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

by Clayton M. Christensen

Most new technologies foster improved product performance. I call these sustaining technologies.

Are disruptive products just commoditization?

this theory, which states that while managers may think they control the flow of resources in their firms, in the end it is really customers and investors who dictate how money will be spent

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.

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.

Only those companies that carefully measure trends in how their mainstream customers use their products can catch the points at which the basis of competition will change in the markets they serve.

The fear of cannibalizing sales of existing products is often cited as a reason why established firms delay the introduction of new technologies.

Hence, as depicted by the dotted curve in Figure 2.5, the challenge is to successfully switch technologies at the point where S-curves of old and new intersect. The inability to anticipate new technologies threatening from below and to switch to them in a timely way has often been cited as the cause of failure of established firms and as the source of advantage for entrant or attacking firms.

there was not a single example in the history of technological innovation in the disk drive industry of an entrant firm leading the industry or securing a viable market position with a sustaining innovation. In every instance, the firms that anticipated the eventual flattening of the current technology and that led in identifying,

established firms attempt to push the technology into their established markets, while the successful entrants find a new market that values the technology.

In good companies, resources and energy coalesce most readily behind proposals to attack upmarket into higher-performance products that can earn higher margins.

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.

There had, therefore, to be a reason why good managers consistently made wrong decisions when faced with disruptive technological change.

It is forces outside the organization, rather than the managers within it, that dictate the company’s course.

When companies stop growing, they begin losing many of their most promising future leaders, who see less opportunity for advancement.

This problem is particularly vexing for big companies confronting disruptive technologies. Disruptive technologies facilitate the emergence of new markets, and there are no $800 million emerging markets. But it is precisely when emerging markets are small—when

How can a manager of a large, successful company deal with these realities of size and growth when confronted by disruptive change? I have observed three approaches in my study of this problem: Try to affect the growth rate of the emerging market, so that it becomes big enough, fast enough, to make a meaningful dent on the trajectory of profit and revenue growth of a large company. Wait until the market has emerged and become better defined, and then enter after it “has become large enough to be interesting.” Place responsibility to commercialize disruptive technologies in organizations small enough that their performance will be meaningfully affected by the revenues, profits, and small orders flowing from the disruptive business in its earliest years. As the following case studies show, the first two approaches are fraught with problems. The third has its share of drawbacks too, but offers more evidence of promise.

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.

The dominant difference between successful ventures and failed ones, generally, is not the astuteness of their original strategy. Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources (or having the relationships with trusting backers or investors) so that new business initiatives get a second or third stab at getting it right. Those that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.

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.

Once members of the organization begin to adopt ways of working and criteria for making decisions by assumption, rather than by conscious decision, then those processes and values come to constitute the organization’s culture

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.

while resources tend to be flexible and can be used in a variety of situations, processes and values are by their very nature inflexible. Their very raison d’être is to cause the same thing to be done consistently, over and over again. Processes are meant not to change.

A separate organization is required when the mainstream organization’s values would render it incapable of focusing resources on the innovation project. Large organizations cannot be expected to allocate freely

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.

dimensions that favored the disruptive attributes of the product. 4 It is critical that managers confronting disruptive technology observe this principle. If history is any guide, companies that keep disruptive technologies bottled up in their labs, working to improve them until they suit mainstream markets, will not be nearly as successful as firms that find markets that embrace the attributes of disruptive technologies as they initially stand.

First, I would acknowledge that, by definition, electric vehicles cannot initially be used in mainstream applications because they do not satisfy the basic performance requirements of that market. I would therefore be sure that everybody having anything to do with my program understands this point: Although we don’t have a clue about where the market is, the one thing we know for certain is that it isn’t in an established automobile market segment. Ironically, I would expect most automakers to focus precisely and myopically on the mainstream market because of the principle of resource dependence and the principle that small markets don’t solve the growth and profit needs of big companies. I would not, therefore, follow the lead of other automakers in my search for customers, because I would recognize that their instincts and capabilities are likely to be trained on the wrong target.