The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change) by
How can great companies fail when they get everything right? That’s the question Clayton Christensen attempts to answer in The Innovator’s Dilemma. Managers, usually those from big, serious companies, should read some Douglas Adams before answering, or put their reports and assessment results in files with covers that have “Don’t Panic” printed in large, friendly letters on them.
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They are most likely facing a paradox. They need to think things through and use an approach different from their usual one. How can I, a big successful company, avoid extinction due to the rise of new, slick technologies that do everything I do better, faster, more reliably, and cheaper? Especially when these technologies start as timid, insecure, and doubtful teenagers?
“Disruptive technologies typically are first commercialized in emerging or insignificant markets.”
This is the question (well not this exactly, but you get the point) The Innovator’s Dilemma answers, using very succinct language. It presents things in a scientific manner with a thorough analysis of the market, the products, and the managerial decision process. The conclusions are drawn on the basis of data analysis and graph plotting.
DISRUPTIVE TECHNOLOGIES / THE INNOVATOR’S DILEMMA
The basic idea is to construct a framework that’ll be valid for all types of industries at any given time. This framework describes the behavioral and decisional processes needed to survive disruptive changes. The trick is that intuitive decisions and market planning only work for sustaining products or services – the ones based on an already existing basis.
Disruptive changes are the ones that hit the market from another angle, rendering the old products obsolete. They usually affect large organizations, rather ironically. But once Christensen starts presenting his case it becomes a logical, why-didn’t-I-think-of-that argument.
Large companies are handicapped by their own size. Just like the “dinosaurs” in Steven Kotler and Peter Diamandis’s Bold, these firms are slow to react, have their own procedures to follow, have their own culture and their own value system. These obstacles aren’t so easily overcome.
Usually, disruptive technologies start as promises. And like every promise, you don’t know if it can be kept until the right moment comes along. The Innovator’s Dillema is full of helpful examples. Honda wanted to release a small motorcycle – 50ccs – in the United States. America said they didn’t need it.
By accident, some young people saw the motorcycles and thought they seemed like perfect dirt track vehicles. So Honda had a disruptive model that initially didn’t have a market. After the market was discovered it secured Honda’s position in the United States, and they went on to dominate the entire motorcycle market with very good management and planning.
Nobody knew that excavators – using a then-new hydraulic system – would be great for digging up small trenches that were perfect for residential buildings, until someone tried selling the product and found a market for it.
Christensen structures his book into eleven chapters and two parts. The first part is dedicated to “Why Great Companies Fail”. It has examples from the disk drive and mechanical excavator industries. The disk drive industry is a great guinea pig for studying disruptive versus sustaining technologies. The industry had an exponential growth, coupled with the similar evolution of computers and technologies that needed disk drives, and it makes for a very revealing read.
The mechanical industry suffered a slower-paced shock with the rise of hydraulics. Mechanical excavators switched technology and, after a while, the majority of mechanical excavator manufacturers ceased to exist.
Christensen proposes Five Principles of Disruptive Technologies:
- Companies depend on customers and investors for resources. Customers drive internal decision-making because companies are resource-dependent.
- Small markets don’t solve the growth needs of large companies. Large companies are not interested in small emerging markets, and they wait too long.
- Markets that don’t exist cannot be analyzed.
- An organization’s capabilities define its disabilities.
- Technology supply may NOT equal market demand.
Leading companies find it hard to explore areas of the market in which disruptive technologies are used in their respective beginnings. This is due to the lower gains they obtain using a young technology, which, on top of that, has the disadvantage of a virtually non-existing market.
“While managers may think they control the flow of resources in their firms, in the end it is really customers and investors who dictate how money will be spent.”
Part two is dedicated to solutions to this problem.
Managers faced with this problem should embed projects with disruptive technologies in an independent organization, which has no growth margin pressure to deal with and is happy to just sell something. This is important because it’s one of the key points in which sustaining and disruptive technologies differ.
Whereas for sustaining technologies being among the first to sell it isn’t a big priority, for disruptive changes being the first to sell is crucial. The markets in this case, being small, are very easily conquered. So the size of the organization should match the markets.
“The pace of technological progress can, and often does, outstrip what markets need.”
Another common mistake made by managers is when they set out sailing into the disruptive landscape, making plans and predictions and establishing growth rates. These new markets are, by definition, unknowable. Managers should begin this kind of journey with the sense of discovery in mind. Failure should be expected, and data gathering should be the ultimate goal.
Managers also tend to think they can bypass the rule of the RPV (resource, process, value) model. For large, successful companies, resources (employees mainly) are not the main focus. Instead, it’s all about processes and values – the means and, respectively, the goals of a company, not the people behind it. Also, another characteristic of values and processes versus resources is that the former is inflexible, whereas the latter can be easily changed.
That being said, it’s not surprising that making a big machine, with established processes and cultures that work towards a big margin gross, use the same approach it usually takes towards a small, unpredictable market is a big no-no.
Christensen then proceeds to put his knowledge and predictions to work with a thought experiment regarding a possible disruptive technology – electric cars (don’t forget the book was initially written in 1997). He puts his framework where his mouth is to analyze the possible outcomes and a possible business strategy to approach this (then) pending technology.
At last, in the final chapter, we get the main conclusions of The Innovator’s Dilemma. Here are the main ideas of the seven “simple and sensible” insights of the book:
- First: Market progress is separate from technology progress. Customers don’t always know what they need.
- Second: Innovation requires resource allocation, which is extraordinarily difficult for disruptive technologies.
- Third: Disruptive technology needs a new market. Old customers are less relevant. Disruptive technology is a marketing problem, not a technological one.
- Fourth: Organizations have narrow capabilities. New markets enabled by disruptive technologies require very different capabilities.
- Fifth: Information required to make investment decisions doesn’t exist. Failure and iterative learning are required.
- Sixth: Disruptive innovations reward leaders.
- Seventh: Small entrant firms enjoy protection because they’re doing things that don’t make sense to the industry leaders.
The Innovator’s Dilemma is powerful; the examples also get to the point and are often amusing. Most of the time people don’t know what it is they want until they see it. That’s why it’s so hard to develop new technologies, find a market for them, and make them a success. The trial-and-error approach, with the mindset of “fail fast, fail early, fail often”, is risky by definition and isn’t on everyone’s menu.
Christensen’s book was a favorite of the late Steve Jobs and, whether you liked Jobs or not, that means something. It’s one the most important books on innovation ever written, and it has profound implications that the reader maybe not be able to see after the first read.
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