Credit: Delane Rouse

With all the buzz about disruptive technology and disruptive innovation, you’d think it was a concept that just arrived via Uber.

In reality, Harvard Business School Professor Clayton M. Christensen coined the phrase almost 20 years ago in his 1997 classic book The Innovator’s Dilemma, When New Technologies Cause Great Firms to Fail.

Note that Professor Christensen says “great firms,” not mediocre ones. His premise is that paradoxically it’s their ‘greatness” that leads to their demise. More on this later, but first a few definitions from the prophetic professor.

He writes “most new technologies foster improved product performance, I call these sustaining technologies. Some sustaining technologies can be discontinuous or radical in character, while others are of an incremental nature. What all sustaining technologies have in common is that they improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.”

Disruptive technologies on the other hand, “bring to market a very different value proposition than had been available previously.”  Products and services based on disruptive technologies are “typically cheaper, simpler, smaller, and frequently, more convenient to use.” While there is a sense today that disruptive technologies burst on the market and quickly destroy industries with outdated and inefficient business models, this has not historically been the case.

Upon introduction, disruptive technologies usually do not perform as well as established mainstream products and services and traditionally have limited market appeal. They are often ahead of their time and the market. However once the market catches up to the technology, the true disruptive potential of the technology can be realized.

While the headlines focus on the companies that are caught flatfooted and ultimately end up in bankruptcy, Blockbuster Video, Borders Books, as examples, many others are able to adjust and live to see another day.  Netflix, with its transition from DVDs to streaming services, is a good example of how a company can adjust. They also provide a good illustration of the paradox of “great” companies mentioned earlier.

Christensen argues that great companies are more at risk for disruption than others because of the good management principles they pursue. He also argues that the seeds of disruption are usually planted when the company is at its peak.

Good management principles, such as listening to your customers, aggressively investing in technology, following market trends and investing in innovations that promised the best returns may be only situationally appropriate. Christensen argues that sometimes you shouldn’t listen to your customers, and you should pursue small, rather than substantial, markets. 

This brings us back to Netflix. When they announced pricing changes that were designed to move existing customers away from DVDs and to streaming services, the announcement caused a mass exodus of subscribers with pundits declaring that the end was near for the company. But by not listening to their existing customers and focusing on a smaller but more strategic market, they positioned themselves to remain competitive.

As to why a company at its peak is more vulnerable, such a company or industry attracts the notice of competitors who want a piece of the action and think they can do it better, faster, and more profitably. At the same time, the success and recognition of the peaking company creates complacency. When all the statistical evidence demonstrates that what the company is doing is working really well, there is little incentive to make any dramatic changes in strategic direction.  

This second part of the theory made me think about the multifamily industry and our potential for disruption. At the last few NMHC events, there is a definite feeling, backed up by statistics, that we are approaching, or at, a peak. If so, and if Professor Christensen is right, then there is no better time to scan the horizon and look for signs of potential emerging disruptive innovation.  

While existing companies can take comfort in the fact that many companies adapt and survive disruptive technology and innovation, corporate structures are usually not well positioned culturally to respond to the challenge.  Two possible solutions include cultivating a culture that anticipates disruption and supports innovation, or creating a more agile and creative subsidiary, ala Skunk Works, that does the same.

Given how much our industry has grown and adapted over the years, there’s every reason to believe that we can and should view disruptive innovation less as a threat than as an opportunity.