Why do good, successful companies do all the right things and still fail or lose their market leadership? In this book, Clayton Christensen shows how great practices that lead to a business’ success can eventually lead to its demise – this is the innovator’s dilemma. In this free version of The Innovator’s Dilemma summary, you’ll learn why great firms fail despite doing all the right things, and the solutions that CEOs, entrepreneurs and managers can apply to solve this dilemma.
The Innovator’s Dilemma: An Overview
Christensen started his research using the hard disk drive industry, which is characterized by rampant and rapid changes, with a high rate of failure:
- Between the 1970s to 1990s, the price per megabyte (MB) decreased at about 5% per quarter, while the amount of information in one square inch of disk surface increased by 35% per year on average.
- Between 1976 and 1995, all of the 17 (relatively large) firms in the industry – except IBM – failed or were acquired. Another 109 out of the 129 new entrants also failed.
These firms didn’t fail because they could not cope with the technological change. They failed because of the introduction of disruptive technologies in their industry.
How Great Firms can Fail
In particular, these 2 management principles are vital to leading firms’ success. However, they are also the reason for their demise in the face of unexpected technology change:
- Always listen to and respond to the needs of your best customers.
- Focus your investments on innovations that promise the highest returns.
Here’s why:
Sustaining Technologies vs Disruptive Technologies
Christensen differentiates between 2 strategically different technologies. Established firms generally beat newcomers at sustaining innovations, but lose their leadership positions due to disruptive innovations.
[Note: Technology in the book refers to “the process by which an organization transforms labor, capital, materials and information into products and services of greater value”. Innovation refers to a change in one of these technologies].
Disruptive innovations are often technologically straightforward, e.g. PCs vs mainframes. They are usually a novel combination of off-the shelf components that are cheaper, simpler, smaller, and more convenient to use. They cannot serve the needs of mainstream markets, but offer value to fringe consumers and hence create new markets (that are initially unattractive to incumbents). Over time, they can be improved to take over older markets. More details in our 12-page version of The Innovator’s Dilemma summary.
Barriers to Innovation
Leading firms do not commit to disruptive technologies until it is too late, because of 2 key barriers to innovation:
1. Value Networks
These are the contexts within which firms identify and respond to customers’ needs, solve problems, secure resources, react to competitors and seek profits. A company’s past experiences results in its perceptions and eventually resource-allocation decisions/patterns. Disruptive technologies usually start off as cheaper, simpler, combination of off-the shelf components, and cannot serve the needs of mainstream markets. The new fringe consumers they create are initially unattractive to incumbents, but both the technology and markets evolve over time to directly threaten incumbents.
Do check out our complete version of The Innovator’s Dilemma summary to learn how this works and how it relates to the technology S-curve commonly used by established firms for decision-making.
2. Barriers to Downward Mobility
Established firms face 3 barriers to downward mobility: (a) characteristic cost structures, (b) resource allocation, and (c) upmarket movement of customers. These 3 factors create a pressure for leading firms to keep moving up-market, which in turn creates a vacuum in the lower-end markets to attract firms with lower cost structures and simpler technologies.
This diagram summarizes The Innovator’s Dilemma:
In the book, Christensen also presents detailed case studies to show how the Innovator’s Dilemma affected firms in the Mechanical Excavator industry and the Steel industry.
Resolving the Innovator’s Dilemma: The 5 Laws of Disruptive Technology
If sound practices (like addressing key customer needs and investing in areas of highest potential returns) don’t work for disruptive technologies, what will?
By studying a range of companies that succeeded vs failed when faced with disruptive technologies, Christensen proposes 5 laws or principles of disruptive technology to help us understand and respond to them effectively. It’s crucial for managers to understand these principles rather than to use them as model answers.
Here’s a quick overview of the 5 laws.
1) Companies Depend on Customers & Investors for Resources
Good resource allocation processes are designed to weed out proposals that customers don’t want (including early-stage disruptive innovations). The solution is to create an independent organization that’s responsible for the disruptive technologies and new/emerging customers.
2) Small Markets Don’t Meet the Growth Needs of Large Companies
Large and successful companies typically don’t invest in disruptive technologies because the new markets are initially too small to be attractive, and the technologies are too low-end (with lower profit margins). The solution is to set up an independent organization that matches the size of the market.
3) Markets that Don’t Exist Can’t be Analyzed
Sustaining technologies work well with sound market research, good planning and execution. Disruptive technologies involve new markets with no existing market data. The solution is to use “discovery-based planning” to address such markets.
4) An Organization’s Capabilities Define its Disabilities
Good managers tend to assign capable people to the job, based on their skills, experiences and values. However, just because an individual has the requisite skills for the job doesn’t mean the organization has the capabilities. The solution is to learn how to appraise your organization’s capabilities and disabilities (using the Resources-Processes-Values (RPV) framework, create new capabilities and select the right team structure for the challenge).
5) Technologies Can Progress Faster than Market Demand
Because technology investment and development tends to outstrip the growth in market demand, large companies tend to move up-market too quickly, over-satisfying the needs of their original customers (“performance oversupply”). The solution involves using 3 product evolution strategies and learning to identify a potentially disruptive new technology.
Putting it Together
In our complete summary, we also share how to combine and apply the 5 principles above in real life to address disruptive technological change.
Getting the Most from The Innovator’s Dilemma
Ready to learn more about disruptive technologies and how to apply the 5 laws above? You can get more detailed insights, examples and actionable tips from our complete book summary bundle which includes an infographic, a 12-page text summary and 23-minute audio summary.
This 2011 edition was published with new research since the book was first published in 1997. Christensen explains in detail the research methodology and approach, with additional notes at the end of each chapter. Besides the key case studies of the hard disk, mechanical excavator and steel industries, he also zooms in on examples (and analysis) of success and failures across a range of industries and companies including Intuit, Eli Lilly, DaimlerChrysler, IBM, CiscoSystems, Johnson & Johnson, General Motors etc. You can purchase the book here or visit claytonchristensen.com.
Do also check out the “sequel” to this book, where Clayton Christensen partnered with Michael Raynor to elaborate on how you can build your own disruptive business. Read The Innovator’s Solution summary here!
About the Author of The Innovator’s Dilemma
The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business is written by Dr. Clayton M. Christensen–an American academic and business consultant best known for developing the theory of disruptive innovation. He was the Kim B. Clark Professor of Business Administration at the Harvard Business School, and cofounded Innosight, Rose Park Advisors, and the Innosight Institute. Dr. Christensen also served as chairman and president of CPS Corporation, as a White House Fellow (during President Reagan’s administration), and as a management consultant of the Boston Consulting Group. He received his B.A. in economics from Brigham Young University, an M.Phil. in applied econometrics from Oxford University, and an MBA from the Harvard Business School. He was the author of several books and more than a hundred articles.
The Innovator’s Dilemma Quotes
“Many of what are now widely accepted principles of good management are, in fact, only situationally appropriate.”
“Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources…so that new business initiatives get a second or third stab at getting it right.”
“To succeed consistently, good managers need to be skilled not just in choosing, training and motivating the right people for the right job, but in choosing, building and preparing the right organization for the job as well.”
“When the organization’s capabilities reside primarily in its people, changing to address new problems is relatively simple. But when the capabilities have come to reside in processes and values and especially when they have become embedded in culture, change can become extraordinarily difficult.”
“Differentiation loses its meaning when the features and functionality have exceeded what the market demands.”
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