The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change)

by Clayton M. Christensen

An alternative explanation, however, is that these failed firms were as well-run as one could expect a firm managed by mortals to be—but that there is something about the way decisions get made in successful organizations that sows the seeds of eventual failure. The research reported in this book supports this latter view: It shows that in the cases of well-managed firms such as those cited above, good management was the most powerful reason they failed to stay atop their industries.

There are times at which it is right not to listen to customers, right to invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small, rather than substantial, markets.

First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms’ most profitable customers generally don’t want, and indeed initially can’t use, products based on disruptive technologies. By and large, a disruptive technology is initially embraced by the least profitable customers in a market. Hence, most companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late.

Every company in every industry works under certain forces—laws of organizational nature—that act powerfully to define what that company can and cannot do. Managers faced with disruptive technologies fail their companies when these forces overpower them.

Principle #1: Companies Depend on Customers and Investors for Resources

With few exceptions, the only instances in which mainstream firms have successfully established a timely position in a disruptive technology were those in which the firms’ managers set up an autonomous organization charged with building a new and independent business around the disruptive technology.

Creating an independent organization, with a cost structure honed to achieve profitability at the low margins characteristic of most disruptive technologies, is the only viable way for established firms to harness this principle.

Principle #2: Small Markets Don’t Solve the Growth Needs of Large Companies

But while a $40 million company needs to find just $8 million in revenues to grow at 20 percent in the subsequent year, a $4 billion company needs to find $800 million in new sales. No new markets are that large. As a consequence, the larger and more successful an organization becomes, the weaker the argument that emerging markets can remain useful engines for growth.

Principle #3: Markets that Don’t Exist Can’t Be Analyzed

It is in disruptive innovations, where we know least about the market, that there are such strong first-mover advantages. This is the innovator’s dilemma.

Companies whose investment processes demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies.

Principle #4: An Organization’s Capabilities Define Its Disabilities

Principle #5: Technology Supply May Not Equal Market Demand

When the performance of two or more competing products has improved beyond what the market demands, customers can no longer base their choice upon which is the higher performing product. The basis of product choice often evolves from functionality to reliability, then to convenience, and, ultimately, to price.