In the mid-1990s, European airline giants such as British Airways and KLM Royal Dutch Airlines came under attack from relative newcomers such as easyJet and Ryanair. Rather than embrace the full-service, hub-and-spoke strategy of the major airlines, the upstarts introduced a low-cost, point-to-point, no-frills strategy that proved to be a hit with European consumers. Before long, they had captured a large segment of the market, and established airlines in Europe were searching for answers to the threat. Meanwhile, Merrill Lynch was searching for its own answers in response to competition from online brokers such as Charles Schwab, E*Trade and Ameritrade. Unilever was concerned about a threat in its business — the growth of low-priced, distributor-owned brands (private label) — and Barnes & Noble was considering how to respond to online distribution of books and Amazon.com. In industry after industry, once formidable competitors that had built their success on apparently unassailable strategic positions were coming under attack from relative unknowns that employed radical new strategies. As a result, established leaders in a variety of industries were asking the same question: “Should we respond to these disruptive innovations and, if so, how?” (See “Examples of Disruptive Strategic Innovations.”)
The leading companies were facing a dilemma: Their attackers utilized strategies that were both different from and in conflict with their own. Thus, if the established companies were to respond by adopting the strategies of their attackers, they would run the risk of damaging their existing business and undermining their existing strategies. However, they couldn’t simply ignore the disruptions. What, then, was an appropriate response?
Understanding the Phenomenon
Strategic innovation is a fundamentally different way of competing in an existing business.1 The way Amazon.com competes in book retailing is different from Barnes & Noble’s way. Similarly, the way Charles Schwab, easyJet and Dell Computer play the game in their industries is different from the way competitors such as Merrill Lynch, British Airways and IBM play the game in theirs.
Strategic innovation means an innovation in one’s business model that leads to a new way of playing the game. Disruptive strategic innovation is a specific type of strategic innovation —namely, a way of playing the game that is both different from and in conflict with the traditional way.
1. C.C. Markides, “Strategic Innovation,” Sloan Management Review 38 (spring 1997): 9–23.
2. M.E. Porter, “What Is Strategy?” Harvard Business Review 74 (November–December 1996): 61–78; and C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms To Fail” (Boston: Harvard Business School Publishing, 1997).
3. E. Kelly, “Edward Jones and Me,” Fortune, Monday, June 12, 2000, 145.
4. C.C. Markides and P.J. Williamson, “Related Diversification, Core Competences and Corporate Performance,” Strategic Management Journal 15 (summer 1994): 149–165; D.N. Sull: “The Dynamics of Standing Still: Firestone Tire & Rubber and the Radial Revolution,” Business History Review 73 (autumn 1999): 430–464; and J. Robins and M.F. Wiersema, “A Resource-Based Approach to the Multibusiness Firm,” Strategic Management Journal 16 (May 1995): 277–299.
5. C.C. Markides, chap. 9 in “All the Right Moves: A Guide To Crafting Breakthrough Strategy” (Boston: Harvard Business School Publishing, 1999).
6. S.P. Schnaars, “Managing Imitation Strategies: How Late Entrants Seize Markets From Pioneers” (New York: Free Press, 1994); and G.J. Tellis and P.N. Golder, “Will and Vision: How Latecomers Grow To Dominate Markets” (New York: McGraw-Hill, 2001).
7. M-J. Chen and D. Miller, “Competitive Attack, Retaliation and Performance: An Expectancy-Valence Framework,” Strategic Management Journal 15 (January 1994): 85–102; M-J. Chen and I.C. MacMillan, “Nonresponse and Delayed Response to Competitive Moves: The Roles of Competitor Dependence and Action Irreversibility,” Academy of Management Journal 35 (summer 1992): 539–570; and K.G. Smith, C.M. Grimm, M-J. Chen and M.J. Gannon, “Predictors of Competitive Strategic Actions: Theory and Preliminary Evidence,” Journal of Business Research 18 (spring 1989): 245–258.
i. M.-J. Chen, K.G. Smith and C.M. Grimm, “Action Characteristics as Predictors of Competitive Responses,” Management Science 38, no. 3 (1992): 439–455; K.G. Smith, C.M. Gannon, M.-J. Chen, “Organizational Information Processing, Competitive Responses and Performance in U.S. Domestic Airline Industry,” Academy of Management Journal 34 (winter 1991): 60–85; and A.J. Slywotsky, “Value Migration: How To Think Several Moves Ahead of the Competition” (Boston: Harvard Business School Publishing, 1996).