How could Digital's collapse be so precipitous? It's because, in many ways, financial performance data is misleading. As you move up to the top of the market, you're getting rid of the less profitable products at the low end and adding business with more attractive margins at the high end. The rate of unit volume growth might be tapering off as you pursue these smaller markets, but your margins actually look better. So Wall Street rewards your stock price until you hit the ceiling.

Every disruptive innovation is powered by a simplifying technology, and then the technology has to get embedded in a different kind of a business model. The first two decades of digital computing were characterized by the huge mainframe computers that filled a whole room, and they had to be operated by PhD Computer Scientists. It took the engineers at IBM about four years to design these mainframe computers because there were no rules. It was an intuitive art and just by trial and error and experimentation they would evolve to a computer that worked.

The personal computer was a disruptive innovation relative to the mainframe because it enabled even a poor fool like me to have a computer and use it, and it was enabled by the development of the micro processor. The micro processor made it so simple to design and build a computer that IB could throw in together in a garage. And so, you have that simplifying technology as a part of every disruptive innovation. It then becomes an innovation when the technology is embedded in a different business model that can take the simplified solution to the market in a cost-effective way.

You can't find returns in investments you haven't made.

Justification for infidelity and dishonesty in all their manifestations lies in the marginal cost economics of “just this once.

Most companies think of disruption as a threat. But disruptive innovations have tremendous growth potential. If incumbent companies can learn how to harness the forces of disruption, they too can improve their ability to create new-growth businesses.

Because these firms listened to their customers, invested aggressively in new technologies that would provide their customers more and better products of the sort they wanted, and because they carefully studied market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership.