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The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change)

Clayton M. Christensen

Last accessed on Friday February 23, 2018

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

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the pace of technological progress can, and often does, outstrip what markets need.

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customers and financial structures of successful companies color heavily the sorts of investments that appear to be attractive to them, relative to certain types of entering firms.

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What all sustaining technologies have in common is that they improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.

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disruptive technologies emerge: innovations that result in worse product performance, at least in the near-term.

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technologies can progress faster than market demand, illustrated

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The last element of the failure framework, the conclusion by established companies that investing aggressively in disruptive technologies is not a rational financial decision for them to make,

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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.

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To maintain their share prices and create internal opportunities for employees to extend the scope of their responsibilities, successful companies need to continue to grow. But while a $40 million company needs to find just $8 million in revenues to grow at 20 percent in the subsequent year, a $4 billion company needs to find $800 million in new sales. No new markets are that large. As a consequence, the larger and more successful an organization becomes, the weaker the argument that emerging markets can remain useful engines for growth.

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In dealing with disruptive technologies leading to new markets, however, market researchers and business planners have consistently dismal records.

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It is in disruptive innovations, where we know least about the market, that there are such strong first-mover advantages.

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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.

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From the earliest studies of the problems of innovation, scholars, consultants, and managers have tried to explain why leading firms frequently stumble when confronting technology change. Most explanations either zero in on managerial, organizational, and cultural responses to technological change or focus on the ability of established firms to deal with radically new technology;

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The primary purpose of this chapter, however, is to propose a third theory of why good companies can fail, based upon the concept of a value network. The value network concept seems to have much greater power than the other two theories in explaining what we observed in the disk drive industry.

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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 leadership in the former and their dismal performance in the latter.

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parallel value networks, each built around a different definition of what makes a product valuable, may exist within the same broadly defined industry.

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But the dilemma in managing the disruptive technology in the heat of the battle is that nothing went wrong inside these companies. Hydraulics was a technology that their customers didn’t need—indeed, couldn’t use. Each cable shovel manufacturer was one of at least twenty manufacturers doing everything they could to steal each other’s customers: If they took their eyes off their customers’ next-generation needs, existing business would have been put at risk. Moreover, developing bigger, better, and faster cable excavators to steal share from existing competitors constituted a much more obvious opportunity for profitable growth than did a venture into hydraulic backhoes, given how small the backhoe market was when it appeared in the 1950s. So, as we have seen before, these companies did not fail because the technology wasn’t available. They did not fail because they lacked information about hydraulics or how to use it; indeed, the best of them used it as soon as it could help their customers. They did not fail because management was sleepy or arrogant. They failed because hydraulics didn’t make sense—until it was too late.

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Middle managers have made their decisions about which projects they’ll back and carry to senior management—and which they will allow to languish.

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In the tug-of-war for development resources, projects targeted at the explicit needs of current customers or at the needs of existing users that a supplier has not yet been able to reach will always win over proposals to develop products for markets that do not exist. This

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Three factors—the promise of upmarket margins, the simultaneous upmarket movement of many of a company’s customers, and the difficulty of cutting costs to move downmarket profitably—together create powerful barriers to downward mobility.

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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.

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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.

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I have come to call this approach to discovering the emerging markets for disruptive technologies agnostic marketing, by which I mean marketing under an explicit assumption that no one—not us, not our customers—can know whether, how, or in what quantities a disruptive product can or will be used before they have experience using it. Some managers, faced with such uncertainty, prefer to wait until others have defined the market. Given the powerful first-mover advantages at stake, however, managers confronting disruptive technologies need to get out of their laboratories and focus groups and directly create knowledge about new customers and new applications through discovery-driven expeditions into the marketplace.

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One of the dilemmas of management is that, by their very nature, processes are established so that employees perform recurrent tasks in a consistent way, time after time. To ensure consistency, they are meant not to change—or if they must change, to change through tightly controlled procedures. This means that the very mechanisms through which organizations create value are intrinsically inimical to change.

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Processes and values define how resources—many of which can be bought and sold, hired and fired—are combined to create value.

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performance oversupply occurs, it creates an opportunity for a disruptive technology to emerge and subsequently to invade established markets from below.

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Generally, once the performance level demanded of a particular attribute has been achieved, customers indicate their satiation by being less willing to pay a premium price for continued improvement in that attribute. Hence, performance oversupply triggers a shift in the basis of competition, and the criteria used by customers to choose one product over another changes to attributes for which market demands are not yet satisfied.

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Two additional important characteristics of disruptive technologies consistently affect product life cycles and competitive dynamics: First, 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.

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Some industry observers believe that if a team of developers were to watch typical users, they would find that functionality has substantially overshot mainstream market demands. If true, this could create an opportunity for a disruptive technology—applets picked off the internet and used in simple internet appliances rather than in full-function computers, for example—to invade this market from below.

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The Innovator&#39;s Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change)

The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change)