General Theory: Disruptive innovations

The term was coined by Harvard Business School professor Clayton Christensen in his book The Innovator's Dilemma (which I highly recommend).

Some innovations (called sustaining) improve existing products. They make faster processors, increase efficiency, or add new features to existing products.

Some innovations are called disruptive because they do not fit in the established market model. They're not suited to improve existing products. They lead to the creation of new products which cannot replace the legacy, at least in the short term. Here's how it works:

1. Disruptive products are generally under-performing (e.g. the early PCs, solar energy). This is because any new technology cannot be as efficient as legacy technologies which have been improved for decades.
2. The disruptive products need to find a niche market where legacy products are not suited. This niche market allows them to survive, and get more and more per formant with time. That's how the PC found a place on the desktop, where the legacy computers (Unix and mainframe) were just not suited because they were too expensive. Similarly, solar energy is better suited in places far from any electric outlet.
   
3. In the meantime, legacy products continue to get better and better. There comes a point however where it doesn't matter. Customer needs constantly increase but products performance/features increase at a much higher rate. There comes a point where the legacy product just over-delivers in terms of performance and/or feature (current office suites would be a good example).
4. When this happens, the disruptive product doesn't need to match legacy products performance or offering, it needs to be good enough. When it was powerful enough, the PC started to attack the server market, and has been gnawing market shares ever since.
   
5. The legacy products then tend to focus on high end customers who have needs the disruptive products still cannot meet. But this is a niche market that can only get smaller as time goes by.
   

A good example would be Hotmail. The online email service initially was bare bone, but it allowed to check one's emails anywhere provided one has an Internet connection, something Outlook cannot offer. As time went by, online email services got good enough to replace fat clients. Note that Outlook is still heavily used in the corporate world, where the needs are different. But there might be one day where online email might be good enough for companies.

See also:

• The Innovator's Dilemma
  
• Case Study: Music and movies online
  
• Case Study: Google Spreadsheet