Read the passage and answer the questions.

Successful companies, no matter what the source of their capabilities, are pretty good at responding to evolutionary changes in their markets-what in The Innovator’s Dilemma (Harvard Business School, 1997), Clayton Christensen referred to as sustaining innovation. Where they run into trouble is in handing or initiating revolutionary changes in their markets, or dealing with disruptive innovation (DI).

Sustaining technologies are innovations that make a product or service perform better in ways that customers in the mainstream market already value. Compaq’s early adoption of Intel’s 32-bit 386 microprocessor instead of the 16-bit 286 chip was a sustaining innovation. So was Merrill Lynch's introduction of its Cash Management Account, which allowed customers to write checks against their equity accounts. Those were breakthrough innovations that sustained the best customers of these companies by providing something better than had previously been available.

Disruptive innovations create an entirely new market through the introduction of a new kind of product or service, one that’s actually worse, initially, as judged by the performance metrics that mainstream customers value. Charles Schwab's initial entry as a bare-bones discount broker was a disruptive innovation relative to the offering of full-service brokers like Merrill Lynch. Merrill Lynch’s best customers wanted more than Schwab-like services. Early personal computers were a disruptive innovation relative to mainframes and minicomputers. PCs were not powerful enough to run the computing applications that existed at the time they were introduced. These innovations were disruptive in that they didn’t address the next-generation needs of leading customers in existing markets. They had other attributes, of course, that enabled new market applications to emerge-and the disruptive innovations improved so rapidly that they ultimately could address the needs of customers in the mainstream of the market as well.

Sustaining innovations are nearly always developed and introduced by established industry leaders. But those same companies never introduce-or cope well with-disruptive innovations. Why? Our resources-processes-values framework holds the answer. Industry leaders are organized to develop and introduce sustaining technologies. Month after month, year after year, they launch new and improved products to gain an edge over the competition. They do so by developing processes for evaluating the technological potential of sustaining innovations and for assessing their customers’ needs for alternatives. Investment in sustaining technology also fits in with the values of leading companies in that they promise higher margins from better products sold to leading-edge customers.

Disruptive innovations occur so intermittently that no company has a routine process for handling them. Furthermore, because disruptive products nearly always promise lower profit margins per unit sold and are not attractive to the company’s best customers, they’ re inconsistent with the established company’s values. Merrill Lynch had the resources-the people, money and technology-required to succeed at the sustaining innovations (Cash Management Account) and the disruptive innovations (bare-bones discount brokering) that it has confronted in recent history. But its processes and values supported only the sustaining innovation: they became disabilities when the company needed to understand and confront the discount and on-line brokerage businesses.

The reason, therefore, that large companies often surrender emerging growth markets is that smaller, disruptive companies are actually more capable of pursuing them. Start-ups lack resources, but that doesn’t matter. Their values can embrace small markets, and their cost structures can accommodate low margins. Their market research and resource allocation processes allow managers to proceed intuitively; every decision need not be backed by careful research and analysis. All these advantages add up to the ability to embrace and even initiate disruptive change.