Like rocket fuel, innovation can help power a prosperous American future -- or blow entire industries to smithereens. Even as it drives growth, innovation can also cannibalize companies in any industry, insidiously stealing their market out from under them. Toyota did it to General Motors , Canon did it to Xerox , and Sony did it to RCA .

This concept, known as "disruptive innovation," was coined by Harvard Business School professor Clayton Christensen. The author of The Innovator's Dilemma, and the foremost expert on innovation in the U.S., visited Fool HQ recently to share his thoughts on the power of new ideas.

Disruptive innovation: Good for consumers, bad for companies
Christensen defines disruptive innovation as any development that transforms an industry whose products historically were complicated and expensive into something that is affordable, simple, and available to a much larger population. According to him, disruptive innovation generally occurs when a company comes in at the bottom of the market with an inexpensive product, and proceeds to clear out that whole market.

Consider the automotive industry. Toyota entered the U.S. market not with the pricy Lexus, but with a small compact model called the Corona, back in the 1960s. From there, it progressed to a Tercel ,to a Corolla, to a Camry, to an Avalon, to a Forerunner, to a Sequoia, and thento a Lexus.

Meanwhile, GM and Ford (NYSE: F), who were manufacturing large cars at the time, looked down at Toyota and said, "We ought to compete against them." Both U.S. automakers began to make smaller compact cars to compete with Toyota -- until they compared the profitability of compacts with that of the Ford Explorer or F-150 pick up.

"They found it didn't make sense to defend the least profitable end of the business when they have the privilege of making even bigger cars to sell to even richer people," said Christensen. "Now it makes sense that the Japanese were coming from the bottom, but the game is basically over for them."

Now, Christensen said, Korea's Kia and Hyundai have stolen the subcompact end of the business, and they're moving upmarket very quickly. "It's not because Toyota is asleep at the switch, but rather, why would they ever invest to defend the least profitable end of the business when they have the privilege of competing against Mercedes and much more profitable products?" he said. Christensen predicts that GM and Ford's fate will eventually be Toyota's as well.

"There's no stupidity on either side of the equation," says Christensen. "The mechanism that drives companies to move up market is the pursuit of profit."

The key to sustainability
How does a company like Apple (Nasdaq: AAPL), widely considered an incredibly innovative business, sustain that over the next 10-20 years? Christensen says the only way companies have ever kept their core business healthy when a disruptive business surfaces is if they set up a completely independent business unit, and gave it the charter to "kill the parent."

"A business unit with its own business model wasn't designed to evolve," Christensen said. "It's designed to give a particular value proposition to a particular set of customers. But a corporation can evolve by creating new business models underneath the corporate umbrella."

Christensen points to IBM (NYSE: IBM) as the poster child for sustainability. IBM set up completely independent business units for each new product or service. Whether it was jumping from making costly mainframe computers to minicomputers, or moving from software and hardware to services, those separate business units enabled the company to slash overhead and costs to boost margins and volume.

"So the individual business units haven't evolved at all, but IBM as a corporation did," Christensen said, "by shutting down dead ones and opening the new disruptive business, and it's a rare thing."

Who is about to be disrupted?
We asked Christensen whether Apple, Amazon.com (Nasdaq: AMZN) or Google (Nasdaq: GOOG) would be disrupted first. He picked Apple, followed by Amazon, and then Google.

At the bottom of Apple's market, Christensen says that music-playing cell phones, primarily from China, are disrupting the iPod. "My prediction is that they'll get driven out of the iPod business in the same way they were marginalized in computers, become an iPhone company, and try to keep shooting up market as Samsung and Nokia come after them," he said. Continued...