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

by Clayton M. Christensen

The truth is, every time managers take an action or make a plan, they do it with the belief that if they take the actions they envision, they’ll get the results they need. So managers are in fact voracious consumers of theory.

It is very difficult for a company whose cost structure is tailored to compete in high-end markets to be profitable in low-end markets as well. 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.

the only thing we may know for sure when we read experts’ forecasts about how large emerging markets will become is that they are wrong.

As we saw, the nature of the technology involved (components versus architecture and incremental versus radical), the magnitude of the risk, and the time horizon over which the risks needed to be taken had little relationship to the patterns of leadership and followership observed. Rather, if their customers needed an innovation, the leading firms somehow mustered the resources and wherewithal to develop and adopt it. Conversely, if their customers did not want or need an innovation, these firms found it impossible to commercialize even technologically simple innovations.

Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. 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. Such

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.

Stanford Professor Robert Burgelman, whose work is extensively cited in this book, once dropped his pen onto the floor in a lecture. He muttered as he stooped to pick it up, “I hate gravity.” Then, as he walked to the blackboard to continue his line of thought, he added, “But do you know what? Gravity doesn’t care! It will always pull things down, and I may as well plan on it.” At a more serious level, the desirability of aligning our actions with the more powerful laws of nature, society, and psychology, in order to lead a productive life, is a central theme in many works,

The other option would be to create an independent organization and embed it among emerging customers that do need the technology.

Because growing companies need to add increasingly large chunks of new revenue each year just to maintain their desired rate of growth, it becomes less and less possible that small markets can be viable as vehicles through which to find these chunks of revenue.

It is, indeed, an innovator’s dilemma. Firms that sought growth by entering small, emerging markets logged twenty times the revenues of the firms pursuing growth in larger markets.

Apple Computer introduced its Apple I in 1976. It was at best a preliminary product with limited functionality, and the company sold a total of 200 units at $666 each before withdrawing it from the market. But the Apple I wasn’t a financial disaster. Apple had spent modestly on its development, and both Apple and its customers learned a lot about how desktop personal computers might be used.

Building such markets entails a process of mutual discovery by customers and manufacturers—and this simply takes time. In Apple’s development of the desktop computer, for example, the Apple I failed, the first Apple II was lackluster, and the Apple II[H11501] succeeded. The Apple III was a market failure because of quality problems, and the Lisa was a failure. The first two generations of the Macintosh computer also stumbled. It wasn’t until the third iteration of the Macintosh that Apple and its customers finally found “it”: the standard for convenient, user-friendly computing to which the rest of the industry ultimately had to conform. 12

only companies that succeeded in addressing disruptive technology were those that created independent organizations whose size matched the size of the opportunity.

One of the dilemmas of management is that, by their very nature, processes are established so that employees perform recurrent tasks in a consistent way, time after time. To ensure consistency, they are meant not to change—or if they must change, to change through tightly controlled procedures. This means that the very mechanisms through which organizations create value are intrinsically inimical to change.

In all 111 cases of sustaining technology, the companies that led in developing and introducing the new technology were the companies that had led in the old technology. The success rate of the established firms in developing and adopting sustaining technologies was 100 percent.

Large companies often surrender emerging growth markets because smaller, disruptive companies are actually more capable of pursuing them. Though start-ups lack resources, it doesn’t matter. Their values can embrace small markets, and their cost structures can accommodate lower margins. Their market research and resource allocation processes allow managers to proceed intuitively rather than having to be backed up by careful research and analysis, presented in PowerPoint. All of these advantages add up to enormous opportunity or looming disaster—depending upon your perspective.

Are the processes by which work habitually gets done in the organization appropriate for this new problem? And will the values of the organization cause this initiative to get high priority, or to languish? If the answer to these questions is no, it’s okay. Understanding problems is the most crucial step in solving them. Wishful thinking about this issue can set teams charged with developing and implementing an innovation on a course fraught with roadblocks, second-guessing, and frustration. The reasons why innovation often seems to be so difficult for established firms is that they employ highly capable people, and then set them to work within processes and values that weren’t designed to facilitate success with the task at hand. Ensuring that capable people are ensconced in capable organizations is a major management responsibility in an age such as ours, when the ability to cope with accelerating change has become so critical.

we must hit a low price point. Disruptive technologies typically have a lower sticker price per unit than products that are used in the mainstream, even though their cost in use is often higher. What enabled the use of disk drives in desktop computers was not just their smaller size; it was their low unit price, which fit within the overall price points that personal computer makers needed to hit. The price per megabyte of the smaller disk drives was always higher than for the larger drives.

In a small, independent organization I will more likely be able to create an appropriate attitude toward failure. Our initial stab into the market is not likely to be successful. We will, therefore, need the flexibility to fail, but to fail on a small scale, so that we can try again without having destroyed our credibility.

One of the most gratifying outcomes of the research reported in this book is the finding that managing better, working harder, and not making so many dumb mistakes is not the answer to the innovator’s dilemma. This discovery is gratifying because I have never met a group of people who are smarter or work harder or are as right so often as the managers I know.