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

by Clayton M. Christensen

Technologies of the first sort sustained the industry’s rate of improvement in product performance (total capacity and recording density were the two most common measures) and ranged in difficulty from incremental to radical. The industry’s dominant firms always led in developing and adopting these technologies. By contrast, innovations of the second sort disrupted or redefined performance trajectories—and consistently resulted in the failure of the industry’s leading firms. 4

Scholars who support this view find that established firms tend to be good at improving what they have long been good at doing, and that entrant firms seem better suited for exploiting radically new technologies, often because they import the technology into one industry from another, where they had already developed and practiced it.

They found that firms failed when a technological change destroyed the value of competencies previously cultivated and succeeded when new technologies enhanced them.

At the next higher level, firms that design and assemble computers may buy their integrated circuits, terminals, disk drives, IC packaging, and power supplies from various firms that manufacture those particular products. This nested commercial system is a value network.

Rather, disruptive projects stalled when it came to allocating scarce resources among competing product and technology development proposals (allocating resources between the two value networks shown at right and left in Figure 2.6, for example). 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 firms attacking from value networks below brought with them cost structures set to achieve profitability at lower gross margins. The attackers therefore were able to price their products profitably, while the defending, established firms experienced a severe price war.

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.

Indeed, disruptive technologies have such a devastating impact because the firms that first commercialized each generation of disruptive disk drives chose not to remain contained within their initial value network. Rather, they reached as far upmarket as they could in each new product generation, until their drives packed the capacity to appeal to the value networks above them. It is this upward mobility that makes disruptive technologies so dangerous to established firms—and so attractive to entrants.

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.

Other scholars have found evidence in other industries that as companies leave their disruptive roots in search of greater profitability in the market tiers above them, they gradually come to acquire the cost structures required to compete in those upper market tiers. 1 This exacerbates their problem of downward immobility.

The explanation forwarded most frequently by the business press, especially in the United States, is that the managers of the integrated companies are conservative, backward-looking, risk-averse, and incompetent. Consider these indictments.

Thus, the integrated steel companies’ march to the profitable northeast corner of the steel industry is a story of aggressive investment, rational decision making, close attention to the needs of mainstream customers, and record profits. It is the same innovator’s dilemma that confounded the leading providers of disk drives and mechanical excavators: Sound managerial decisions are at the very root of their impending fall from industry leadership.

There were, in fact, five fundamental principles of organizational nature that managers in the successful firms consistently recognized and harnessed. The firms that lost their battles with disruptive technologies chose to ignore or fight them. These principles are: Resource dependence: Customers effectively control the patterns of resource allocation in well-run companies. Small markets don’t solve the growth needs of large companies. The ultimate uses or applications for disruptive technologies are unknowable in advance. Failure is an intrinsic step toward success. 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. 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 did the successful managers harness these principles to their advantage? They embedded projects to develop and commercialize disruptive technologies within an organization whose customers needed them. When managers aligned a disruptive innovation with the “right” customers, customer demand increased the probability that the innovation would get the resources it needed. 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. They found that their markets generally coalesced through an iterative process of trial, learning, and trial again. They utilized some of the resources of the mainstream organization to address the disruption, but they were careful not to leverage its processes and values. They created different ways of working within an organization whose values and cost structure were turned to the disruptive task at hand. 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.

resource allocation processes are designed to weed out proposals that customers don’t want. When these decision-making processes work well, if customers don’t want a product, it won’t get funded; if they do want it, it will. This is how things must work in great companies. They must invest in things customers want—and the better they become at doing this, the more successful they will be.

Although their merged organizations might have more resources to throw at innovation problems, their commercial organizations tend to lose their appetites for all but the biggest blockbuster opportunities. Huge size constitutes a very real disability in managing innovation.

Managers who face the need to change or innovate, therefore, need to do more than assign the right resources to the problem. They need to be sure that the organization in which those resources will be working is itself capable of succeeding—and in making that assessment, managers must scrutinize whether the organization’s processes and values fit the problem.

In contrast, at highly successful firms such as McKinsey and Company, the processes and values have become so powerful that it almost doesn’t matter which people get assigned to which project teams. Hundreds of new MBAs join the firm every year, and almost as many leave. But the company is able to crank out high-quality work year after year because its core capabilities are rooted in its processes and values rather than in its resources.

When the organization’s capabilities reside primarily in its people, changing to address new problems is relatively simple. But when the capabilities have come to reside in processes and values and especially when they have become embedded in culture, change can become extraordinarily difficult.

product becomes a commodity within a specific market segment when the repeated changes in the basis of competition, as described above, completely play themselves out, that is, when market needs on each attribute or dimension of performance have been fully satisfied by more than one available product. The performance oversupply framework may help consultants, managers, and researchers to understand the frustrated comments they regularly hear from salespeople beaten down in price negotiations with customers: “Those stupid guys are just treating our product like it was a commodity. Can’t they see how much better our product is than the competition’s?” It may, in fact, be the case that the product offerings of competitors in a market continue to be differentiated from each other. But differentiation loses its meaning when the features and functionality have exceeded what the market demands.

when a product becomes a commodity

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. Initially, when no available product satisfies the functionality requirements the market, the basis of competition, or the criteria by which product choice is made, tends to be product functionality. (Sometimes, as in disk drives, a market may cycle through several different functionality dimensions.) Once two or more products credibly satisfy the market’s demand for functionality, however, customers can no longer base their choice of products on functionality, but tend to choose a product and vendor based on reliability. As long as market demand for reliability exceeds what vendors are able to provide, customers choose products on this basis—and the most reliable

vendors of the most reliable products earn a premium for it. But when two or more vendors improve to the point that they more than satisfy the reliability demanded by the market, the basis of competition shifts to convenience. Customers will prefer those products that are the most convenient to use and those vendors that are most convenient to deal with. Again, as long as the market demand for convenience exceeds what vendors are able to provide, customers choose products on this basis and reward vendors with premium prices for the convenience they offer. Finally, when multiple vendors offer a package of convenient products and services that fully satisfies market demand, the basis of competition shifts to price. The factor driving the transition from one phase of the buying hierarchy to the next is performance oversupply.

The Innovator’s Dilemma Book Group Guide

good summary of the book