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In the 15 years since we first introduced the term "disruptive technology" into the lexicon of business management, there has probably been as much confusion about it as there has been clarity because the terms "disruption" and "technology" carry many prior connotations in the English language. Disruption connotes something "upsetting" and "radically different," among other things. And to many, "technology" connotes revolutionary ways of doing things that are comprehensible only to Ph.D. scientists and computer nerds. As a result of these other connotations of the words we chose, many who have only casually read our research have assumed that the concept of disruptive innovation refers to a radically new technology that tips an industry upside down.

But we have tried to give the term a very specific meaning: "disruption" is an innovation that makes things simpler and more affordable, and "technology" is a way of combining inputs of materials, components, information, labor, and energy into outputs of greater value. Hence, every company—from Intel to Wal-Mart—employs technology as it seeks to deliver value to its customers. Some executives believe that technology can solve the challenges of growth and cost that confront their firms or industries. Yet this is rarely the case. Indeed, widely heralded technologies often fall short of the expectation that they will transform an industry. Anyone who has been inside a modern hospital, for example, has noted the myriad sophisticated technologies at work today, yet health care only seems to get more expensive and inaccessible. The reason is that the purpose of most technologies—even radical breakthroughs—is to sustain the functioning of the current system. Only disruptive innovations have the potential to make health care affordable and accessible.

In this chapter we first review the concept of disruptive innovation and its constituent elements. We then zero in on the concept of a business model, showing that it is composed of four elements—a value proposition, and the resources, processes and profit formula required to deliver that value proposition to targeted customers. Because business model innovation is the crucial ingredient in harnessing a disruptive technology in order to transform an industry, we then describe three different classes of business models around which the health-care industry will be organized in the future. Along the way, we offer illustrations from other industries showing that when innovators stop short of business model innovation, hoping that a new technology will achieve transformative results without a corresponding disruptive business model and without embedding it in a new disruptive value network or ecosystem, fundamental change rarely occurs. In other words, disruptive technologies and business model innovations are both necessary conditions for disruption of an industry to occur. We close the chapter by explaining the process by which existing companies and their leaders can create new business models that match the degree of disruption needed.

In the subsequent five chapters we will build upon the foundation we lay out in this ...

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