Why do good, successful companies that do all the “right” things still fail or lose their market leadership in face of unexpected competition? In “The Innovator’s Dilemma”, Clayton Christensen shows how the same (good) practices that lead to a business’ success can eventually lead to its demise – this is the innovator’s dilemma. The book also provides a set of rules that CEOs, entrepreneurs and managers can apply to solve this dilemma. In this summary, we’ll outline why great firms fail despite doing all the “right” things, and give an overview of the 5 principles of disruptive technologies, and the solutions to counter these challenges.
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.
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 labour, 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.
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. [In the book, Christensen explains in detail how this works and how it relates to the technology S-curve commonly used by established firms for decision-making. You can get a detailed overview in our full 12-page book summary.]
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 are explained in detail in the book / full summary.] 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. [We’ve captured the key highlights in our complete book summary.]
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.
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
Rather than provide a standard to-do list or checklist, Christensen used a detailed case study to illustrate a thinking process that can be useful across different contexts when addressing the problem of disruptive technological change. The key thinking process involves:
• Identifying potentially disruptive technology (Principle 5)
• Developing a flexible learning-focused strategy (Principle 3)
• Assessing the best commercial and team structure to execute this strategy (Principle 4)
• If appropriate, create an independent organization (Principles 1 & 2). Create a different cost structure, start with a lean budget (to push the team to think out of the box and search for novel solutions), with a tolerance for failure so the new organization can start the trial and error process.
Other Details in “The Innovator’s Dilemma”
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.
There is also an additional book group guide to stimulate thinking and discussion about the concept and application of the ideas in the book. Get your copy of The Innovator’s Dilemma or our The Innovator’s Dilemma summary bundle here!
Deepen your understanding of disruptive technologies and strategies with these useful resources: