WINTER 2003

VOL.44 NO.2

MITSloan
Management Review
Constantinos D. Charitou & Constantinos C. Markides

Responses to
Disruptive Strategic
Innovation

Please note that gray areas reflect artwork that has

been intentionally removed. The substantive content
of the article appears as originally published.

REPRINT NUMBER 4427

Responses
to Disruptive
Strategic
Innovation
I

Disruptive strategic
innovations are not
necessarily superior to
the traditional ways of
competing, nor are they
always destined to conquer
the market. Rushing to
embrace them can be
detrimental for established
companies when other
responses, including
ignoring the innovation,
make more sense.

n 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 couldnt simply ignore the disruptions. What, then, was an
appropriate response?

Constantinos D. Charitou
and Constantinos C. Markides

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 & Nobles way. Similarly, the way Charles Schwab, easyJet and Dell

Constantinos D. Charitou received his doctorate from London Business School and now
works in the private sector. Constantinos C. Markides is the Robert P. Bauman Professor of
Strategic Leadership at London Business School. Contact them at ccharitou@lanitis.com and
cmarkides@london.edu.

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Examples of Disruptive Strategic Innovations

Industry

Strategic Innovation

Innovator(s) and Date of Introduction

General retailing (United States)

Online distribution

Amazon.com: July 1995 (books), June 1998 (music)

Car-rental industry (United States)

Focusing on a different type of customer and

operating an extensive network of car-rental
offices located in cities, rather than in major
airports

Enterprise Rent-A-Car
(The company was founded in 1957.)

Computer industry (United States)

Selling computers directly to customers

Dell Computer: 1983

Retail-brokerage industry (United

States)

Online trading

Aufhauser & Co.: 1994

E*Trade, Charles Schwab: 1996

Retail-brokerage industry (United

States)

Operating an extensive network of singlebroker offices across the country as separate

profit centers

Edward Jones: 1972

(the year when the company formally adopted the
new business model)

Steel industry (United States)

Introduction of minimills (a low-cost production method to make flat-rolled sheet steel

a high-end steel product)

Nucor: 1989
(introduced the worlds first continuous, thin-slab
casting facility for sheet steel)

Automobile industry (Europe)

Mass-customized cars

Smart car (by DaimlerChrysler): October 1998

Used-car business (United States)

A new retail and distribution method for selling

used cars (extensive refurbishing of cars, product
guarantees, no-haggle pricing and sophisticated
use of in-house financing)

AutoNation USA, CarMax: 1996

Banking industry (United Kingdom)

Direct banking
Telephone banking
PC banking
Online banking

First Direct:
October 1989
May 1996
Summer 1997

General-insurance industry (United

Kingdom)

Direct insurance
Direct motor insurance
Direct home insurance

Direct Line Insurance:

April 1985
Fall 1993

Life insurance and pensions industry

(United Kingdom)

Direct life insurance and personal pensions

Virgin Direct: June 1996

Airline industry (Europe)

Low-cost, no-frills, point-to-point airline service

Ryanair: 1991
(routes between United Kingdom and Ireland only)
easyJet: November 1995

Retail supermarket industry (United

Kingdom)

Home delivery of grocery services

Food Ferry, Teleshop: early 1990s

(London area only)
Tesco Direct: 1998
(now part of Tesco.com, launched in 2000)

Online home delivery of grocery services

Stock exchanges (Europe and North
America)

Electronic communications networks (ECNs)

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 ones 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. Examples include Internet banking, low-cost airlines, direct insurance, online brokerage trading,
online distribution of news and home delivery of grocery services.
Past research has shown that disruptive strategic innovations
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OM Exchange: 1984
(Recently, new ECNs such as Instinet, Island ECN
and OptiMark were introduced in European and
North American exchanges.)

share certain characteristics. First, compared with traditional

approaches, they emphasize different product or service attributes. Thus traditional brokers sell their services on the basis of
their research and advice to customers, whereas online brokers
sell on price and speed of execution. As a result, innovators
become attractive to a new customer segment.
Second, disruptive strategic innovations usually start out as
small and low-margin businesses. Thats why they rarely gain support or long-term commitment from established competitors. The
innovations are small and are not attractive until they start growing.
Third, disruptive strategic innovations grow to capture a large

share of the established market. Over time, they improve to the extent that they are able to deliver performance that is good enough in
the old attributes that established competitors emphasize and superior in the new attributes. Inevitably, their growth attracts the attention of established players. As more customers (both existing
and new) embrace the strategic innovation, the new business receives increasing attention from the media and established players.
Soon, established companies cannot afford to ignore the new way
of doing business anymore and begin to consider ways to respond.
At this stage, established companies confront an unavoidable
fact: The new ways of playing the game are in conflict with the established ways. That is because the strategic innovations have different key success factors and thus require the company to develop
a new combination of tailored activities as well as new supporting
cultures and processes. For example, if British Airways is to compete effectively against easyJet, it must evaluate the discount end of
the market and develop the activities and processes required to be
successful in it. But the new activities are incompatible with the
companys existing activities because of the different trade-offs in
the two ways of doing business. Thus, British Airways cannot simply start selling tickets through the Internet like easyJet, because its
existing distributors travel agents will object.

The existence of trade-offs makes it difficult for an established

company to respond to the disruptive innovation effectively. A
company that tries to compete in both positions simultaneously
risks degrading the value of its existing activities and will experience major inefficiencies. Any attempt to manage the innovation
by utilizing the companys old systems, processes, incentives and
mind-sets will only suffocate and kill the new business.
Conflicts between the traditional and the new way of playing
the game have prompted many academics to argue that, in
response to disruptive innovation, an enterprise should either
ignore the disruption (and stick to its core strategy) or embrace
the disruption, but only in a separate division or company.2 But
are those the only responses for established companies? And
under what circumstances is each option preferable? It was with
those questions in mind that we embarked on a multiyear research
project to explore disruptive strategic innovation in more detail.
(See About the Research.)

Responding to Disruptive Innovation

Of the 98 established companies that completed our survey questionnaire, two-thirds had responded to a disruptive innovation in
their industry by adopting it in some form either by setting up

About the Research

Our research design is based on an
action-response framework. The actions
that we examine are the disruptive
strategic innovations introduced in various European and North American industries. Strategic innovation is defined as a
new and fundamentally different way of
competing in an existing industry, one
that conflicts with the traditional way.
Our research focuses on the responses by
the established competitors in each industry under consideration, with the objective of identifying how those incumbents responded to the disruptive
strategic innovations. The research,
therefore, adopts a similar design to the
one that other observers have used in
studies on competitive interaction.i
We looked at the following disruptive
strategic innovations: direct banking (by
telephone or Internet); direct general insurance; direct life and health insurance;
online-brokerage trading; home ordering
and delivery of groceries; low-cost, nofrills airline service; and screen-based

electronic trading systems. Each satisfies

the two criteria for a disruptive strategic
innovation: It represents a new way of
competing in an existing industry that is
both radically different from and in conflict with the traditional way.
We measured whether the innovations were different from the established way along a number of dimensions, including customer selection,
scope, differentiation, manufacturing
systems, organizational configuration
and a go-to-market mechanism. We also
measured whether the newly identified
strategic position conflicted with the
established way along dimensions such
as distribution, culture and customer
conflicts.
We collected our data in two ways:
through field research and through a
questionnaire. We first interviewed 10
companies in Europe and the United
States. The interviews were conducted in
person (mainly at the companys head office) and usually lasted between two and

four hours, depending on the number

of people interviewed in each company.
Following the interviews, we prepared
several short case studies describing the
insights that were generated.
In the second phase, we used the
ideas developed from the fieldwork and
the relevant streams of literature on disruptive strategic innovation to prepare
a detailed questionnaire addressing our
research questions. A 13-page questionnaire specific to each industry was sent
to 740 established companies in the 11
sample industries. We received 115 completed questionnaires from 98 different
companies.
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).

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a separate organizational unit or by using the existing organizational infrastructure. Of course, the way those established players
adopted the innovation proved to be more nuanced than simply
deciding whether to create a separate unit. Among the companies
that did not adopt the innovation in their industry, there were
also a variety of strategic responses including, but not limited
to, ignoring the disruption. Overall, we identified five key responses to disruptive strategic innovation.

Response One: Focus on and Invest in the Traditional Business The

biggest misconception about disruptive strategic innovation is
that the new way of doing things will grow and eventually overtake the traditional way of playing the game. Established competitors, the thinking goes, had better face up to the innovation
by embracing it somehow. That misconception probably arose
from research on technological innovation showing that new dis-

Why Not Embrace Disruptive Innovation?

There are many reasons a company may choose not to
embrace a disruptive innovation. The managers surveyed
rated, according to importance, the factors that contributed
to their decision.
Want to remain focused on
our core business and
existing way of competing

3.9

Invested a lot in existing

business and want to capitalize on that investment

3.6

Top management not in

favor of entering new
business

3.1

Have more important

issues to deal with in
existing business

3.0

Still analyzing the

situation

2.7

Do not have time and

resources to enter new
business now

2.6

Too difficult to enter

new business now

2.5

Do not believe new

business is viable

2.4

Do not believe new

business is profitable

2.2

Too expensive to enter

new business now

2.1

Do not have necessary

skills to compete effectively in new business

2.0

1
2
Not important at all

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4
5
Very important

ruptive technologies replaced the existing technologies completely and destroyed competitors that failed to jump from the old to
the new. That may be true for disruptive technological innovations, but not for disruptive strategic innovations.
With a strategic innovation, the new way of competing grows
(usually quickly) to control a certain percentage of the market
but fails to overtake the traditional way completely. For example,
Internet banking and Internet brokerage have grown rapidly in
the last five years but have captured, at most, only 10% to 20% of
the market. Similarly, budget, no-frills airlines have grown phenomenally since 1995 but have captured no more than 20% of
the total market. In market after market, the new ways of playing
the game grow to a respectable size but never really replace the
old ways. Nor are the innovations ever expected to grow to 100%
of their markets.
Appreciating that the new way is neither superior to the existing way nor destined to conquer the whole market opens up alternatives for established players. An established competitor does
not necessarily have to embrace the innovation. It could respond
by making its traditional way of competing even more attractive
and competitive. That might sound obvious, but in most established competitors, the framing of the decision has usually been:
Should we do it or not, and if we do, how do we play two games
simultaneously? Companies rarely consider that responding to
disruptive innovation can mean declining to adopt it and instead
investing in its own business.
Yet that is exactly how Gillette responded in the face of the
disposable-razor threat. Like any disruptive strategic innovation,
disposables entered the razor market by emphasizing a different
dimension of the product (price and ease of use versus Gillettes
closeness of shave) and grew quickly to capture a large market
segment. How did Gillette respond? Without completely ignoring the disruption, it chose to focus its resources on its traditional business to improve its competitive standing relative to
the new way of doing business. It produced disposable razors in
a defensive way, but it focused its energy and resources on its
main business and innovated by creating two new products, the
Sensor and the Mach3. Innovation in the traditional business
eventually led to the decline of the disposable-razor market from
its heights in the 1970s. Even Gillettes November 2002 decision
to create a new line of disposable razors did not come at the expense of its main business.
According to our research, companies that chose not to
embrace a disruptive strategic innovation did so because they
wanted to remain focused on their existing businesses, often to
capitalize on large investments already made. In addition, senior management was against embracing it because of important
issues and challenges in the existing business. (See Why Not
Embrace Disruptive Innovation?)
Edward Jones, one of the leading companies in the U.S. retail-

Though an innovation may be part of the established competitors industry, it may not be part of
its market. An established company must assess whether the new way is related to its existing way.

brokerage industry, is another firm in the study that decided not

to embrace the disruptive innovation, Internet brokerage, which
invaded its market in the mid-1990s. According to chief operating officer Doug Hill, We think online trading is for speculators
and entertainment. We are not in the entertainment business; we
are in the peace of mind business.
Instead, Edward Jones focused on improving its value proposition for its targeted customers, investing in its trademark personal, face-to-face service in its offices across the country. The
company continues with its one-broker office strategy, which
runs counter to that of virtually every other major U.S. securities
organization. As managing partner John Bachmann has stated,
You will not buy securities over the Internet at Edward Jones.
Thats going to be true as far as I can see into the future. If you
arent interested in a relationship and you just want a transaction,
then you could go to E*Trade if you want a good price. We just
arent in that business.3
Jones conservative style of managing assets, remaining unchanged despite the rapid expansion of online trading, has
helped fuel remarkable growth. The number of offices has expanded from 304 in 1980 to more than 4,000 today (more than
any other U.S. brokerage firm). Edward Jones response highlights a key finding of our research: New ways of competing are
not always destined to win the battle. In fact, depending on how
they respond, established competitors can slow down or even destroy the new ways.

Response Two: Ignore the Innovation Its Not Your Business Our
research uncovered a second aspect of disruptive strategic innovation that can easily lead established companies astray: Compared with the traditional way of doing business in an industry,
the new way targets different customers, offers different value
propositions and requires different skills and competences. In
fact, the new way is often so divergent from the established players way of playing the game, it might be viewed as a totally
different business. For example, is online brokerage similar to
traditional brokerage or a totally different industry? By adopting
a disruptive innovation that only appears to be in its business, an
established competitor is effectively diversifying in an unrelated
market. That could lead to disaster.
Thats why Hartford Life chose not to get into direct selling of
life and health insurance by phone or Internet. According to the

company, direct sales methods are appropriate primarily for simple products for the low-end segment of the market. Since our
product and distribution does not focus on this market, we do
not see direct sales as a current threat, nor do we see it as a sales
opportunity, says one senior executive. We target the top 5% of
affluent Americans, people with a net worth in excess of $2 million. These customers have complex financial problems and need
professional advisers to identify problems and solutions. The lifeinsurance agent or broker, working with the clients attorney or
accountant, is often used to provide this consultation as part of
the selling process. People with lower income levels do not have
such complex financial issues and may be more approachable
through direct sales methods. Since this is not our target market,
we have spent few resources on evaluating or implementing direct-marketing strategies. The affluent market is large and growing fast enough to fuel our growth for the foreseeable future.
That example reinforces the point that even though an innovation may be part of the established competitors industry, it
may not be part of its market. This implies that before deciding
to adopt a disruptive innovation, an established company must
assess carefully whether the new way is related to its existing way.
Assessing relatedness is a thorny issue for many established
companies. Traditional measures of relatedness provide an incomplete and potentially inaccurate picture of the scope of exploiting interrelationships between two businesses. Recent academic research has shown that companies need to go beyond
cosmetic similarities and assess relatedness at the competency
level rather than the industry level.4 Specifically, they should assess what kind of skills, competences and assets they currently
have and what they need in the new business. The skills and
competences that count are those that are difficult for competitors to imitate or substitute. Only if the traditional and the new
business share enough of these difficult-to-imitate assets and
competences should the two businesses be considered related.
The mistake that established competitors make is to assume
that because a disruptive innovation creates a new market in their
industry, it must be an easy market to enter and a quick way to
achieve growth. That may not be what awaits them should they
enter the new market. A more appropriate response is to ignore the
innovation it may look appealing but it is not their business.
The second response is both similar to and different from the
first. In response one, established competitors recognize the
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innovation as a threat to their business. As a result, they

invest to make their business more attractive to customers
relative to the disruptive innovation. In response two, the
established competitors do not see the innovation as a
threat. They continue to play the game in their business as if
the disruption did not even occur.

Response Three: Attack Back Disrupt the Disruption Established competitors play one game emphasizing certain
product attributes and targeting certain customers. Disruptive innovators attack them by playing a second game. They
build their success by emphasizing new, nontraditional
product or service attributes that, by definition, become attractive to new customers. Over time, the innovators also become good enough at delivering the attributes that traditional customers value and thus begin to attract the
customers that originally had remained loyal to the established companies. How should the established competitors
respond? Why not develop a third game, attacking the innovators by emphasizing still different product attributes?
In the early 1960s, for example, the Swiss dominated the
global watch industry, selling watches on the basis of Swiss
craftsmanship and the accuracy of their mechanical movements. The dominance all but evaporated in the 1970s when
companies such as Seiko and Timex introduced cheap
watches that used quartz technology and provided added
functionality and features. As with every disruptive innovation, the innovators did not attack by trying to become better at providing the product attributes that the established
competitors (the Swiss) were emphasizing (quality of the
movement and accuracy). Instead, they focused on different
product attributes price, features and functionality. Swiss
share of global world production declined from 48% in 1965
to 15% by 1980.
The response of the established Swiss watch industry
should be a lesson to all companies facing similar strategic
disruptions. Instead of adopting the new way of playing the
game, the Swiss responded by introducing the Swatch. The new
watch did not pretend to be better than Seiko or Timex in price
or performance. Instead, it emphasized a totally different product
attribute style. Instead of responding to the disruptive game
by embracing it, the Swiss chose to disrupt it. Since its launch in
1983, Swatch has become the worlds most popular watch, with
100 million sold in more than 30 countries.
Other companies currently disrupting their disruptors include Sony (in mobile phones), Apple Computer (in personal
computers) and British Airways. For example, after its airline
market was attacked by easyJet and Ryanair, British Airways responded by emphasizing comfort and luxury in its service offering witness the introduction of seats that become flat beds,
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Conflicts in Playing Two Games

When trying to maintain an existing business while simultaneously
adopting an innovation, managers face a number of business risks.
Surveyed managers assessed the degree of risk they encountered
on a variety of fronts.

By embracing the disruptive strategic innovation, we risk

cannibalizing our
existing customer base

1.9
2.7

1.8

undermining the value of our

existing distribution network

2.9

Companies
that responded to the
strategic
innovation

1.3

compromising the quality of service

we offer to our customers

2.3

undermining the companys

image or reputation and the value
associated with it

1.4

Companies
that did not
respond to
the strategic
innovation

2.5

1.5

destroying the overall

culture of our organization

2.8

losing focus through adding activities that may confuse our employees
and customers regarding the companys incentives and priorities

1.6
2.7

trying to do everything for

everybody, thus defocusing our
organization

1.4
2.7

1.8

destroying our existing

distribution network

2.5

1.6

shifting our customers from highvalue activities to low-margin ones

2.9

legitimizing the new business, thus

creating an incentive for other
companies to enter this market also

1.9
2.0

1
Not
at all

2
A little

3
A fair
amount

4
A lot

5
Very
much

and the luxurious executive lounges in airports around the

world. Similarly, both Apple and Sony are responding to the invasion of cheap products in their businesses by emphasizing style
and design as the attributes of their products the Apple iMac
is a classic example.

Response Four: Adopt the Innovation by Playing Both Games at Once

A fourth alternative is simply to adopt the disruptive innovation.
The decision must be based on a detailed cost-benefit analysis.5
But even when an established company has resigned itself to the
fact that a disruptive innovation is here to stay and that it had
better find a way of adopting it, doing so can be problematic.
The question arises, How do we adopt it? Unlike entrepreneurial startup companies such as The Body Shop or Dell

Computer entrants that occupied no other strategic position

established companies already have a way of playing the
game. If an established company decides to adopt the strategic
innovation, it must find ways of playing two different and conflicting games simultaneously.
Despite the challenge, 68 of the 98 companies we surveyed
decided to embrace the disruptive innovation in their industries.
The study showed that managerial perceptions about the dangers
of playing two games varied considerably, with some companies
viewing the potential conflicts as serious risks to their existing
businesses and others being relatively unconcerned. (See Conflicts in Playing Two Games.) Not surprisingly, those companies
that viewed the potential conflicts as serious risks decided not to
embrace the innovation. Those that embraced the innovation
viewed the size and importance of the conflicts facing them as
manageable.
The majority (62%) of those that decided to adopt the disruptive innovation entered the new business by establishing a
separate unit most doing so from the start, with the rest spinning out the new venture later, under the wing of the parent company. The remaining companies chose to compete in the new
business solely through their existing organizational structure
and divisions.
Sixty-eight percent of the companies that established a separate unit used a different name for the new organization, and
83% of those put a new CEO or division manager in charge. In
most cases, that person moved from an existing position within
the organization.
The products or services that the companies offered in the
new businesses were, on average, different from those in the
established businesses along dimensions such as targeted customer segment, level of personal service provided, price and
overall characteristics. To offer the new products and services to
customers, a majority of the new units (79%) shared back-office
activities with the parent companies.
Clearly, embracing the disruptive innovation through a separate organizational unit was popular. Graham Picken, creator of
the United Kingdoms most successful telephone bank in the late
1980s (First Direct, a subsidiary of Midland Bank), offers insight:
The question is not whether conflicts exist between the traditional retail-banking business and direct banking. They do exist
and are important. The key question is how well the company
manages these conflicts, which will ultimately determine its success in competing in the two different businesses. First Direct was
formed as a stand-alone company and had the freedom to set up
its own processes, organizational structure, incentive and control
mechanisms, and create its own distinct culture. The new bank,
Picken says, was set up to be what is known as a greenfield operation, to offer a new value proposition to a newly identified
customer segment by distancing itself from the Midland Bank.
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One indication of Midlands desire to create an organization disassociated from traditional banking was keeping the word bank
out of the new units name.
Simply separating the new unit is not enough. The new business must have autonomy to run its operations as it sees fit. We
found that the higher the degree of decision-making autonomy
given to the new units, the more effective the company was in
playing two games simultaneously. For example, when Royal
Bank of Scotland formed Direct Line Insurance to introduce direct telephone insurance in the United Kingdom in 1985, it gave
founder Peter Woods total operational autonomy. I was given
the freedom and power to build a new, independent company, he
says. I was able to hire new people from outside the bank and set
up Direct Line Insurance as a separate business.
In addition to decision-making autonomy, the new units in
the study had their own budgetary and investment policies and
procedures. They also developed their own cultures and values.
However, their reward mechanisms were kept similar to those in
the established businesses.
Overall, the research results suggest that although it is difficult
to manage two strategic positions simultaneously, the task is not
impossible. Using questionnaire data, we conducted regression
analyses to examine whether separating the new business is beneficial to the company, finding that, on average, it is. But it also
appeared that how the new unit is managed (in terms of autonomy, processes and incentives) has more to do with its eventual

success than the decision to keep it separate. The study suggests

that the higher the degree of decision-making autonomy given to
a new unit and the greater the synergies between it and the parent company, the more effective the company is at playing two
games simultaneously.

Response Five: Embrace the Innovation Completely and Scale

It Up The final option available to established companies is to
abandon their existing ways of playing the game and embrace the
disruptive strategic innovation wholeheartedly. In that case, the
goal is not only to imitate the innovation but also to scale it up
and grow it into a mass market.
Consider, for example, the case of online brokerage. What few
people know is that the first online broker was not Charles
Schwab or E*Trade. Rather, it was two Chicago companies, Howe
Barnes Investments and Security APL, which launched a joint
venture called Net Investor in January 1995 to offer Internetbased stock trading. Six years later, the venture was dwarfed by
the success of Charles Schwab. So although Charles Schwab did
not discover online brokerage, it can be credited with scaling it up
into a mass market.
The key point for established competitors to remember is that
innovation involves two essentially different activities coming
up with a new technological, strategic or product idea and then
creating a market out of it. For an innovation to be successful,
both activities have to be effectively coupled, but there is no need
for the same organization to do both. One company may
come up with a new and disruptive way of playing the game
How To Respond to Disruptive Strategic Innovation
and another may take the idea and run with it.
In fact, the skills and capabilities needed for scaling up
How a company responds to disruptive innovations depends on
are essentially different from those needed to discover the
two main factors: its motivation and ability to do so. If motivation
new idea. In this regard, established companies have a comis low, the response should be to ignore the disruption and focus on
petitive advantage over the pioneers they have the skills
the main business. If motivation is high, the appropriate response is
and competences to embrace a disruptive innovation introdictated by ability and circumstances.
duced by another company and grow it into a mass market.
High
Established companies are, typically, slow movers, and
Focus on your own
Adopt and separate
they
ought to be. Assembling the required skills and capabusiness
or
or
bilities to take ideas and grow them into big markets is a
Adopt and keep internal
Ignore the innovation
or
formidable undertaking. Most of the investments involve
(it is not your business)
Attack back and disrupt
substantial sunk costs not to be undertaken lightly. Estabthe disruption
lished companies are better able to make the serious inAbility To
Respond
vestments in production needed to generate high-quality
Focus on your own
Attack back and disrupt
products economically. Further, only big-name, estabbusiness
the disruption
lished competitors are credible enough to send a clear sigor
Embrace the innovation
nal that the market is about to develop in new and profand scale it up
itable ways. They can reach out to the many potential
consumers who are ready to purchase the new product or
Low
service but are unwilling to shoulder the risk of choosing between many alternatives and create consensus to
Motivation To
Low
High
support a dominant design. Finally, established companies
Respond

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Innovation involves two essentially different activities coming up with a new idea
and creating a market out of it. There is no need for the same organization to do both.

are best at creating the kind of organization required to serve

such a large and rapidly growing market.
The idea that established competitors have the option of embracing somebody elses disruptive innovation and growing it
into a mass market is neither new nor novel.6 What is amazing is
how few established competitors consider it. Many of the managers we interviewed at established companies talked about the
strategy but refrained from using it. Yet history suggests that
those companies that pursue the option successfully create the
basis for tremendous growth for years to come.

destroy the innovation or embrace it completely, abandoning its

traditional business. If the companys motivation to respond is
high and its ability to adopt the innovation is also high because
of the absence of major conflicts, it should imitate the innovation, incorporating it into the traditional business.
Every organization needs to determine its own specific response according to the unique circumstances facing it. The recommendations here are applicable only on average. But appreciating that the new ways of competing are not inherently superior
to the existing ways and that established companies have many
options for responding is half the battle.

When To Do What
Which of the five responses to disruptive strategic innovation is
right for a specific company? The answer depends on the companys position in its industry, its competences, the rate at which the
disruption is growing, the nature of the innovator that introduced the disruption and so on. However, past research has identified two factors that influence how companies should respond
to major disruptions in their businesses: motivation to respond
and ability to respond.7
In the case of disruptive strategic innovation, the ability of
an established company to respond is determined by factors including the companys portfolio of skills, its resources and the
time it has at its disposal. But most important is the nature and
size of the conflicts between the traditional business and the
new business: The higher the degree of conflict, the lower the
ability to respond. Similarly, the companys motivation to respond is determined by factors such as the rate at which the innovation is growing and how threatening it is to the main business. Here the most important factor is how strategically related
the new business is to the existing one: The more strategically
related the new business is, the more motivated the company
will be to respond.
If the two factors are plotted on a matrix, certain implications
emerge. (See How To Respond to Disruptive Strategic Innovations.) When the companys motivation to respond is low either because the disruptive strategic innovation is not growing
fast or is not threatening to the traditional business the established company should ignore it and focus on its own business no
matter what its ability to respond. However, if the companys motivation to respond is high, but its ability to adopt the innovation
is low because of major conflicts, it should either attempt to

REFERENCES
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 Innovators 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.

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