Stealth Disruptive Innovation

Clayton M. Christensen and Michael E. Raynor describes two types of innovation in their book "The innovators Solution": 'Sustaining Innovation' and 'Disruptive Innovation'.

Sustaining innovation is an innovation that brings to market a product or service that a company in the market could sell for higher margins to its best customers. In other words, sustaining innovation brings a better product into the market.

A disruptive innovation brings to market a product not as good as the products in the current market, and so it cannot be sold to the mainstream customers. But it is simple and it is more affordable. It takes root in an undemanding portion of the market, then improves from that simple beginning to intercept with the needs of customers in the mainstream later.

the authors contend that the odds overwhelmingly favor the incumbent leaders of the industry in battles of sustaining innovation, whereas the entrants have the upper hand for disruptive innovation.
(if you find this concept interesting, I recommend reading the book. You can also get a short overview in this interview with the author.)

As an entrepreneur this would naturally steer you towards creating disruptive innovations, because if you agree with the concepts in the book, you have a high likely of getting clobbered if you try and build a business with a sustaining innovation. The problem with focusing on disruptive innovations is that often entrepreneurs often miss the mark about what customers needed often due to a lack of knowledge of a particular business/industry or issues that customers face in that space. Obviously by having members of your team that have a background in that space will help (and it is unlikely you will get much credence/funding/support anyhow without industry knowledge on your team), but this still does not guarantee success.

However in some cases it might be possible to do both and this could be a very successful path. Going to market as sustaining innovation to build out the right feature set, and then ultimately turning to a disruptive model for growth. Takes whats happening in the housing market. Internet companies are creating all sorts of tools and services that are currently sustaining innovations for real-estate agents/companies. Solutions help agents post houses (information, pictures, movies), find houses faster and more efficiently for their clients, set up agreements between buyers and sellers etc. These solutions aren't perfect, however through usage the products are being refined, improved and integrated until ultimately a large majority of consumers will begin to wonder why they really need a real estate agent? (Early adopters already thing this) Now a sustaining innovation has become a disruptive innovation.

Often I think this happens somewhat by accident, but the creative entrant might be able to drive this path from the start, depending on the industry/space they are playing in. Industry, and more importantly how forward thinking the members of that industry are will impact greatly on the success of this strategy. If, however you can make it work, it will ensure an efficient focus of your resources on building/embedding the right product initially before shifting to a disruptive model for growth.