Disruptive Innovation is supposed to be about changing an industry’s economics.   But lately, many of the “disruptors” have arrogantly decided to disrupt laws and ethics, more so than economics!

Clayton Christensen’s Disruptive Innovation

First, a digression on the meaning of Disruptive Innovation.  Clayton Christensen’s website defines disruptive innovation as follows:

Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. – See more at: http://www.claytonchristensen.com/key-concepts/#sthash.KHCxJ5IX.dpuf

(Apparently one can coin a “term of art” by simply combining two words that are commonly used together.)

I, and about 10 billion other people, have found this definition of disruptive innovation to be way too narrow! For instance, this definition required Christensen to famously conclude that Uber did not represent disruptive innovation, while Netflix did (see here).  Such silliness. Christensen’s definition is, of course, a great example of one type of disruptive innovation.

A better Definition of Disruptive Innovation

A recent article by McKinsey, does a much better job of defining digital disruption by focusing on how an innovation alters the underlying economics of an industry.  The core idea is that any technology which fundamentally changes the existing supply or demand economics of an industry is disruptive.  This is a much more appealing definition.  If you have not read the article, you really should.  It is excellent.

McKinsey Disruptive Innovation

Now, Back to the Disruptors

Many of recent famous disruptors decided it was not enough to change economics by increasing demand or supply, they also had to challenge the regulations, laws, or even the ethics of an industry.  In each case, this required a phenomenal amount of hubris:

Disruptor Economic Disruption Hubris
Theranos Tiny, drugstore blood draw for many more tests at once.  A fraction of the cost.  A total change in supply economics. Theranos appears to have lied about the use of their technology, withdrew two years of results, and stonewalled on validation studies.
Zenefits Actually there never really was a true economic disruption theory, but, the idea was to combine a lot of HR tasks into a nice software interface. Zenefits decided to ignore regulations about who can sell insurance products and built software to automate the process of misleading auditors!
LendingClub In theory, a “marketplace” for peer to peer lending, in reality a little less than that.  But, the idea was possibly to improve the economics of origination and risk assessment. LendingClub started investing in a company that buys its loans (no longer acting as a marketplace) and the CEO failed to disclose to board he was already an investor in the same company.
Uber Fundamentally changes the supply side of the taxi industry by making almost any driver a possible Uber driver. Uber spent $8 million trying to convince Austin, Texas citizens that Uber drivers should not be finger-printed as taxi drivers are required to.  Austin voters sided with regulators; citing Uber as arrogant.
Volkswagen Diesel fuel offers fundamental, though not breakthrough, improvements in fuel economy. Like Zenefits, Volkswagen actually designed and implemented software to fool regulators!

Summary

I’m especially impressed with the entire new category of software that Zenefits and Volkswagen have created: software designed specifically to thwart regulators.  I suspect we will see a lot of that as insurance companies, governments and others try to better monitor corporate activities through automated techniques.  The hackers will make a business not by destroying corporate systems, but by defrauding those who seek to integrate to them!

We better start reminding entrepreneurs and companies to focus on disrupting supply and demand economics, not the rules by which everyone plays!

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