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Identifying Disruptive Innovation: Innovation Theory and the Defense Industry

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Identifying Disruptive Innovation: Innovation Theory and the Defense Industry by Peter Dombrowski and Eugene Gholz (PDF)

Clayton Christensen developed a powerful framework for evaluating innovations and choosing business strategies to respond to technological change.  He divides innovations into two categories, “disruptive” and “sustaining,” based mainly on whether or not the new product’s performance is measured by new metrics.
Sustaining innovations improve performance along an established trajectory that is familiar to traditional customers. Disruptive innovations, on the other hand, offer a different kind of performance that does not help traditional customers with their normal business practices. Christensen argues that incumbent firms will sensibly cater to their established customers, because they understand the established market well and work hard to preserve good customer relationships. As a result,  incumbents will tend to focus on sustaining innovations and will neglect disruptive ones. However, this tendency will leave them vulnerable to new entrants that lack established customer ties and are therefore willing to pursue disruptive innovations, initially by selling to fringe customers. Christensen describes cases in a wide range of industries in which competition from new firms selling disruptive innovations led to the collapse of well-known, well-managed incumbent firms.

In this article, we improve on Christensen’s theory in a way that makes it more analytically useful—making the theory more predictive than descriptive. Christensen actually defines disruptive innovations as those in which incumbent firms lose out in the post-innovation competition, conflating cause and effect. That choice helps make his case histories engaging and easy to read. But it also  makes his theory hard to test and hard to apply ex ante rather than ex post, because it requires analysts to know the outcome of the post-innovation competition before they can assign the value of the independent variable—that is, before they can decide whether the innovation in question is disruptive or sustaining. Christensen also introduces auxiliary assumptions about the nature of competition in the product market that complicate the story. In this article, we remedy those problems, classifying innovations explicitly in terms of a single dimension that is relatively measurable: the performance metrics that potential customers use
to judge products.

Our improved classification of innovations depends only on the characteristics
of the new product. Whether the product is a new device, a new organizational form, or some other kind of improvement, the question is whether the innovation improves performance that is measured in traditional ways or in new ways. Disruptive innovations offer new performance metrics, while sustaining innovations
offer improvements along previously established performance trajectories. Our adaptation makes it possible to empirically test Christensen’s hypotheses: that incumbent firms are well positioned to produce sustaining innovations but rarely make disruptive innovations, and that disruptive innovations often allow new entrants to dethrone established market leaders. This improvement to the classification scheme for the independent variable makes Christensen’s conceptual apparatus far more useful, and we hope that it offers a progressive step in the study of innovation. We also illustrate our theoretical improvement with two case studies of contemporary innovation in the American defense industry.

In the 1990s, American political and military leaders watched the world change: computers and communications innovations revolutionized all areas of civilian and commercial life. Generals, admirals, and civilians in the Office of the Secretary of Defense grew anxious. When they had entered military service decades earlier, most took pride in military equipment that was at the cutting edge of technology. But as the World Wide Web, cellular telephones, and Playstations beckoned from the civilian world, military technologies increasingly looked obsolete. By the late 1990s, most military leaders were committed to applying comparable information technology to military tasks. According to transformation proponents, the new investment in high-tech equipment is more important than ever, because transformation should improve military efficiency and effectiveness in the “global war on terror.”

Many military leaders claim that the information technology “revolution in military affairs” should also involve replacing the established defense industry. They have observed that entrepreneurial upstarts often replaced established firms during the commercial information technology revolution. Perhaps those same
upstarts should also invade the military market: if Cisco Systems makes vital networking equipment for Wal-Mart, perhaps Cisco can and should make similar equipment for the military. Even if commercial equipment cannot be used directly in the military context, and even if commercial IT firms cannot easily develop separate product lines to sell to the military, it seems reasonable to replace the established defense firms. Today’s defense industry, which grew up during the Cold War, is skilled in developing and manufacturing non-networked, traditional military equipment. For the Information Age, the argument goes, the United States military needs a new group of dynamic suppliers, replete with information technology
specialists and new core competencies.

As intellectual support for the idea that the military should buy its equipment from new suppliers, advocates of transformation like Vice Admiral Arthur Cebrowski, who headed the Pentagon’s Office of Force Transformation after he retired from the Navy, openly borrowed from Christensen’s celebrated approach to business analysis. In explaining revolutions in military affairs, military analysts have generally emphasized how new technologies change the ways that militaries organize and fight, often upending the balance of power among leading nationstates. That is, analysts emphasize the effects of innovation on military power but they take the innovations themselves as sui generis. By reaching out to consider the
sources of innovation and the ways that industry helps to implement new military ideas, transformation advocates tapped into one of the most dynamic research fields in business analysis, economics, sociology, and engineering.  Unfortunately, Cebrowski’s fortuitous encounter with Christiansen’s theory led to a faulty analysis of the challenges facing the U.S. military and its equipment suppliers. Transformation advocates, misinterpreting the theory in part because of the weaknesses in Christensen’s initial description, often exaggerate the likely amount of turmoil in the industrial landscape of the defense industry.

In particular, Cebrowski and others latched onto Christiansen’s concept of disruptive innovation, but their use of the term has less to do with the substance of  Christensen’s analysis than its convenience as an evocative shorthand for vast technological, organizational, and cultural changes. Transformation clearly will entail big changes for the military that will certainly disrupt established routines, and big change is naturally described as “disruptive” in casual conversation.

But disruptive innovation in Christensen’s sense has a technical meaning that does not capture the actual situation that military planners face when they seek to procure innovative technologies. As we will demonstrate, what the military actually wants from its transformation project generally fits the technical definition of sustaining innovation. And according to Christensen’s logic, that means that the best source of supply for the new equipment is the established defense industry. So transformation advocates made a mistake when they tried to steer military purchases to new firms. This mistake had real implications for business and the defense budget, but the American political process helped correct it.

For the complete article, click here to download a PDF.

© 2009 Peter Dombrowski and Eugene Gholz
innovations / spring 2009 101

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