Investing in Disruption
Let's say the business press has been speculating about which firm in your industry will make a particular technological advance in an existing product line. The press is looking to identify the winner, as they speculate that the winner's stock value will go up when it announces this new incremental improvement. If you read between the lines - and you're the CEO - you might make the decision to invest heavily in the incremental improvement in order to take advantage of this hit to stock price. In strategic terms, we're talking about a sustainable improvement, one of many that have been made over the years in your product line. The question we're talking about still is "Does it make sense to invest heavily in this sustainable improvement in an existing product line, or is it OK to follow along as other industry participants make the incremental improvement first?"
Let's contrast this sustainable improvement with a disruptive improvement, an improvement made to a product in a small, emerging market. Let's underline the contrast again. Does it make more sense to invest in a sustainable improvement to a current product line, or does it make more sense to invest in a disruptive innovation in a product line that, while new, could grow rapidly?
Christensen tells us the answer (Christensen, 132). Invest heavily in the disruptive innovation to the new product line. The pay-off is twenty times as lucrative as the investment in the sustainably innovated product line.
In financial terms, we're talking about two types of risk, market risk and competitive risk (Christensen, 132). If you are going to invest for the biggest bang for your buck, invest in markets, especially emerging markets and products as opposed to investments in competitive situations where market leadership doesn't matter so much (Christensen, 132).
Reference
Christensen, Clayton M. The Innovator's Dilemma. When New Technologies Cause Great Firms to Fail. Harvard Business School Press. 1997.