The Innovator’s Dilemma
by Clayton Christensen

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The Innovators Dilemma

What You Will Learn from The Innovator’s Dilemma

The Innovator’s Dilemma is the revolutionary business book that has forever changed corporate America.

Why is success so difficult to sustain? When you look across the sweep of business history, most companies that once seemed successful would downgrade their position in the market a decade or two later. The Innovator’s Dilemma is based on a truly radical idea—that a great company can fail precisely because they do everything right.

That’s why we call it the innovator’s dilemma. The dilemma rears its head when a type of disruptive technology arises at the low end of the market. In the most straightforward and unassuming application, explaining this paradox is the purpose of this book.

The Downfall of Kodak

One of the most famous stories of a great company collapse in our time is Kodak. They were dominant in their industry with great management and profit. However, when they crashed, they were overtaken by virtually every other company in their field.

You might think that Kodak’s management was just unable to identify digital photography as a disruptive technology or ‘the next big thing’. With no doubt, this was certainly the case for a while. But let’s look behind the curtain to understand how Kodak’s denial led to a situation, which Clayton Christensen already described in 1997 as the ‘innovator’s dilemma’.

The management at that time was not preparing for the new world of digital photography. They’d rather adopt the new technology to Kodak’s existing product portfolio. So Kodak started to use the digital for quality improvements of film as they were so deeply involved in the photo film, chemical and paper business. The management of Kodak presided over the development of technological cornerstones but was also equipped with accurate market analysis. Unfortunately, they took the wrong choices.

Theories

1. Sustaining vs disruptive technologies

All sustaining technologies improve the performance of established products, along the dimensions of performance that mainstream customers have historically valued. Some sustaining technologies can be discontinuous or radical in nature while others are incremental.

An important finding in this book is that even the most difficult sustaining technologies have rarely precipitated the failure of leading firms. Ironically, in each of the instances in the book, it was a disruptive technology that precipitated the leading firm’s failure. Innovations are more likely to result in worse product performance (at least in the short term).

Disruptive technologies bring an unconventional value proposition than what had been available previously in a market. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe or new customers would value. Products based on disruptive technologies are typically cheaper, simpler, smaller and frequently more convenient to use.

 

2. Knowing when to lead

Are the pioneers really the ones with arrows on their backs? A crucial strategic decision in the management of innovation is whether it’s important to be a leader or a follower. Volumes have been written on first-mover advantage and an offsetting amount on waiting until the innovation’s major risks have been resolved by the pioneering firms.

Despite evidence that leadership in disruptive innovation pays huge dividends, established firms often fail to take the lead. Disruptive technologies facilitate the emergence of new markets but there is no $800 million in new markets. This is why emerging markets are least attractive to companies in search of large revenue.

 

3. Internal resource allocation can be backward

A company’s freedom of action is limited to satisfying the needs of external stakeholders. They assert that organisations will survive and prosper only if their staffs and systems serve the needs of customers and investors by providing them with the goods, services and profits they require.

Hence the ones who often rise in prominence are companies that give customers what they want. The controversy of this idea is that they are powerless to change the courses of their firms against the dictates of their customers. Even if a manager has a bold vision to take their company in a different direction, the power of the customer-focused processes in any company will reject the manager’s new ideas.

Investing aggressively in disruptive technologies isn’t a rational financial decision for established companies. Disruptive products generally promise lower margins and they are typically first commercialised in emerging or insignificant markets. It’s rare for companies that focus on greater customer satisfaction or profitability to invest in disruptive technologies until it’s too late.

 

4. Emergent and upmarket discovery

We can’t analyse markets that don’t exist. New companies and markets for disruptive technologies are formed by trial and error.

Not only are the market applications for disruptive technologies unknown at the time of their development, but they are also unknowable. Thus, the strategies and plans that managers formulate for confronting disruptive technological change should be plans for learning and discovery rather than plans for execution. Managers who believe they know a market’s future will plan and invest very differently from those who recognise the uncertainties in a developing market. In this environment, a planned and researched approach to developing and marketing innovative products is critical.

 

5.  Plans to learn vs plans to execute

Because failure is intrinsic to the search for the initial market applications for disruptive technologies, managers need an unusual approach from what they would take to a sustaining technology market.

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. By approaching disruptive businesses with the mindset that they can’t know where the market is, managers would identify critical information about new markets and the sequence in which they occur.

 

6. Trajectories of market need vs technology improvement

The second element of the failure framework is the observation that technologies can progress faster than market demand.  Suppliers often overshoot their market. They give customers more than they need or ultimately are willing to pay for. It means that disruptive technology that may underperform todayrelative to what users in the market demand—may be fully competitive in the same market tomorrow.

 

An organisational capabilities framework

By inquiring about the sorts of innovations that their organisations are likely to implement successfully, managers can learn a lot about their capabilities by dividing their answers into the following categories:

A. Resources

Resources are the most visible factors that contribute to what an organisation can and can’t do. These include people, equipment, technology, product designs, brands, information, cash and relationships with suppliers, distributors and customers.

Resources are the things managers most instinctively identify when accessing whether their organisation can implement change. However, that alone doesn’t provide sufficient information about their capabilities.

B. Processes

Organisations create value as employees transform inputs of resources. Processes are the patterns of interaction, coordination, communication and decision making through which they accomplish these transformations.

Processes are defined to address specific tasks. Some processes are formal—in that, they are explicitly defined, visibly documented and consciously followed. Other processes are informal—in that, they are habitual routines or ways of working that have evolved over time.

Processes are established so that employees perform recurrent tasks in a consistent way, time after time. However, these mechanisms are often intrinsically disadvantageous to change. These typically inflexible processes are hindering many organisations’ abilities to cope with change.

C. Values

The values of an organisation are the criteria in which decisions about priorities are made. They are the standards by which employees prioritise decisions,  judge what is attractive and unattractive and whether one customer is more important than another.

The values of successful firms tend to evolve in a predictable fashion in at least two dimensions.

The first relates to acceptable gross margins. As companies add features and functionality to their products and services to capture more customers in premium tiers of their markets, they often add overhead costs. As a result, gross margins that were attractive at one point become unattractive.

The other dimension relates to how big business has to be in order to be interesting. Because a company’s stock price represents the discounted present value of its projected earnings, most managers feel compelled to increase growth.

How HP Overcame The Innovator’s Dilemma

HP’s experience in the personal computer printer market illustrates how a company pursues disruptive technology by killing another of its business units.

In the ‘80s, HP began building a business around laser jet printing technology. It was a discontinuous improvement on dot-matrix printing. When an alternative way of translating digital signals into images on paper with inkjet technology first appeared, there were rigorous debates about whether the laser jet or inkjet would emerge as the dominant design.

Rather than placing its bet exclusively on one or the other product, HP created a completely autonomous organisational unit, with the objective to make the inkjet printer a success. It then allowed those two products to compete with each other. Despite their inferior quality, the inkjet printers were still good enough for many students and professionals on desktop computers. So the inkjet business captured many would-be laser jet customers. One of its businesses may have killed the other but if they didn’t someone else would have.

When commercialising disruptive technologies, HP found or developed new markets that valued the attributes of the disruptive products rather than searching for a technological breakthrough.

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