THE INNOVATORS’S DILEMMA – Clayton Christensen

The Innovator’s Dilemma, written by Clayton Christensen, explores the frequent failure of well-managed firms to succeed when faced with technological change. The study highlights a surprising paradox – that the very practices necessary to build a successful business: responsiveness to customer needs, aggressive investment, attention to competitive trends and dynamics, may prove fatal when applied in response to forms of technological change.

Readers may initially respond with a good dose of skepticism to what sounds like a load of HBS hyperbole. Do not the leading firms generally retain leadership as technologies advance? Examples abound – Intel, Ford, and Timex. This reflex is accurate, and is not contested by Christensen. The bulk of technological change is in fact incremental as market leaders improve and enhance their existing offerings - what the author refers to as sustaining technologies. The problem arises when disruptive technologies emerge. What distinguishes these developments is that they actually offer inferior product performance in the near-term – at least according to the traditional metrics, but nonetheless precipitate the failure of incumbent leaders. Herein lies the paradox. How is it that inferior technologies lead to the downfall of leading firms? Two elements are necessary.

First, the new products must offer a combination of adequate performance in the traditional sense (i.e. disk drive memory capacity), but offer new attributes (i.e. cheaper, smaller, simpler, reliability). Christensen found that these inferior offerings initially only serve the needs of a fringe group of customers, whose small size makes them unattractive to the market leaders. Furthermore, because these offerings are widely regarded as inferior, they generally garner lower margins than the existing mainstream products, giving established firms – with their higher cost bases – further reason for rejection. Thus, new competitors enter the market from below, by employing disruptive technologies, which they then proceed to improve upon by pursuing a series of sustaining improvements.

The second necessary criterion is that the performance of established technology must supersede what customers require. In the pursuit of greater differentiation and continuous product improvement, established suppliers frequently “overshoot” the demands of the market, and offer products too complicated and advanced for the general market. Thus, although the disruptive technologies are inferior on a relative basis, they are often more than adequate in the absolute. Furthermore, so long as the rate of progress achieved by the new technologies is greater than the rate of improvement demanded by the market, the “inferior” product will eventually achieve a sufficient level of performance to satisfy this market demand.

Having highlighted the disturbing impact of disruptive technologies – that good management practices actually drive firms to failure – Christensen proceeds to develop a framework for successfully managing the unique challenge these developments create. In doing so he explores many interesting themes and offers insightful conclusions, several of which are as follows:

1. Leadership is more important in dealing with disruptive technologies than it is in dealing with sustaining innovations.

2. Emerging markets are typically small, and thus are not the answer for the immediate growth needs of large companies.

3. First mover advantage creates minimal advantage for sustaining innovation, but enormous value in disruptive technologies.

4. Forecasting disruptive change is impossible, making its development an iterative process, thereby putting a premium on staying power and learning organizations.

5. Marketing failures – the inability to find customers for new developments frequently explain the failure of traditional firms to commercialize disruptive technologies.

6. Spin-out organizations are highlighted as one method for entrenched firms to pursue disruptive technologies which are otherwise ill-suited to their resource, process and values mix.