Disruption is commonly defined as a “disturbance or problems that interrupt an event, activity, or process.”

Clayton Christensen, author of The Innovator’s Dilemma, wrote that successful, outstanding “incumbent” companies can do everything right and yet still lose their market leadership, or even fail, as new, unexpected competitors rise and take over the market. The next generation product is not being built for the incumbent’s existing customer base but for a spinoff market; while the incumbent’s large customer base, which is not interested in a new product, insists upon more innovation with the familiar incumbent product.

It’s like a game of leapfrog, where the innovation disruptor, instead of confronting the powerful incumbent head-on, “leapfrogs” over it.

Nowhere can this be seen more clearly than in the rise of Tesla. Elon Musk focused squarely on developing a luxury electric car when the big manufacturers were still dabbling. Today, the company is valued higher than many mainline auto companies; as Hendrik Reimers wrote on SeekingAlpha.com, “Tesla trades close to $379, which gives the whole company a market capitalization of slightly more than $60 billion. Let’s compare that to Audi ($34 billion), BMW ($61 billion) and Daimler ($80 billion). That’s right, Tesla is already worth as much as BMW, close to twice as much as Audi, and is nearing Daimler dimensions.” (As of this writing, in January 2019, despite the recent stock market slump, Tesla is trading at $338.)

While it may be happening at a faster rate, disruption is nothing new. “We saw it with Cornelius Vanderbilt and the railroads,” said Morgan Stanley auto and mobility analyst Adam Jonas. “There were times when people thought men like these were crazy…. We saw it with Thomas Edison and the electric utility grid. Henry Ford’s bankers were furious at the risk he was taking with the moving assembly line. But they did it. And once in a while, these things pay off. Elon Musk is in that genre of capitalist/scientist/storyteller.”

Cycles of Disruption

One thing to remember about disruption is that today’s disruptor becomes tomorrow’s status quo. When disruptive companies establish themselves as part of our daily lives—like Apple, Amazon, and Google have during the past twenty years—they become the norm. Then other companies try to improve upon their once-revolutionary value propositions, or even one aspect of them, in order to seize their own market share.

In the cycle of disruption, the company that is prepared to sustain innovation over the long term can seize the advantage. Apple, Amazon, and Google have set themselves up for long-term profitability because they’ve built disruption into their business models. Of course their success over the next twenty or thirty years remains to be seen, but so far those three companies seem to have done a pretty good job of creating sustained disruption.

Insight: Dell Computers Survives Disruption

The marketplace is littered with companies that thrived as powerful disruptors only to be overtaken when markets changed and their business model became outdated. One such company is Dell Computers.

In 1984, at the age of nineteen, with $1,000 in capital from his family, Michael Dell founded PC’s Limited, a seller of IBM PC compatible computers, while a student of the University of Texas at Austin and operated the company from his dormitory room. By 1992, Fortune magazine included Dell Computer Corporation in its list of the world’s 500 largest companies, making Michael Dell, at twenty-seven years old, the youngest CEO of a Fortune 500 company ever. With the advent of the Internet, Dell became leader in customized personal computers that were sold directly to consumers online. This strategy was so successful that by 1999, the company surpassed Compaq, Packard Bell, Gateway, and everyone else to become the number one manufacturer of computers.

But the market changed, and the disruptor became the dinosaur. In 2005, sales growth slowed due to the maturing PC market, which constituted two-thirds of Dell’s sales. Analysts recommended that Dell needed to make inroads into non-PC businesses segments such as storage, services and servers. Due to competitor pressure, the company found itself selling a greater proportion of cheap PCs than before, which eroded profit margins. Dell’s customer service worsened as it moved call centers offshore and as its growth outstripped its technical support infrastructure.

Laptops became the fastest-growing segment of the PC market, but Dell’s reliance on Internet sales—once the cutting edge of innovation!—meant that it missed out on growing laptop sales in big box stores. By 2011, with a shrinking PC industry, Dell continued to lose market share, as it dropped below Lenovo to fall to number three in market share.

The ailing company was rescued by its founder and namesake. On February 5, 2013, Dell announced that Michael Dell and Silver Lake Partners, aided by a $2 billion loan from Microsoft, would take the company private in a $25 billion leveraged buyout deal. The company merged with EMC Corporation to form Dell Technologies, which today sells a wide variety of personal computers, servers, smartphones, televisions, computer software, computer and network security, as well as information security services.

It was a close call, with much pain, factory closings, and layoffs along the way.