But the metal product was poor quality, suited for rebar but not cars.
Rebar is at the bottom of the steel market, and since it was a low-margin product, integrated steel companies were happy to lop it off the bottom of their product line and leave the mini mills to compete with one another. By 1979, mini mills had driven the last of the integrated mills out of the rebar market and the price of rebar had dropped by 20%.
But mini mills didn’t stop there. They figured out how to make slightly higher quality steel and came for the next-lowest product type, which integrated steel mills once again were happy to leave to mini mills. After all, this would allow the integrated steel mills to focus on high-margin steel and improve their profit margins even more.
This pattern continued until suddenly, mini mills had taken over. Not one integrated steel company had built a mini mill, and all but one have since gone under. This example illustrates that a disruptive innovation typically is not an overnight success. Christenson writes, “It took more than 40 years before the mini mill Nucor matched the revenue of the largest integrated steelmakers.” But after getting a foothold at the bottom of the market and taking one step at a time, they eventually reached the top.
2. Video streaming
Video streaming on platforms like Hulu and HBO might seem like an obvious improvement over cable and Blockbuster. But take a closer look and it’s clear how radical this disruption really was.
Video streaming took the entertainment industry completely by surprise, quickly rising from the bottom of the market as a low-cost way for people to watch shows and movies to eventually disrupting the cable industry and driving video rental stores into the ground. Netflix has become the largest subscription video provider in the US, outstripping cable and satellite.
And it’s not just cable and stores—video streaming companies are changing the way video is produced. Nearly two decades after Netflix’s launch, streaming providers are out to “capture the entire trillion-dollar Hollywood ecosystem” with new content production models. Tech giants like Amazon, Google and Apple want in on the game with their own production and streaming platforms.
Like many disrupters, Netflix took hold in a small, niche market: movie buffs who didn’t care about new releases and didn’t mind waiting a few days for DVDs to arrive in the mail. The service was slow and didn’t offer brand-new hits right away. Blockbuster served a different type of customer that rented more on impulse and prioritized new releases, and therefore ignored Netflix.
Forbes’ Arnie Alsin illustrates this point by drawing a parallel between the rise of streaming platforms and the rise of television:
“The current wave of digital, Internet-based streaming content disruption mirrors the introduction of the television in the 1940’s. Both disruptions radically redefined content platforms, business models, and customer habits. And perhaps predictably, both disruptions were met with cynicism by incumbent executives and spectators who simply laughed them off. Blockbuster’s former CEO, Jim Keyes, told the Motley Fool in 2008 that Netflix isn’t ‘even on the radar screen in terms of competition.’ By 2010, Blockbuster had gone bankrupt.”
Incumbents like video stores and cable providers remained focused on the profitable customers in front of them, not the disruptive innovation bubbling at their feet. And soon enough, they were out of date and out of sync with the way everyday people love to watch movies and television.
Transistor radios first took hold in a low-end niche market, then completely changed the world. In the 1950’s, middle-class families typically owned nice radio consoles manufactured by companies like RCA and Zenith. These models used vacuum tubes and offered excellent sound quality, but they were inefficient, clunky, and expensive.
Then, Sony’s transistor radios arrived on the scene. They were cheap, small, and portable … but the sound quality was awful. But for teenagers, transistor radios meant personal freedom and the ability to hear music wherever and whenever they wanted. After all, it was the only radio they could afford. Teenage radio listeners were a market that barely existed at the time, and high-end radio companies didn’t bother with them.
But over time, transistor radio quality got incrementally better, and their popularity followed. Billions were manufactured during the 1960s and 1970s. These radios changed the way the world consumed music and radio, sparking a “musical and cultural revolution” and setting the stage for other personal music players like the Walkman, CD players, and even smartphone music apps.
But by this time, companies like RCA and Zenith were already far behind.
4. Online encyclopedia and reference
Online reference services like Wikipedia have disrupted traditional encyclopedias such as the Encyclopedia Britannica. But it took over a decade to put them out of business, quite the feat considering these encyclopedias were widely considered the gold standard for centuries.
According to Peter Daisyme, “You’d have to pay $1,000 or more for a few hundred pounds’ worth of hardcover [encyclopedia] volumes, and hope that it lasted more than a year or two of relevance before its important details were updated. Wikipedia is updated constantly, and is available for free, though it didn’t carry much trust at first.”
This is a point worth noting: at first, internet references like Wikipedia were untrustworthy. They were considered a low-quality alternative to the more established, recognized traditional encyclopedias. Yet they were available cheaply or for free, for a much wider audience than expensive encyclopedias. Meanwhile, they featured constantly updated information instead of requiring readers to wait for and purchase new issues as they came into print.
These are hallmarks of classic disruptive innovation, and represent a great example of how long it can take to overthrow an incumbent. The success doesn’t come overnight, but it is certainly swift and final.
Smartphones and their accompanying app business model disrupted laptops as the primary way consumers use the internet. Today, well over half of website visits come from mobile phones instead of desktop computers. But even more importantly, smartphones and their app marketplaces completely changed how we interact with online services and products, which gave rise to many services that didn’t previously exist.
Smartphones help illustrate some nuances about the disruption concept. For example, Apple’s iPhone is widely hailed as a disrupter, but it didn’t disrupt the smartphone market itself. At the time it was released, it was an improvement on existing smartphone models and targeted the same customers—a hallmark of sustaining innovation. Christenson himself predicted that the iPhone would be a flop because he recognized it as a sustaining innovation in the space.
But the iPhone did spread widely as a disruption. It just disrupted something completely unexpected: the laptop market. Apple used the iPhone to usher in a new business model, which let developers far and wide create applications and connect directly with consumers. This changed the way people accessed the web and created a new market of app users and phone users. Smartphones started giving laptops a run for their money as the most popular way to use the internet.
6. Personal computers
Just as smartphones disrupted laptops and personal computers, personal computers once disrupted earlier computing predecessors like the mainframe computer.
Mainframe computers were the first manifestation of digital technology, according to Christenson. They were powerful, but required a lot of money and skill to own and use. Only the largest corporations and universities had them, and they cost several million dollars. Meanwhile, only experts with years of training could even operate them.
Mini computers followed, and eventually, the desktop computer was invented. It soon found its way into homes all over the world. With a bit more time and innovation, laptops (and then smartphones) continued to democratize technology. All of a sudden, the market for computers was massive when compared to the previously elite, centralized market; so many more people could access these products.
Christenson says, “It was very hard for the pioneers of the industry to catch these new waves. Most of those were created and dominated by new companies.”
7. Retail medical clinics
Retail medical clinics are an example of a disruptive business model that is shaking up the hospital model and traditional doctor’s offices. Patients can go to retail clinics to get relief from common maladies, such as allergies and sinus infections, or receive routine vaccinations and blood tests. They’re typically located in accessible areas with convenient opening hours for easy walk-in appointments.
Christenson himself worked on this problem alongside two doctors. They realized that the incumbents, big hospitals and doctors’ offices, “were like integrated mills,” because they could do everything. They had expert doctors and specialists who had received years of training and accumulated years of experience—they could interpret patients’ problems and prescribe custom solutions. But because this model was very customized, unique and unpredictable, it was also very expensive in terms of expertise and administration because it couldn’t be routinized. As Christenson and colleagues explain it, “We call this a “solution shop” business model. In contrast, a number of convenient care clinics are taking a disruptive path by using what we call a “process” business model: They follow standardized protocols to diagnose and treat a small but increasing number of disorders.”
By lowering the level of expensive expertise and providing relatively easy, cheap, convenient and accessible services that have been turned into repeatable processes, retail clinics are opening up care to a wider market and disrupting longstanding incumbents in healthcare.
Digital cameras were an innovation that started to compete in quality and price with film cameras roughly 20 years ago. Today, cell phone cameras have disrupted the photography market as a whole, fundamentally redefining what it means to take a photo and who has access to this type of technology.
Kodak engineer Steve Sasson invented the digital camera in the 1970’s, but the company rejected it. Sasson says, “It was filmless photography, so management’s reaction was, ‘that’s cute — but don’t tell anyone about it.’” As Roberto Saracco describes this moment, “many at Kodak (and elsewhere) were convinced that it was just a crude version of photography that would have never affected the well-established photography market.”
Indeed, cellphone cameras were crude at first—much like the early transistor radios. But people used them anyway because phones were in the palm of their hand and incredibly convenient. This opened up an entirely new market for photography.
And each year, cell phone camera quality gets better. Today, Apple has a “Shot on iPhone” billboard campaign that prominently displays high-quality photos taken by everyday consumers on their iPhones—a far cry from hiring sought-after expert photographers who were the only ones with access to the proper equipment to produce a great shot.
In the light bulb industry, LEDs (light emitting diode) and CFLs (compact fluorescent lights) dramatically disrupted incandescent light bulbs.
For many decades, incandescent bulbs were the only realistic choice for illuminating the home or office. When LEDs arrived on the market, they were so low-quality and unreliable that they developed a reputation to match; no one thought they’d ever be considered a viable alternative to incandescent bulbs.
But eventually, LED bulbs became more reliable. Suddenly, they were a much more effective alternative to incandescent bulbs:
- More efficient than incandescent light bulbs, using 80% less electricity
- Longer-lasting than standard light bulbs by years or decades, up to five times longer than any comparable bulb on the market
- Cheaper than alternatives. “If you replaced 20 incandescent bulbs with LED light bulbs throughout your home, you could save up to $3,260 over their 23-year lifespan (and that’s assuming utility rates don’t rise).”
But like most classic disrupters, LEDs were initially so low-quality that no one paid them any mind.
10. P2P accommodation
Peer-to-peer (P2P) commerce occurs when two individuals interact directly, selling and buying products and services to each other. A great example is P2P accommodation. Companies like Airbnb and Hipcamp let individuals open up rooms in their homes, or offer up plots of private land for camping, and visitors can book directly.
Previously, travelers had to go through centralized companies like hotel chains to book an overnight stay. But P2P accommodation companies like Airbnb and Hipcamp developed websites and apps where individuals could easily list cozy accommodations, promote their offerings and chat directly with potential visitors.
Homeowners gained access to a market of travelers they never could have dreamed of pre-Web 2.0. On the other side of the screen, travelers have access to destinations they might never have had before and the ability to stay in accommodations that are more unique and less standardized than hotel chains.
Airbnb began as low-end accommodation, literally renting airbeds to visitors of the 2008 Democratic National Convention who couldn’t find hotel rooms. But it now offers a range of options, from low-end rooms to luxury villas. The sharing economy for accommodations poses a real threat to traditional hotel and travel vendors, as shown by a study by Morgan Stanley: “25 percent of leisure travelers and 23 percent of business travelers will have used Airbnb by the end of 2017, with 49 percent of Airbnb users reporting having used the service as a substitute for a standard hotel.”
This is forcing chains like Hyatt, InterContinental and Wyndham to rethink their offerings, and many have even invested in Airbnb-like companies to get a share of the action.
11. Personal copiers
The disrupters we’ve discussed so far took hold at the bottom or niche of a market and then moved up (called a low-end foothold). But other disrupters, such as personal copiers, created a market where there wasn’t one before. This is called a new-market foothold.
Before individuals owned their own photocopiers, companies like Xerox sold high-quality copiers to customers with lots of resources, like corporations. Individuals and small organizations (like teachers or libraries) had to make do with carbon copy paper or mimeographs.
Eventually, however, new photocopier companies introduced personal copiers that even individuals could afford. They turned non-consumers into consumers, creating a new market and eventually gaining traction in the mainstream.
Innovations that aren’t disruptive
12. Ride sharing
Ride sharing companies like Uber and Lyft have transformed and all but replaced the taxi industry as most people’s option of choice for their commutes, travel, and simply getting around town. These companies experienced meteoric rises, and Uber’s $70B+ valuation (generated in less than a decade) makes it an extreme example of fast, innovative success in tech.
But Uber and similar services are not true disruptive innovations.
Uber didn’t start from a low-end foothold or a new-market foothold. When it launched in San Francisco, its customers were already using taxis, so it didn’t exactly target nonconsumers. And Uber wasn’t a low-end alternative to a complicated, costly, inaccessible service. It actually originated in a mainstream market first, and then increased overall demand and appealed to lower-end segments later. In fact, when Uber first launched, it exclusively used luxury black cars.
Ridesharing amenities seem to be sustaining innovations that simply improve on the existing taxi experience. For example, Uber is more convenient, slightly cheaper, more reliable and offers a rating system to help improve the customer experience. But it didn’t start by offering experiences that were so subpar that taxis overlooked them while serving high-end customers. This disqualifies it from the official title of a disruptive innovation.
13. Electric vehicles
Electric vehicles are innovative, and have certainly improved on the energy use and design of traditional cars. But no matter how many people call Tesla a disrupter, it isn’t one.
Tesla didn’t enter at a low-end or nonexistent market segment. It goes after high-end customers that are still very much coveted by incumbent car makers. In addition, the high price tags don’t exactly make Teslas accessible to the overlooked and underserved.
2 Potential Future Disruptors
14. 3D Printing
Are 3D printers disruptive? 3D printing improves on traditional methods of manufacturing, and it has the potential to change how consumers obtain things they need. Early 3D printers were decidedly low-fi, but they have been steadily improving in sophistication. Today, 3D printers can produce complex items on demand, ranging from prosthetic body parts to spatulas and even more 3D printers.
It’s still unclear how widespread the use of 3D printers will become and whether they could introduce new business models or consumption habits that disrupt incumbent manufacturers. But as Freddie Dawson writes for Forbes, “The more optimistic see 3D printers as an essential item that will eventually be in every house if prices for machines and printing materials continue to trend downwards. Then instead of ordering products through shops or online retailers, consumers would be able to download and print their own – either through open source or commercial sites.”
This would shake up the supply chain of plastic and products, as well as their distribution; what if products were no longer manufactured in certain countries and shipped across borders, and instead commerce became about the movement of plastic manufacturing powders? Whether any of this will come to pass still remains to be seen, but 3D printing has already begun making waves.
15. Online education
Online learning platforms and courses are poised to disrupt higher education. The industry has seen plenty of innovation over the last 100 years that has iterated on the classic four-year university model, such as two-year colleges or companies like Minerva Schools. But these innovations are, for the most part, sustaining innovations that haven’t toppled anything. They’re still catering to people who consume higher education, and the top universities have remained unchallenged for decades.
But what about online education? Massive online open courses (MOOCs) make education accessible to a much broader group of people — indeed, nearly anyone with an internet connection can tune in and learn, and they’re typically free or much cheaper than attending a four-year university. And it’s not just established learning institutions that can create courses. Individuals from all over the world create their own courses to distribute on online platforms like Udemy and Skillshare.
Online courses seem low-quality in comparison to the real classroom, but they are also improving in quality every day. Meanwhile, their scalability is simply astronomical; whether creators distribute a course to a thousand people or a hundred thousand people, they only need to create it once.
Christenson writes, “The question now is whether there is a novel technology or business model that allows new entrants to move upmarket without emulating the incumbents’ high costs—that is, to follow a disruptive path. The answer seems to be yes, and the enabling innovation is online learning, which is becoming broadly available. Real tuition for online courses is falling, and accessibility and quality are improving. Innovators are making inroads into the mainstream market at a stunning pace.”
“Will online education disrupt the incumbents’ model? And if so, when? In other words, will online education’s trajectory of improvement intersect with the needs of the mainstream market?”
Only time will tell. There are many innovations that are transformative, that are undeniable improvements on the status quo, and that decimate their competitors and become kings and queens of their industries. But not all of them are disruptive.
True disruptive innovations are often hiding in plain sight, serving customers that companies in power aren’t particularly motivated to attend to. But through steady improvement and a lot of patience, they climb and climb until they are alone at the top.
We monitor these closely within our portfolio at OpenView.
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