Why great companies fail to innovate

The Innovator's Dilemma, by Clayton M. Christensen (1997)

**Pages: 229**, Final verdict: Must-read

How do disruptive technologies cause great companies to fail? In his most famous book, The Innovator's Dilemma, Clayton Christensen explores the process by which very well managed companies let themselves be disrupted by new technologies. And the catch is: they get disrupted even though they do all the right things - hence the dilemma.

Clayton M. Christensen is a professor at Harvard Business School and one of the most respected business thinkers alive. His academic work, which started with this book, came to shape the discussion about innovation for the past 20 years, and it will certainly remain a must-read for every manager in the 21st century.

How disruptive innovation works

The book takes us through examples of disruptive technologies in different industries, with a big emphasis on the hard drive industry between the 1970s and 1995. Christensen starts by clarifying that his study wasn't focused on companies which failed because they became bureaucratic or arrogant.

The Innovator's Dilemma is about the companies which failed, despite having a great management, listening to their customers and making big investments in innovation. His thesis is that those companies failed because they did all those things.

  • Disruptive innovation ≠ radical innovation - Radical innovation is about sustaining improvements in same technology. E.g.: new motors for cable actuated excavators (sustaining) vs. hydraulic excavators (disruptive)
  • Value networks - A value network is the market where a certain product is sold. E.g. desktop computers and smartphones both use hard drives, but they are two different value networks. Each value network has its own inherent cost structure and business model.
  • Performance attributes - The same product is valued differently in different value networks. E.g.: Hard drives in the desktop computer value network are valued by their reliability, while hard drives for smartphones are valued for their storage capacity.

Due to their large resources and customer oriented processes, established companies are very good at making their products better (sustaining improvements). For example, Ford is very good at developing better cars. And when a disruptive technology comes along, established companies are often the first to develop prototypes. However, one of the characteristics of disruptive innovations is that they start by not satisfying the requirements of the typical value network (e.g. an electric car currently doesn't satisfy consumer requirements due to their low mileage autonomy).

A well run company won't launch a product which doesn't satisfy its consumers. Moreover, current value networks for electric cars (like golf caddies) provide lower margins than their current business. Therefore, there are no incentives for a well managed company to invest in disruptive innovations.

Startups will then pick up the disruptive technology and find a new value network where it can be used. Due to their smaller size, these companies don't have a problem in entering a lower margins market.

Up until now, established companies think they made the right choices and their profits continue rising and they focus on the higher margins market. The problem comes when disruptive technologies become good enough in the performance attribute valued by the established value networks (e.g. electric cars have enough autonomy). At that point, the consumers change to the new technology so quickly that established companies get completely disrupted.

Avoiding being disrupted

When a disruptive technology reaches an established value network, incumbent firms have two options: 1) try to compete by developing new products with the disruptive technology or 2) move upmarket to new value networks previously occupied by other firms. Since, established firms rarely have the capabilities to produce and market the disruptive technology, they are left with no choice but to move to other value networks.

But Christensen helps us avoid being disrupted. The first step is to understand the following principles:

  1. Companies depend on customers and investors for resources - don't expect your company to be able to focus on projects which diverge from current customers' needs.
  2. Small markets don't solve the growth needs of large companies - a big organization will never be excited by small markets (which are the only place disruptive technologies can be applied at first)
  3. Markets that don't exist can't be analyzed - your early predictions might say that a market is small, but the reality is that it is impossible to estimate its size at the outset
  4. An organization's capabilities define its disabilities - the processes which make a company really good at selling to individual consumers can also make this company really bad at selling to companies
  5. Technology supply may not equal market demand - the rate of performance improvement of a certain technology may make it much better than what market demands

A manager who wants to take advantage of disruptive technology should embrace, instead of fight, those principles. For example, he should not try to estimate market sizes which can't be analyzed, but instead take a fail-and-learn approach:

  • Create or acquire a small spin-off company
  • Embrace the fact that first product launches might fail and engage product development as an iterative process (similar ideas as in The Four Steps to the Epiphany or The Lean Startup)
  • Approach disruptive product development as a marketing problem, rather than a technological one. Ask yourself: "which clients will value this technology?", instead of "how can I make my current clients use this technology?"
  • Being a first entrant in a disruptive technology provides a clear advantage. On the contrary, this first-mover advantage doesn't show in sustaining technologies

In the end, Christensen shows us how understanding the way disruptive innovation works will helps us harness its power, instead of falling in the trap of what seemed like an unsolvable dilemma.

Bottom line

The Innovator's Dilemma is an incredibly well structured book. With lots of examples, Clayton Christensen builds up to explain the theory of disruptive innovation in a detailed manner. Both at the beginning and at the end of the book, we get a chapter which summarizes its main concepts. Those summaries are so good that they make this review look like an amateur's work.

The writing is easy to follow, although the style is very academical - a clue to Christensen's thorough way to derive conclusions from case studies.

The depth of ideas and Christensen's clear insights into how companies work, make The Innovator's Dilemma a must-read for anyone in the business world. Even if you're familiar with the topic from videos or other articles, I would still recommend reading the book.

Further learning:

Happy reading.