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

by Clayton M. Christensen

One theme common to all of these failures, however, is that the decisions that led to failure were made when the leaders in question were widely regarded as among the best companies in the world.

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.

Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

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.

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. They demand market data when none exists and make judgments based upon financial projections when neither revenues or costs can, in fact, be known. Using planning and marketing techniques that were developed to manage sustaining technologies in the very different context of disruptive ones is an exercise in flapping wings.

The very processes and values that constitute an organization’s capabilities in one context, define its disabilities in another context.

The basis of product choice often evolves from functionality to reliability, then to convenience, and, ultimately, to price.

When faced with sustaining technology change that gave existing customers something more and better in what they wanted, the leading practitioners of the prior technology led the industry in the development and adoption of the new. Clearly, the leaders in this industry did not fail because they became passive, arrogant, or risk-averse or because they couldn’t keep up with the stunning rate of technological change.

My findings consistently showed that established firms confronted with disruptive technology change did not have trouble developing the requisite technology: Prototypes of the new drives had often been developed before management was asked to make a decision.

Sustaining projects addressing the needs of the firms’ most powerful customers (the new waves of technology within the value network depicted in Figure 2.5) almost always preempted resources from disruptive technologies with small markets and poorly defined customer needs.

The patterns of success and failure we see among firms faced with sustaining and disruptive technology change are a natural or systematic result of good managerial decisions. That is, in fact, why disruptive technologies confront innovators with such a dilemma. 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.

In turn, this gave these companies a very specific model for improving profitability. Generally, they found it difficult to improve profitability by hacking out cost while steadfastly standing in their mainstream market: The research, development, marketing, and administrative costs they were incurring were all critical to remaining competitive in their mainstream business. Moving upmarket toward higher-performance products that promised higher gross margins was usually a more straightforward path to profit improvement. Moving downmarket was anathema to that objective.

As such, while senior managers may think they’re making the resource allocation decisions, many of the really critical resource allocation decisions have actually been made long before senior management gets involved: Middle managers have made their decisions about which projects they’ll back and carry to senior management—and which they will allow to languish.

Yet, to expect the processes that accomplish these things also to do something like nurturing disruptive technologies—to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets—is akin to flapping one’s arms with wings strapped to them in an attempt to fly.

The ultimate uses or applications for disruptive technologies are unknowable in advance. Failure is an intrinsic step toward success.

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.

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.

They placed projects to develop disruptive technologies in organizations small enough to get excited about small opportunities and small wins.

They planned to fail early and inexpensively in the search for the market for a disruptive technology.

When commercializing disruptive technologies, they found or developed new markets that valued the attributes of the disruptive products,

when the same analytical and decision-making processes learned in the school of sustaining innovation are applied to enabling or disruptive technologies, the effect on the company can be paralyzing.

Research has shown, in fact, 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.

But as Honda’s experience in the North American motorcycle market illustrates, markets for disruptive technologies often emerge from unanticipated successes, on which many planning systems do not focus the attention of senior management. 12

Three classes of factors affect what an organization can and cannot do: its resources, its processes, and its values.

Consider, for example, the product evolution model, called the buying hierarchy by its creators, Windermere Associates of San Francisco, California, which describes as typical the following four phases: functionality, reliability, convenience, and price.