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

by Clayton M. Christensen

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.

There is considerable upward mobility into other networks. It is in restraining downward mobility into the markets enabled by disruptive technologies that the value networks exercise such unusual power.

An important strategic implication of this rational pattern of upmarket movement is that it can create vacuum in low-end value networks that draws in entrants with technologies and cost structures better suited to competition.

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.

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.

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.

customer-focused resource allocation and decision-making processes of successful companies are far more powerful in directing investments than are executives’ decisions.

managers harnessed, rather than fought, the forces of resource dependence: They spun out independent companies to commercialize the disruptive technology.

It seems to be very difficult to manage the peaceful, unambiguous coexistence of two cost structures, and two models for how to make money, within a single company.

implanting the projects that are to develop such technologies in commercial organizations that match in size the market they are to address. These assertions are based on two key findings of this study: that leadership is more crucial in coping with disruptive technologies than with sustaining ones, and that small, emerging markets cannot solve the near-term growth and profit requirements of large companies.

contrast to the evidence that leadership in sustaining technologies has historically conferred little advantage on the pioneering disk drive firms, there is strong evidence that leadership in disruptive technology has been very important.

Experts’ forecasts will always be wrong. It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be.

In general, for sustaining technologies, plans must be made before action is taken, forecasts can be accurate, and customer inputs can be reasonably reliable. Careful planning, followed by aggressive execution, is the right formula for success in sustaining technology. But in disruptive situations, action must be taken before careful plans are made.

They must be plans for learning rather than plans for implementation.

Discovery-driven planning, which requires managers to identify the assumptions upon which their business plans or aspirations are based, 11 works well in addressing disruptive technologies.

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

Resources are usually things, or assets—they can be hired and fired, bought and sold, depreciated or enhanced. They often can be transferred across the boundaries of organizations much more readily than can processes and values.

The patterns of interaction, coordination, communication, and decision-making through which they accomplish these transformations are processes.

To ensure consistency, they are meant not to change—or if they must change, to change through tightly controlled procedures.

The values of an organization are the criteria by which decisions about priorities are made.

The leading disk drive companies had the resources—the people, money, and technology—required to succeed at both sustaining and disruptive technologies. But their processes and values constituted disabilities in their efforts to succeed at disruptive technologies.

the start-up stages of an organization, much of what gets done is attributable to its resources—its people. The addition or departure of a few key people can have a profound influence on its success. Over time, however, the locus of the organization’s capabilities shifts toward its processes and values.

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.

managers who determine that an organization’s capabilities aren’t suited for a new task, are faced with three options through which to create new capabilities. They can: Acquire a different organization whose processes and values are a close match with the new task Try to change the processes and values of the current organization Separate out an independent organization and develop within it the new processes and values that are required to solve the new problem

If the acquired company’s processes and values are the real driver of its success, then the last thing the acquiring manager wants to do is to integrate the company into the new parent organization.

If, on the other hand, the company’s resources were the primary rationale for the acquisition, then integrating the firm into the parent can make a lot of sense—essentially plugging the acquired people, products, technology, and customers into the parent’s processes, as a way of leveraging the parent’s existing capabilities.

If a company needs to do both types of tasks simultaneously, then it needs two very different processes. And it is very difficult for a single organizational unit to employ fundamentally different, opposing processes.

and what are the guidelines by which they should be managed? A separate organization is required when the mainstream organization’s values would render it incapable of focusing resources on the innovation project.

Whether the independent organization is physically separate is less important than is its independence from the normal resource allocation process.

Functional and lightweight teams are appropriate vehicles for exploiting established capabilities, whereas heavyweight teams are tools for creating new ones. Spin-out organizations, similarly, are tools for forging new values.

the intersecting trajectories of performance supplied and performance demanded are fundamental triggers behind the phases in the product life cycle.

Performance oversupply triggered a change in the basis of competition. Once the demand for capacity was satiated, other attributes, whose performance had not yet satisfied market demands, came to be more highly valued

describes as typical the following four phases: functionality, reliability, convenience, and price.

the attributes that make disruptive products worthless in mainstream markets typically become their strongest selling points in emerging markets; and second, disruptive products tend to be simpler, cheaper, and more reliable and convenient than established products.

These latter firms, by creating a commercial base and then moving upmarket, will ultimately address the mainstream market much more effectively than will firms that have framed disruptive technology as a laboratory, rather than a marketing, challenge.

First, the pace of progress that markets demand or can absorb may be different from the progress offered by technology. This means that products that do not appear to be useful to our customers today (that is, disruptive technologies) may squarely address their needs tomorrow.

Second, managing innovation mirrors the resource allocation process:

Third, just as there is a resource allocation side to every innovation problem, matching the market to the technology is another.

Fourth, the capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe.

Fifth, in many instances, the information required to make large and decisive investments in the face of disruptive technology simply does not exist. It needs to be created through fast, inexpensive, and flexible forays into the market and the product. The risk is very high that any particular idea about the product attributes or market applications of a disruptive technology may not prove to be viable. Failure and interactive learning are, therefore, intrinsic to the search for success with a disruptive technology.

Sixth, it is not wise to adopt a blanket technology strategy to be always a leader or always a follower. Companies need to take distinctly different postures depending on whether they are addressing a disruptive or a sustaining technology.

companies are excellent at developing the sustaining technologies that improve the performance of their products in the ways that matter to their customers. This is because their management practices are biased toward: Listening to customers Investing aggressively in technologies that give those customers what they say they want Seeking higher margins Targeting larger markets rather than smaller ones

Disruptive technologies change the value proposition in a market. When they first appear, they almost always offer lower performance in terms of the attributes that mainstream customers care about.

But disruptive technologies have other attributes that a few fringe (generally new) customers value. They are typically cheaper, smaller, simpler, and frequently more convenient to use. Therefore, they open new markets. Further, because with experience and sufficient investment, the developers of disruptive technologies will always improve their products’ performance, they eventually are able to take over the older markets.

Companies Depend on Customers and Investors for Resources

The highest performing companies, therefore, have well-developed systems for killing ideas that their customers don’t want.

Small Markets Don’t Solve the Growth Needs of Large Companies

Markets That Don’t Exist Can’t Be Analyzed

Technology Supply May Not Equal Market Demand