8/22/22, 7:29 PM What Is New Market Disruption?

3 Examples | HBS Online

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WHAT IS NEW-MARKET DISRUPTION? 3 EXAMPLES

06 JAN 2022

Catherine Cote Staff

D

isruptive Strategy,
Entrepreneurship & Innovation

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Identifying untapped opportunities is at the heart of innovation. Doing so can enable you to strategize for
sustained success in a competitive landscape, no matter your industry.

According to Harvard Business School Professor Clayton Christensen, who teaches the online course
Disruptive Strategy, there are three types of innovation:

1. Sustaining innovation, in which a company creates better products to sell for higher profits to its best
customers

2. Low-end disruption, in which a company uses a low-cost business model to enter at the bottom of an
existing market and claim a segment, causing incumbent businesses to retreat upmarket to make
higher profit margins

3. New-market disruption, in which a company creates and claims a new segment in an existing market
by catering to an underserved customer base, slowly improving in quality until incumbent businesses'
products are obsolete

Low-end disruption and new-market disruption are types of disruptive innovation. Disruption is the
process by which a smaller company—usually with fewer resources—moves upmarket and challenges
larger, established businesses. In both low-end and new-market disruption, incumbent businesses are
motivated by higher profit margins to not fight the new entrant for market share.

You may approach disruption from the perspective of an incumbent business that thrives on sustaining
innovations or has an opportunity to disrupt an existing market with an innovative product or service.
Either way, learning about disruptive innovation can enable you to assess your company’s place in the
competitive landscape, understand the factors influencing disruption, and craft strategies to avoid or
drive disruption.

Here’s a deep dive into one type of disruptive innovation: new-market disruption.
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WHAT IS NEW-MARKET DISRUPTION?

New-market disruption
occurs when a company creates a new segment in an existing market to reach
unserved or underserved customers; for example, creating a cheap version of an expensive product to
cater to less wealthy consumers. Because the incumbent company caters to wealthier customers, it has
little to no motivation to fight your company for this new market segment.

Over time, the cheaper version of the product can improve in quality and appeal to other market
segments, pushing the more expensive version further toward obsolescence.

3 Characteristics of New-Market Disruption

There are three main characteristics of new-market disruption that set it apart from other innovation
types:

1. It targets non-consumption. The innovative product’s target audience couldn't previously purchase or
access this type of product.

2. It makes a profit at lower prices per unit sold than the incumbent businesses. This is essential
because, as long as the profit margins are lower than that of incumbents’ products, they won’t be
motivated to fight the entrant for market share.

3. It provides lower performance for existing customers but higher performance for non-customers. This
makes the entrant seemingly non-threatening to incumbent businesses. Existing customers likely
won’t consider switching to the new product because its quality is lower. Yet, for the market segment
that previously hasn’t had access to the product, lower quality is acceptable.

New-Market Disruption vs. Low-End Disruption

The difference between new-market and low-end disruption lies in the innovation’s relationship to the
existing market.

“Low-end disruption doesn’t create new markets, you just gain market share against the old,” Christensen
says in Disruptive Strategy. “New-market disruption competes against the original players by going after
new customers that these [companies] aren't interested in, selling them a simple product.”

Think of new-market and low-end disruption as two ways to approach the challenge of driving incumbent
businesses upmarket. One pushes incumbents out of the low end of the existing market, while the other
creates a new market segment altogether.

Related:
3 Examples of Disruptive Technology That Are Changing the Market

3 EXAMPLES OF NEW-MARKET DISRUPTION

Here are three examples of new-market disruption in action to inspire your organization’s strategy.

1. Personal Computers and Smartphones

Two examples of new-market disruption outlined in Disruptive Strategy are the emergence of personal
computers and, later, smartphones. Together, they illustrate how disruptors become incumbents that can
then be disrupted by a new innovation.

The first computers, called mainframes, were incredibly large and expensive. At the time, it was rare for
a person to own a mainframe computer—after all, they cost about $2 million and filled an entire room.
The early computer market catered only to big companies and universities.

The invention of the personal computer created a new market segment that wasn’t being served by
mainframes: individuals. Early personal computers cost around $2,000, making computing technology
more widely accessible than ever before. Although early personal computers were limited in performance
and quality, they appealed to the masses who previously didn’t have access to such technology. Over the
years, the capabilities of personal computers improved to the point that mainframe computers were
deemed virtually obsolete.
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Enter smartphones: an innovation that’s brought computing technology to yet another new market
segment. Where people previously had to purchase a personal computer to use the internet, now they
can do so from the palm of their hand for only a fraction of the cost. As time progresses, smartphone
capabilities—which are also poised to disrupt the digital photography industry—are improving to the
point that personal computers are becoming less necessary.

2. Transistor Radios

Another example of new-market disruption is the transistor radio, which shook up the radio market in
1954. For 30 years prior, the market was dominated by large, expensive stereo systems. The systems
were considered pieces of furniture and catered to the wealthy who had money, time, and space to sit
and listen to them in their homes.

The first portable transistor radio, made by Texas Instruments, targeted the less wealthy: teenagers and
people with jobs that required them to move around a lot. Each of these new market segments previously
had no reasonable options in the radio market.

While the transistor radio was relatively low quality, it provided something stereo systems didn’t:
mobility, and at an affordable cost. The quality of portable radios continued to improve dramatically with
the introduction of the Sony Walkman, MP3 players, the Apple iPod, and smartphones, rendering in-
home stereo systems less attractive.

3. Shared-Mobility Services

An example of new-market disruption is emerging in the auto industry. Shared mobility services, which
encompass ridesharing options (such as Uber and Lyft) and rentable mobility options (such as cars,
bikes, and electric scooters by companies including Zipcar, Bluebikes, and Lime), have created a market
segment in the auto industry for a previously unreached audience: those who can’t afford or don’t want to
purchase a car.

While owning a car has advantages—namely flexibility and personalization—for many, it’s either not
financially possible or doesn’t make sense for city living.

To cater to those people, shared mobility services provide flexibility for a much lower cost than owning a
car. This illustrates the concept of a new-market disruptive innovation providing a level of performance
deemed too low by mainstream market customers (in this case, car owners) but acceptable by members
of the new market segment. If you own a car, having to locate and rent a Zipcar or download the Lyft app
and wait for a driver may seem unappealing because you’re used to the flexibility of having your own
vehicle. If you don’t own a vehicle, the flexibility of a Zipcar or Lyft is a big improvement.

This example hasn’t quite progressed to the disruptive innovation stage yet. Will mobility sharing options
eventually become so flexible and affordable that owning a car is considered unnecessary? Only time will
tell.

PREPARING FOR AND CREATING NEW MARKETS

Whether you work at an incumbent business or an aspiring new market entrant, understanding new-
market disruption can prepare you for the opportunity and threat of disruption.

Taking an online course like Disruptive Strategy can help you bolster your understanding of the three
types of innovation, articulate how each concept applies to your business and industry, and learn how to
strategize for the future.

Are you interested in driving innovation for your organization? Explore our six-week course Disruptive
Strategy to learn the tools, frameworks, and intuition to develop winning disruptive strategies.

About the Author

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Catherine Cote is a marketing coordinator at Harvard Business School Online. course research?
Prior to joining HBS Online, she worked at an early-stage SaaS startup where

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she found her passion for writing content, and at a digital consulting agency,
where she specialized in SEO. Catherine holds a B.A. from Holy Cross, where
she studied psychology, education, and Mandarin Chinese. When not at work,
you can find her hiking, performing or watching theatre, or hunting for the
best burger in Boston.

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