The Innovator’s Dilemma by Clayton Christensen
May 7, 2012
It is not a simple task to bring some value while reviewing a classic book about which many thought leaders have already extensively elaborated upon. So I won’t even try and I shall just attempt to make a synthesis for further #hypertextual references.
Clayton Christensen is an Harvard Professor and he published this acclaimed book in 1997. 15 years later, this book remains as relevant as ever.
I won’t sound very creative while claiming that this is an awesome book. No wonder why it was one of Steve Jobs favorite essay. #hypertextual Main takeaways one click away …
Disruptive Vs Sustaining
This book has been the first to talk about disruptive innovation. Wikipedia definition :
A disruptive innovation is an innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology.
In Christensen’s book, the opposite of disruptive is established or sustaining. This book pitch is : companies can do all things right in terms of management and product strategy while implementing sustaining innovation but still can fail because they haven’t invested into disruptive technologies. I guess Nokia and Kodak leaders wish they had read this book.
Most studies of this book take place in the disk drive industry. Just like genetics researchers study fruit flies because their complete life-cycle span on a single day, Christensen chose this business area because it is a fast paced environment where disruptive technologies emerge on a very frequent basis.
However, Christensen also describes case studies taken from other types of markets to draw analogies and prove how generally applicable his theory is.
Motives behind reluctance
Christensen identifies two main reasons why firms overlook disruptive technologies.
First, these often are simpler than established technologies and are below the existing market demand in terms of performance. Since these technologies cannot meet existing market demand, established companies do not invest nor allocate resources in developing them. Instead, they’d rather “listen to their customers” to improve the offer while implementing sustaining technologies.
The second reason that motivates companies reluctance to invest into disruptive technologies is based on the value network. Broadly speaking, a value network is the structure and organisation (both internal and external) that support a business model. If the market is too small to offer enough profits and growth for the firm’s value network, it won’t invest in the corresponding technology.
Whatever the reasons, this causes misses opportunities as described below …
Neglecting emerging markets
When a disruptive technology emerges, the market either does not exist as yet or is not big enough to match the established company value network and growth objectives. So established companies would rather invest into the higher end of the existing market where more added value is created and more profits can be achieved.
On the other hand, new entrants are very efficient to attack these markets because “the firms attacking from value networks below brought with them cost structure set to achieve profitability at lower gross margins” (p. 47).
However, while developing in emerging markets, the technologies mature and eventually meet customer expectations in all markets making previous technologies obsolete. This is somehow described by the following illustration (from Teradyne Aurora project on MIT web).
Missing new markets
The other problem is that sometimes, disruptive technologies address a problem that never was before. And as such they create a new market.
Since new market cannot be analysed, well managed companies who drives investment according to market studies do not invest on these. Which Christensen summarizes on page 165 : The very mechanisms through which organizations create value are intrinsically inimical to change.
An example of market creation is the Honda Supercub 50cc motorcycles who failed miserably to compete against Harley Davidson but created a new market with dirt biking. Honda then developped the technology and improved his offer in terms of performance, eventually met customer expectations and created a high end on this market.
Disk Drive industry examples are the one of smaller disk drives that do not match the established market requirements (mainframe computer then personal computers) but happen to fully match the ones of emerging markets (personal then laptop computers respectively).
A sour bargain
According to the Harvard professor, while giving up on emerging markets, established firms make a sour bargain exchanging market risk (risk that disruptive technology does not take off) against a competitive risk, while entering markets against entrenched competition.
Christensen shows that there are enormous returns and significant first movers advantages associated with early entry into emerging market in which disruptive technologies are initially used.
As an example, while studying disk drive market, Christensen shows that the firms that followed late into the markets enabled by disruptive technologies generated an average cumulative revenues of $US 64.5 M per firm. While the average company that led in disruptive technology generated $US 1.9 B in revenues. In other words, Firms that entered small emerging markets logged twenty times the revenues of the firms pursuing growth in into larget markets.
A reminder of this famous quote by Peter Drucker : (via Chad Dickerson article) : People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.
Performance oversupply and shift in customer expectations
Quite often, established companies focus too much on improving performances (using sustaining innovation) thinking that this will satisfy customer needs. Christensen shows here that this 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 (p. 187)
This is a wonderful observation. My take is that this is the main Steve Jobs takeaway from the book. In the home computer market he understood well before any of his competitors that technological measurable prowess (CPU, Disk and memory size) was becoming commodities and no longer market differentiator. Design and usability were. This vision allowed him to transform the silicium of technological objects into the gold of social ones.
Build, Test, Learn, Iterate
So what is the solution ? Christensen recommended strategy to figure out what’s new emerging market might want is to build something and test the market to learn from it and then iterate. This is the core proposition of Lean Startup, the Eric Ries best-seller, another fantastic read about innovation #hypertextual will soon write about, so watch this space …