The Innovator's Dilemma

This book by Clayton Christensen describes why established, successful companies most often miss the disruptive innovation that radical change their industry. And, it lays out some strategies to help these companies reduce their risk of failing to take advantage of disruptive innovations.

This is a book that must be read and understood by any organization that is threatened by disruptive innovation. In today’s environment with information technologies burgeoning, and nano technologies beginning to bud, that’s every organization.

I have done something here in this book summary that I don’t often do, which is to just use the authors words to describe what the book is about and what he’s learned. But, the introduction and summary at the end of the book are written so well, that I’ll just quote him.

“This book defines the problem of disruptive technologies and describes how they can be managed, taking care to establish what researchers call the internal and external validity of its propositions.

Chapters 1 and 2 develop the failure framework in the context of the disk drive industry, and the initial pages of chapters 4 through 8 return to that industry to build a progressively deeper understanding of why disruptive technologies are such vexatious phenomena for good managers to confront successfully. The reason for painting such a complete picture of a single industry is to establish the internal validity of the failure framework. If a framework or model cannot reliably explain what happened within a single industry, it cannot be applied to other situations with confidence.

Chapter 3 and the latter sections of chapters 4 through 9 are structured to explore the external validity of the failure framework-the conditions in which we might expect the framework to yield useful insights. Chapter 3 uses the framework to examine why the leading makers of cable excavators were driven from the earthmoving market by makers of hydraulic machines, and chapter 4 discusses why the world's integrated steel makers have floundered in the face of minimill technology. Chapter 5 uses the model to examine the success of discount retailers, relative to conventional chain and department stores, and to probe the impact of disruptive technologies in the motor control and printer industries. Chapter 6 examines the emerging personal digital assistant industry and reviews how the electric motor control industry was upended by disruptive technology. Chapter 7 recounts how entrants using disruptive technologies in motorcycles- and logic circuitry dethroned industry leaders; chapter 8 shows how and why computer makers fell victim to disruption; and chapter 9 spotlights the same phenomena in the accounting software and insulin businesses.

Chapter 10 applies the framework to a case study of the electric vehicle, summarizing the lessons learned from the other industry studies, showing how they can be used to assess the opportunity and threat of electric vehicles, and describing how they might be applied to make an electric vehicle commercially successful. Chapter 11 summarizes the book's findings.

Taken in sum, these chapters present a theoretically strong, broadly valid, and managerially practical framework for understanding disruptive technologies and how they have precipitated the fall from industry leadership of some of history's best-managed companies.”

In the summary he describes seven observations:

“First, the pace of progress that markets demand or can absorb may be different from the progress offered by technology. This means that products that do not appear to be useful to our customers today (that is, disruptive technologies) may squarely address their needs tomorrow. Recognizing this possibility, we cannot expect our customers to lead us toward innovations that they do not now need.

Therefore, while keeping close to our customers is an important management paradigm for handling sustaining innovations, it may provide misleading data for handling disruptive ones. Trajectory maps can help to analyze conditions and to reveal which situation a company faces.

Second, managing innovation mirrors the resource allocation process: Innovation proposals that get the funding and manpower they require may succeed; those given lower priority, whether formally or de facto, will starve for lack of resources and have little chance of success. One major reason for the difficulty of managing innovation is the complexity of managing the resource allocation process. A company's executives may seem to make resource allocation decisions, but the implementation of those decisions is in the hands of a staff whose wisdom and intuition have been forged in the company's mainstream value network: They understand what the company should do to improve profitability. Keeping a company successful requires that employees continue to hone and exercise that wisdom and intuition. This means, however, that until other alternatives that appear to be financially more attractive have disappeared or been eliminated, managers will find it extraordinarily difficult to keep resources focused on the pursuit of a disruptive technology.

Third, just as there is a resource allocation side to every innovation problem, matching the market to the technology is another. Successful companies have a practiced capability in taking sustaining technologies to market, routinely giving their customers more and better versions of what they say they want. This is a valued capability for handling sustaining innovation, but it will not serve the purpose when handling disruptive technologies. If, as most successful companies try to do, a company stretches or forces a disruptive technology to fit the needs of current, mainstream customers-as we saw happen in the disk drive, excavator, and electric vehicle industries-it is almost sure to fail. Historically, the more successful approach has been to find a new market that values the current characteristics of the disruptive technology. Disruptive technology should be framed as a marketing challenge, not a technological one.

Fourth, the capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe. This is because capabilities are forged within value networks. Hence, organizations have capabilities to take certain new technologies into certain markets. They have disabilities in taking technology to market in other ways. Organizations have the capability to tolerate failure along some dimensions, and an incapacity to tolerate other types of failure. They have the capability to make money when gross margins are at one level, and an inability to make money when margins are at another. They may have the capability to manufacture profitably at particular ranges of volume and order size, and be unable to make money with different volumes or sizes of customers. Typically, their product development cycle times and the -steepness of the ramp to production that they can negotiate are set in the context of their value network.

All of these capabilities-of organizations and of individuals-are defined and refined by the types of problems tackled in the past, the nature of which has also been shaped by the characteristics of the value networks in which the organizations and individuals have historically competed. Very often, the new markets enabled by disruptive technologies require very different capabilities along each of these dimensions.

Fifth, in many instances, the information required to make large and decisive investments in the face of disruptive technology simply does not exist. It needs to be created through fast, inexpensive, and flexible forays into the market and the product. The risk is very high that any particular idea about the product attributes or market applications of a disruptive technology may not prove to be viable.

Failure and iterative learning are, therefore, intrinsic to the search for success with a disruptive technology. Successful organizations, which ought not and cannot tolerate failure in sustaining innovations, find it difficult simultaneously to tolerate failure in disruptive ones.

Although the mortality rate for ideas about disruptive technologies is high, the overall business of creating new markets for disruptive technologies need not be inordinately risky. Managers who don't bet the farm on their first idea, who leave room to try, fail, learn quickly, and try again, can succeed at developing the understanding of customers, markets, and technology needed to commercialize disruptive innovations.

Sixth, it is not wise to adopt a blanket technology strategy to be always a leader or always a follower. Companies need to take distinctly different postures depending on whether they are addressing a disruptive or a sustaining technology. Disruptive innovations entail significant first-mover advantages: Leadership is important. Sustaining situations, however, very often do not. The evidence is quite strong that companies whose strategy is to extend the performance of conventional technologies through consistent incremental improvements do about as well as companies whose strategy is to take big, industry leading technological leaps.

Seventh, and last, the research summarized in this book suggests that there are powerful barriers to entry and mobility that differ significantly from the types defined and historically focused on by economists. Economists have extensively described barriers to entry and mobility and how they work. A characteristic of almost all of these formulations, however, is that they relate to things, such as assets or resources, that are difficult to obtain or replicate. Perhaps the most powerful protection that small entrant firms enjoy as they build the emerging markets for disruptive technologies is that they are doing something that it simply does not make sense for the established leaders to do. Despite their endowments in technology, brand names, manufacturing prowess, management experience, distribution muscle, just plain cash, successful companies populated by good managers have a genuinely hard time doing what does not fit their model for how to make money. Because disruptive technologies rarely make sense during the years when investing in them is important, most conventional managerial wisdom at established firms constitutes an entry and mobility barrier that entrepreneurs and investors can bank on. It is powerful and pervasive.”

The Innovator’s Dilemma
Clayton M. Christensen
Harper Business Essentials, 2002, 261 pp