The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail
The subject of this classic is disruptive technology.
With the help of many examples from industry (disk-drives being his main workhorse) the author explains what technologies are likely to disrupt, who is likely to be disrupted, why they are likely to be disrupted and what the choices are that the established players have when presented with disruption.
The most important point is that disruption generally comes from the practice of repackaging and marketing already existing, straightforward technology at a lower price point to a new customer base that is not economically viable for the established players.
For example, QuickBooks was marketed to mom-and-pop stores who could not afford to pay an accountant and it was the el-cheapo version of Quicken. It is of no use to a proper corporation. JC Bamford got started with hydraulic backhoes that were good enough for small contractors looking to dig a small ditch but wholly inadequate for the purposes of a miner. 5.25 inch disk drives were marketed to the nascent market for personal computers and were of no use to minicomputer manufacturers.
Disruptive technology is cheaper per unit, but its price / performance ratio is much worse than that of the established technology. It’s not good enough for the clients of the established players. Ergo it must be sold on its (lower) price alone, meaning that its purveyors must seek new markets. Flash memory, for example, was first used in cameras, pacemakers etc. Not in computers!
There is a large number of reasons that established players will frown upon the new technology:
1. Good companies listen to their clients. Their clients will tell them they don’t want it. They will demand performance and they will pay for performance.
2. Profitability will be lower in the lower-margin disruptive technology. Profit margins will typically mirror cost structures and will thus be higher for the higher-end product. Established players will in the short term make more money if they allocate their resources toward not falling behind their immediate competition for the higher-end product. (i.e. “sustaining” their competitive edge in the higher margin / higher tech market)
3. The processes used by the established players to sell and support the established technology may not be the right ones for the new tech.
The main thing to realize is that the technology does not live by itself. It is embedded in a “value network.” A car serves a commuter, a digger serves a mine, a disk drive is screwed down somewhere in a computer etc.
The seeds of disruption lie in the fact that the technology itself and its value network may not necessarily be progressing at the same speed.
If the technology is improving much faster than the trajectory of improvement of the “value network” (for example, if the desktop PC users demand extra disk storage slower than the industry is capable of delivering extra disk storage), then
1. The point comes when the value network of the established technology does not need the incremental improvements on which the established players are competing with one another to deliver.
2. More importantly, a point comes when the performance of the disruptive technology becomes good enough to be embedded in the value network of the established technology. So 3.5 inch disks developed for laptops can do good enough a job for a desktop, for example, without taking up the space required for a 5.25 inch disk.
It gets worse: sure, disruptive technology is deficient in terms of features / performance, but the price sensitive customers who do not care so much about performance often care a lot about reliability. (A small contractor who buys a single backhoe digger cannot afford a maintenance team.) Similarly, the unsophisticated customers of the disruptive technology may care a lot about ease of use. (Mom and pop using Quickbooks have no idea what double-entry book-keeping is!) What this means is that when the performance of the disruptive technology has become good enough for it to be embedded into the value network of the established technology, it often brings with it an advantage in reliability and ease of use.
So at that point the disruptive technology is cheaper, more reliable and easier to use than the established technology, all while delivering adequate performance.
And that’s how purveyors of the established technology (who have been at war with one another to deliver on the ever-increasing performance their customers have been demanding) find themselves at a disadvantage versus the disruptors when it comes to reliability and ease of use right about when their customers tell them they won’t pay for extra performance or features any more.
The disadvantage of the lower-tech disruptor has created an advantage and it’s game, set and match!
What’s an established player to do? If I’m running a super successful company and I spot a new technology what am I to do?
One thing I should not do is listen to my underlings. The dealers who sell my cars will not want a customer who just walked into the dealership to buy a V8 to drive out in a small electric car. The salespeople will keep asking me for the most expensive product because they will be paid a commission on their margin and will keep pushing me “north-east” on the price / performance chart. Resistance to disruptive technology often comes from the rank-and-file.
I also should not listen to my shareholders. Small markets (and all disruptive technology starts small) do not solve the growth problems of large companies.
First and foremost, I must understand that the challenge I face is a MARKETING challenge. The tech I’ve got covered. The resources too.
If my company’s processes and my company’s values (defined as “the standards by which employees make choices involving prioritization”) are aligned with the marketing challenge, I’m in luck: chances are that for my company this new technology will eventually become a “sustaining” technology.
I can get my wallet out and buy EARLY a couple of the new entrants. Early enough that my money is not buying process or values or culture, but merely assets/resources and ideally walking and talking resources (the founders) who will adopt the processes and values of my organization.
Alternatively, I can carve out some great people from my organization and:
1. Give them responsibility for the new technology and assign to them the task of identifying the customers for this new technology
2. Match the size of this new subdivision to the current size of the market.
3. Allow them to “discover” the size of the opportunity, rather than burden them with having to forecast it: “the ultimate uses or applications for disruptive technologies are unknowable in advance”
4. Let them fail small, as many times as necessary
That’s what IBM did when they ran their PC business out of Florida and what HP did when they realized ink jets would one day compete with laser printers!
If, on the other hand, my company’s processes or my company’s values are not aligned with the marketing challenge, then I need to buy a leader in the new technology, and have a finger in every pie. And I need to protect my acquired company from my organization. This is, obviously, a bigger challenge (and one my shareholders may not embrace, as their dollars are as good as mine, but the author stays away from this discussion!) As the succession in technologies plays out, I will then eliminate large parts of my current organization. The author cites an occasion on which this is exactly how things played out.
And there you have it! I think that’s the author’s answer to “The Innovator’s Dilemma”
Obviously, that’s a very quick sketch. You’ll have to buy the book to see the complete story (and to be convinced, I suppose). Be warned that in the interest of keeping the various chapters self-consistent you may find some repetition, but overall this is a very quick read.
I’m aware of people who really dislike Clayton Christensen. I’ve even come across a Twitter account that’s dedicated to trashing him. But I, for one, was convinced that he’s describing a valid concept with many applications.
Also, as a guy who established a disruptive business within an established player I totally experienced both the dismay of my superiors when they realized that “small markets don’t solve the problems of large organizations” and the discomfort of trying to shoehorn my project into the rather baroque established processes.
So I have lived through many of the steps the book describes and I reckon they are described very accurately. The research shows!