Chapter 1
Literature Review
Introduction
The purpose of this chapter is to bring together discussions in the literature that underpin the case studies that are examined in subsequent chapters. However, the chapter is not designed to be all-encompassing for one simple reason, namely that the literature specifically related to disruption was originally developed in the context of unregulated industries and has never been amended to take account of the possibility of regulation via a licencing regime.
What follows necessarily begins with a review of the literature concerning disruption in an unregulated context since, if nothing else, it has to be demonstrated why this has limited applicability for this book. This is divided into three parts that examine three significant contributions to the debate about disruption.
The final main section examines the issue of consolidation. Given that telecommunications provision is restricted via licences, it is not possible for a potential disruptor to enter the industry unless it either obtains an additional licence ā which is more likely to occur if there is a new technology to be exploited ā or takes over an existing operator that in the majority of cases has proved to be unsuccessful in challenging the main incumbents using essentially identical strategies.
The Christiansen Interpretation of Disruption
The main purpose of the theory of disruption is to explain why incumbent firms fail to respond appropriately when confronted with innovations introduced by new entrants. It provides a different perspective from previous contributions on the same topic, such as the notion of architectural innovation (Henderson & Clark, 1990), or the distinction between competence-destroying technologies and competence-enhancing technologies by Tushman and Anderson (1986).
The initial conceptualization of disruption theory was based on the PhD thesis of Christensen which was developed somewhat in Bower and Christensen (1995), Christensen and Bower (1996) and Christensen (1997). In Christensen and Raynor (2003), the theory was widened from technological to other types of innovation such as the business model and service innovation. The concept of ānew-marketā disruption was also introduced in addition to ālow-endā disruption.
However, discussion around the theory has resurfaced in more recent times, and hence what follows is based on the updated version of the theory presented in Christensen, Raynor, and McDonald (2015). The summary below sets out the key contents of that article. Their basic premise is that disruption theory's core concepts āhave been widely misunderstood and its basic tenets frequently misappliedā. Furthermore, disruption as a concept is used loosely to āinvoke the concept of innovationā. In effect, the concept of disruptive innovation is used to describe any situation in which āan industry is shaken up and previously successful incumbents stumble.ā
So what exactly is disruption? The answer provided is as follows:
- āIt describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.ā
- āSpecifically, as incumbents focus on improving their products and services for their most-demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others.ā
- āEntrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more suitable functionality ā frequently at a lower price.ā
- āIncumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously.ā
- āEntrants then move upmarket, delivering the performance that incumbentsā mainstream customers require, while preserving the advantages that drove their early success.ā
- āWhen mainstream customers start adopting the entrantsā offerings in volume, disruption has occurred.ā
The authors provide certain clarifications as follows:
- Disruptive innovations get started in two overlooked markets ā ālow-end footholdsā and ānew-market footholdsā.
- The incumbents' customers are not initially interested in new disruptive innovations because performance is lower on the dimensions such as quality of service (QoS), customer service and handset subsidies valued by them. However, if QoS becomes acceptable, the price stays low and/or their preferences change to value other dimensions, they switch provider.
- Disruption is a process. While it is going on, incumbents will defend their territory, yielding up first market share and later profitability.
- Following a disruptive path does not necessarily lead to great success, and not every successful newcomer follows a disruptive path.
- Incumbents need to react, but should not overreact by dismantling a still-profitable business; rather they should invest in sustaining innovations ā making good products better.
- The theory of disruption predicts that if a new entrant offers better products or services, āthe incumbents will accelerate their innovations to defend their business.ā Either they will offer āeven better services or products at comparable prices, or one of them will acquire the entrantā.
- The theory predicts that entrants āpursuing a sustaining strategy for a stand-alone business will face steep odds.ā
It is of particular interest that the authors take the view that Uber does not fit the model because it did not start from a low end or new market and directly attacked the mainstream market with a high-quality offering. They explain the success of Uber by reference to the regulatory constraints that occur within the taxi industry. Where entry and prices are regulated, they note that incumbents have few ways to innovate.
Critiques of Christiansen
It is particularly important to note that the above argument is process-driven ā it is concerned with how a particular outcome is achieved rather than with measurement of that outcome. Indeed, treatment of the entire issue of measurement is distinctly low-key. It would seem to be the case that disruption can only be said to have occurred when the new entrant is perceived by customers as a direct substitute for incumbents ā in other words, it is itself seen as an incumbent ā which could occur within a wide range of market shares gained by the disruptor.
The methodology underlying the Christensen theory has been extensively criticized. In particular, he has been accused of using āhand-pickedā case studies (Cohan, 2014; Lepore, 2014; Tellis, 2006). Cohan notes that the cases used are exclusively cases in which the disruptive technology does succeed, and that Christensen did not consider cases in which it failed. Lepore (2014) even appears to challenge the integrity of Christensen by accusing him of hand-picking case studies and also criticizes his analysis of these cases. She notes that the choice of the disk-drive industry, which Christensen himself describes as not comparable, makes an odd choice for an investigation aiming to design a model applicable to other industries. She also observes that the outcomes of its main case study could be considered differently by adopting a longer time frame.
Tellis (2006) is more moderate and claims that Christensen's sampling is acceptable for building a theory. Chesbrough (2001) states that the theory is focused more on internal validity than external validity, and that it may be context-dependent as all cases were located in the USA. Most empirical work has been in the form of well-documented and thorough case studies of particular industries, but the extent to which findings from these case studies can be generalized across industries has not been addressed. Weeks (2015) notes that anomalies identified in several cases by other authors have not been sufficiently addressed by Christensen. He also suggests that the perceived deficiencies of the theory may be caused by the fact that the main contributions have not been subject to an extensive peer review as they have been published in books or in the Harvard Business Review (HBR). Weeks (2015, p. 419) assumes that āa more rigorous peer review of his methodology and of some of the disruptive innovation concepts may have allowed Christensen to refine the exposition of his theory more thoroughly through the years.ā
The reliance on analysing cases after the event raises the issue of the predictive power of the theory. In practice, Christensen made himself (in)famous for his poor predictions. For example, Christensen predicted that the iPhone would fail (McGregor, 2007) as it was a sustaining technology relative to Nokia. Lepore (2014) also relates that in March 2000 Christensen launched a āDisruptive Growth Fundā for which stocks were selected according to his theory. The fund went on to perform less than the NASDAQ and was liquidated less than one year later. Weeks (2015) also questions the relevance of Christensen's analysis of digital photography and of his prescriptions for Kodak.
A more problematic issue is whether the theory actually accounts for the cases that Christensen himself has investigated, as several authors have come to different conclusions derived from the same cases. For example, on the disk-drive industry, which constitutes one of the key case studies on which Christensen based his theory development, McKendrick, Doner, and Haggard (2000) challenge the conclusion that most disruptive innovations have been introduced by new entrants and that incumbents mostly failed. Similarly, King and Tucci (2002) and Chesbrough (2003), analysing the same industry, found out that established incumbents were more likely to introduce innovations in new niche markets and also to exhibit a higher survival rate. King and Baatartogtokh (2015) reviewed 77 cases discussed by Christensen in his two books by interviewing experts on the industries concerned. They tested four key propositions of the disruption theory and found out that they were only partly verified. In 24 cases (31% of the total), leading incumbents were not following a trajectory of sustaining innovation. In 60 cases (78%), sustaining innovation was not outperforming the mainstream customers' expectations. In 30 cases (39%), incumbents did not have the capability to respond to the disruption threat. In 29 cases (38%), incumbents were not displaced. Overall, the four key propositions were verified in only 9% of the cases.
Weeks (2015) also highlights the lack of specification of the unit of analysis. He questions which unit of analysis the research is targeting. There are several choices including the technology (or innovation), the industry, the firm or firm leaders. He notes (pp. 421ā422) that at various times, Christensen's work makes statements about each potential unit of analysis. He comments (p. 426) that āif the unit of analysis is the firm, one might consider which firms are more likely to be able to introduce disruptive innovationsā¦.If the industry is the unit of analysis, one encounters other possible questions. Are certain industries more likely to survive disruptive innovations? What characteristics influence these outcomes: supplier networks; customer networks; rivalry; labor practices?ā
Markides (2006) observes that the theory, initially designed for technologies, has been inappropriately widened to other types of innovations. āA disruptive technological innovation is a fundamentally different phenomenon from a disruptive business model innovation as well as a disruptive product innovation: these innovations arise in different ways, have different competitive effects, and require different responses from incumbents.ā He adds that āTo qualify as an innovation, the new business model must enlarge the existing economic pie, either by attracting new customers into the market or by encouraging existing customers to consume moreā¦.It is important to note that business model innovators do not discover new products or services; they simply redefine what an existing product or service is and how it is provided to the customer.ā In particular, a business model innovation does not usually end up by dominating the market for three reasons: (1) the new business model may not be superior to the incumbent's one; (2) the best incumbent's response is not necessarily to adopt the innovation and (3) if the incumbent adopts it, it is not necessarily better to create a separate unit for it.
Danneels (2004) also raises the time issue and wonders at what point of time an innovation can be characterized as disruptive: once it is marketed or only after it disrupts incumbents? This issue is developed further by Tellis (2006) who notes that it makes it difficult to identify ex ante which ones, among the multiple underperforming innovations on the market, may become disruptive.
It is significant that only a few articles relate disruption to external influences, and when they do, they do so without much explicit reference to regulation. In some cases the work is noted by others only in passing. Among the first category, Chesbrough (1999) found that, contrary to the USA experience, incumbents in the disk-drive industry in Japan have not been disrupted. He attributes this difference to country-specific factors such as regulations, culture and financing system. Weeks (2015) raises the issue of the possible characteristics that would make some industries more likely to be disrupted. Hagel, Brown, Wooll, and de Maar (2015) put more emphasis on the external context ā market conditions, such as product characteristics, demand characteristics and industry structure; and catalysts, such as macroeconomic factors and public policy. King and Baatartogtokh (2015) found that in 40% of the 77 cases analysed by Christensen, changing economies of scale played a role in disruption as it reduced the number of players who could profitably serve the market.
Yu and Hang (2010) raise a number of issues about context and environment: the environmental determinants of disruptive innovation, the factors explaining why disruption happens in some countries rather than others, and the identification of emerging markets and of the needs of new customers. Urbinati, Chiaroni, Chiesa, FranzĆ², and Frattini (2018) highlight the relevance of context factors by analysing the case of Uber in four different cities in the world (although Uber is not considered as a disruptive innovation by Christensen). They suggest that the market concentration, the regulatory system, the offering diversification and the culture of a country can play a key role in explaining the different patterns observed. Corsi and Di Minin (2014) add a geographical dimension to the theory by relating disruptive innovation to the case of emerging economies.
A Telecommunications-based Critique
It is evident from the above that the line of argument pursued by Christensen has attracted a great deal of criticism. But that is in the context of unregulated indu...