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

by Clayton M. Christensen

Companies stumble for many reasons, of course, among them bureaucracy, arrogance, tired executive blood, poor planning, short-term investment horizons, inadequate skills and resources, and just plain bad luck.

What this implies at a deeper level is that many of what are now widely accepted principles of good management are, in fact, only situationally appropriate. 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.

technology, as used in this book, means the processes by which an organization transforms labor, capital, materials, and information into products and services of greater value.

love this definition of technology use this in comtext of svp technology role definition

The first is that there is a strategically important distinction between what I call sustaining technologies and those that are disruptive.

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

Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

They give customers more than they need or ultimately are willing to pay for. And more importantly, it means that disruptive technologies that may underperform today, relative to what users in the market demand, may be fully performance-competitive in that same market tomorrow.

this is our iphone app situation

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.

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.

customers and investors who dictate how money will be spent because companies with investment patterns that don't satisfy their customers and investors don't survive.

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.

The evidence is strong that formal and informal resource allocation processes make it very difficult for large organizations to focus adequate energy and talent on small markets, even when logic says they might be big someday.

more evidence that an incubator approach has better odds of suceeding

In many instances, leadership in sustaining innovations-about which information is known and for which plans can be made-is not competitively important. In such cases, technology followers do about as well as technology leaders. 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.

definition of innovators 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.

Called discovery-based planning, it suggests that managers assume that forecasts are wrong, rather than right, and that the strategy they have...

Principle #4: An Organization's Capabilities Define ...

An organization's capabilities reside in two places. The first is in its processes-the methods by which people have learned to transform inputs of labor, energy, materials, information, cash, and technology into outputs of higher value. The second is in the organization's values, which are the criteria that ma...

Similarly, values that cause employees to prioritize projects to develop high-margin products, cannot simultaneously acco...

The very processes and values that constitute an organization's capabilities in one context, define its di...

ognitive dissonance makes this not possible

In doing so, they create a vacuum at lower price points into which competitors employing disruptive technologies can enter.

this is us disregarding small merchant opportunities

This is one of the innovator's dilemmas: Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake.

"technology mudslide hypothesis": Coping with the relentless onslaught of technology change was akin to trying to climb a mudslide raging down a hill. You have to scramble with everything you've got to stay on top of it, and if you ever once stop to catch your breath, you get buried.

love this quote use to describe the cse industry

Essentially, it revealed that neither the pace nor the difficulty of technological change lay at the root of the leading firms' failures. The technology mudslide hypothesis was wrong.

distinction between sustaining and disruptive technologies

think comb diagram where the bottom is disruptive

The concept of the value network-the context within which a firm identifies and responds to customers' needs, solves problems, procures input, reacts to competitors, and strives for profit-is central to this synthesis.6

each firm's competitive strategy, and particularly its past choices of markets, determines its perceptions of the economic value of a new technology.

In established firms, expected rewards, in their turn, drive the allocation of resources toward sustaining innovations and away from disruptive ones. This pattern of resource allocation accounts for established firms' consistent leader...

This means that, while Figure 2.1 is drawn to describe the nested physical architecture of a product system, it also implies the existence of a nested network of producers and markets through which the components at each level are made and sold to integrators at the next higher level in the system.

we can use a technique called hedonic regression analysis to identify how markets valued individual attributes and how those attribute values changed over time. Essentially, hedonic regression analysis expresses the total price of a product as the sum of individual so-called shadow prices (some positive, others negative) that the market places on each of the product's characteristics.

we should use this for derived importance

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.13

this is the nuts of the afrguement

Rather, disruptive projects stalled when it came to allocating scarce resources among competing product and technology development proposals

Disruptive innovations are complex because their value and application are uncertain, according to the criteria used by incumbent firms.

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. Recognizing this possibility, we cannot expect our customers to lead us toward innovations that they do not now need. Therefore, while keeping close to our customers is an important management paradigm for handling sustaining innovations, it may provide misleading data for handling disruptive ones. Trajectory maps can help to analyze conditions and to reveal which situation a company faces.

Second, managing innovation mirrors the resource allocation process: Innovation proposals that get the funding and manpower they require may succeed; those given lower priority, whether formally or de facto, will starve for lack of resources and have little chance of success. One major reason for t...

allocation process. A company's executives may seem to make resource allocation decisions, but the implementation of those decisions is in the hands of a staff whose wisdom and intuition have been forged in the company's mainstream value network: They understand what the company should do to improve profitability. Keeping a company successful requires that employees continue to hone and exercise that wisdom and intuition. This means, however, that until other alternatives that appear to be financially more attractive have disappeare...

Third, just as there is a resource allocation side to every innovation problem, matching the market to the technology is another. Successful companies have a practiced capability in taking sust...

customers more and better versions of what they say they want. This is a valued capability for handling sustaining innovation, but it will not serve the purpose when handling disruptive technologies. If, as most successful companies try to do, a company stretches or forces a disruptive technology to fit the needs of current, mainstream customers-as we saw happen in the disk drive, excavator, and electric vehicle industries-it is almost sure to fail. Historically, the more successful approach has been to find a new market that values the cur...

Fourth, the capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe. This is because capabilities are forged within value networks. ...

new technologies into certain markets. They have disabilities in taking technology to market in other ways. Organizations have the capability to tolerate failure along some dimensions, and an incapacity to tolerate other types of failure. They have the capability to make money when gross margins are at one level, and an inability to make money when margins are at another. They may have the capability to manufacture profitably at particular ranges of volume and order size, and be unable to make money with different volumes or sizes of customers. Typically, their p...

All of these capabilities-of organizations and of individuals-are defined and refined by the types of problems tackled in the past, the n...