The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail

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3 Sentence Summary

The Innovator’s Dilemma tries to answer why successful companies often falter when confronted with disruptive changes in technology or market structure. Best business practices – like benchmarking the competition, investing in new technologies, and listening to the customer – can become stumbling blocks. Christensen’s book provides a strategic framework for any company that desires to avoid becoming obsolete in today’s innovative and fast-paced economy. 

5 Key Takeaways

1. Disruptive technology is usually built around proven technologies put together into a novel product architecture that offers the customer a new set of attributes never before available.
2. A technology has the potential to be disruptive if the trajectory of improvement is steep enough to intersect the demand of the mainstream market.
3. Disruptive technology is not attractive to the mainstream customer because it is not an incremental improvement. It will only be successful in the beginning with a niche market that values the new technology.
4. Big companies fail to adapt, not because of a lack of resources, but because their processes and values get in the way of developing small margin opportunities.
5. Managers must align resources and incentives to encourage small scale innovation, tolerate failure, and go after new markets.

The Innovator’s Dilemma Summary

Introduction

• There is something about the way decisions get made in successful organizations that sows the seeds of eventual failure.
• Many widely accepted principles of good management are, in fact, only situationally appropriate.

How Can Great Firms Fail? Insights from the Hard Disk Drive Industry

• The established firms were the leading innovators in every sustaining innovation in the industry’s history.
• The industry leaders did not fail because they became passive, arrogant, or risk-averse.
• Disruptive innovations were technologically straightforward.
• The purpose of advanced technology development in the industry was always to sustain established trajectories of performance improvement.
• Leading firms lack downward vision and mobility. They are held captive by their customers.

Value Networks and the Impetus to Innovate

• The organizational structure typically facilitates component-level innovation. This works until the fundamental product architecture changes. When that happens, product development sub-groups impede innovation.
• Firms typically will not focus on technologies with lower gross margins.
• “Listen to your customer” is bad advice in the midst of a disruptive technology change.
• For disruptive technologies, what matters is whether it will ultimately get good enough to intersect what the market demands.

Disruptive Technological Change in the Mechanical Excavator Industry

• The leading firms in the established technology will remain financially strong until the disruptive technology reaches the mainstream market. And once it does, it is already too late.
• Established firms make the mistake of trying to push the disruptive technology into their established markets, while the successful entrants find a new market that values the technology.
• Working harder, being smarter, investing more aggressively, and listening more astutely to customers are all solutions to the problems posed by new sustaining technologies. But these paradigms of sound management are useless – even counterproductive, in many instances – when dealing with disruptive technology.

What Goes Up, Can’t Go Down

• The very costs required to become competitive in higher-end markets restrict downward mobility and create further incentive to move upmarket.

Managing Disruptive Technological Change

• As long as the new technology was required to address the needs of their existing customers, established firms were able to adapt successfully.
• Poor management was not the root cause of their failure. Good management was the problem.
• The very decision-making and resource-allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies.

Five Principles

1. Resource dependence: Customers effectively control the patterns of resource allocation in well-run companies.
2. Small markets don’t solve the growth needs of large companies.
3. The ultimate uses or applications for disruptive technologies are unknown in advance. Failure is an intrinsic step toward success.
4. Organizations have capabilities that exist independently of the capabilities of the people who work within them. Organizations’ capabilities reside in their processes and their values – and the very processes and values that constitute their core capabilities within the current business model also define their disabilities when confronted with disruption.
5. Technology supply may not equal market demand. The attributes that make disruptive technologies unattractive in established markets often are the very ones that constitute their greatest value in emerging markets.

How Successful Managers Harnessed These Principles

1. They embedded projects to develop and commercialize disruptive technologies within an organization whose customers neede them. Align disruptive innovation with the “right” customers and it’ll get the resources it needs.
2. They placed projects to develop disruptive technologies in organizations small enough to get excited about small opportunities and small wins.
3. They planned to fail early and inexpensively in the search for the market for disruptive technology.
4. They utilized the resources of the mainstream organization to address the disruptive technology, but they were careful not to leverage its processes and values.
5. When commercializing disruptive technologies, they found or developed new markets that valued the attributes of the disruptive products, rather than search for a technological breakthrough so that the disruptive product could compete as a sustaining technology in mainstream markets.

Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them

• A company’s customers effectively control what it can and cannot do.
• Create an independent organization and embed the disruptive product among emerging customers that do need the technology.
• Through the mechanisms of seeking corporate profit and personal success is how customers exert a profound influence on the process of resource allocation, and hence on the patterns of innovation.

Match the Size of the Organization to the Size of the Market

• Managers facing disruptive technological change must be leaders, not followers, in commercializing disruptive technologies.
• They must implant the projects that are to develop such technologies in commercial organizations that match the size of the market (smaller).
• Creating new markets is significantly less risky and more rewarding than entering established markets against entrenched competition.
• Leadership in disruptive technologies creates enormous value.
• It’s better to risk the market not being there than to wait and compete from behind.
• Because emerging markets are small by definition, the organizations competing in them must be able to become profitable at a small scale.
• Don’t wait until an emerging market becomes “large enough to be interesting.”
• Rather than continually working to convince and remind everyone that the small, disruptive technology might someday be significant or that it is at least strategically important, large companies should seek to embed the project in an organization that is small enough to be motivated by the opportunity offered by a disruptive technology in its early years. This can be done either by spinning out an independent organization or by acquiring an appropriately small company.
• There are enormous returns and significant first-mover advantages associated with early entry into the emerging markets in which disruptive technologies are initially used.
• As a general rule, the more complex a market, the less important is leadership in sustaining technological innovations. It is in dealing with knife-edge markets or with disruptive technologies that leadership appears to be crucial.

Discovering New and Emerging Markets

• Experts forecasts will always be wrong.
• Research has shown that the vast majority of successful new business ventures abandoned their original business strategies when they began implementing their initial plans and learned what would and would not work in the market.
• Businesses that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.

How to Appraise Your Organization’s Capabilities and Disabilities

• Organizations have capabilities that are independent of the people who work there.
• Managers who face the need to change or innovate need to do more than assign the right resources to the problem. The need to be sure that the organization in which those resources will be working is itself capable of succeeding. Do the organization’s processes and values fit the problem?
• Functional and lightweight teams are appropriate vehicles for exploiting established capabilities, whereas heavyweight teams are tools for creating new ones. Spin-out organizations, similarly, are tools for forging new values.

Performance Provided, Market Demand, and the Product Life Cycle

• Historically, when performance oversupply occurs, it creates an opportunity for a disruptive technology to emerge and subsequently to invade established markets from below.
• Performance oversupply triggers a change in the basis of competition. Other product attributes, whose performance does not yet satisfy market demand, come to be more highly valued and become the dimension that drives makers to differentiate their products.
• A product becomes a commodity when the market needs of each attribute or dimension of performance have been fully satisfied by more than one available product.
• Differentiation loses its meaning when the features and functionality have exceeded what the market demands.
• A key characteristic of a disruptive technology is that it heralds a change in the basis of competition.
• The attributes that make disruptive products worthless in mainstream markets typically become their strongest selling points in emerging markets.
• Disruptive products tend to be simpler, cheaper, and more reliable and convenient than established products.
• Disruptive technologies present a marketing problem, not a technological problem. Fit the market to the product, not the product to the established market.

Managing Disruptive Technological Change

• A technology has the potential to be disruptive if the trajectory of improvement is steep enough to intersect the demand of the mainstream market.
• Historically, disruptive technologies involve no new technologies; rather, they consist of components built around proven technologies and put together in a novel product architecture that offers the customer a set of attributes never before available.
• Just as disruptive technologies don’t fit the models of established firms for improving profits, they often don’t fit the models of their distributors either.

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