This podcast is about the landmark book on innovation – The Innovator’s Dilemma. The book is by Harvard’s Clayton Christiansen who continues to be one of the most respected voices on everything innovation.
In this podcast, I’m going to give you a peek into the book. I will use many of his direct quotes so that there is no loss in communication of his key points. Having said that, the book is somewhat dated – first published in 1997. Some of the primary companies used as examples are either seriously struggling today or out of business – for example, Digital was a very big and successful company in the minicomputer business. This company was first bought by Compaq computer which was then bought by Hewlett-Packard.
The author makes it very clear why he wrote the book.
“This book is about the failure of companies to stay atop their industries when they confront certain types of market and technological change. It’s not about the failure of simply any company, but of good companies – the kinds that many managers have admired and tried to emulate, the companies known for their abilities to innovate and execute. Companies stumble for many reasons, of course, among them bureaucracy, arrogance, tired executive blood, poor planning, short-term investment horizons, inadequate skills and resources, and just plain bad luck. But this book is not about companies with such weaknesses: it is about well-managed companies that have their competitive antenna up, listen astutely to their customers, invest aggressively in new technologies, and yet still lose market dominance.”
In the author’s research he developed a set of rules from extensive research and analysis of both failures and successes. These rules or principles he calls the principles of disruptive innovation. The author says that these principles show, “that when good companies fail, it often has been because their managers either ignore these principles or chose to fight them. Managers can be extraordinarily effective in managing even the most difficult innovations if they work to understand and harness the principles of disruptive innovation.”
Before getting into the five principles, let’s first his three key findings. First, there is a “strategically important distinction between what I call sustaining technologies and those that are disruptive.”
While acknowledging that sustaining technologies can sometimes be radical most are incremental in nature. He defines sustaining technologies as ones that “improve the performance of established products, along with the dimensions of performance that mainstream customers in major markets have historically valued.” These kinds of technologies are some of the most frequently used by industry. Importantly, these sustaining technologies have “rarely have even the most difficult sustaining technologies precipitated the failure of leaving firms.”
On the other hand, disruptive technologies have led to the failure of leading companies. In describing disruptive technologies, he says, they “underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently, more convenient to use.” Two of the main examples he utilizes in the book to illustrate this are computers and discount retailing – which were still young new categories in the mid-1990s when the book was written.
The author points out a very interesting phenomenon that “technologies can progress faster than market demand.” This means that companies in their attempt to continuously improve product performance eventually may overshoot the market and “give customers more than they need or ultimately are willing to pay for.” This opens the door for disruptive technologies that “may underperform today, relative to what users in the market demand, may be fully performance competitive in that same market tomorrow.” An example the author cites is large, mainframe computers that eventually developed massive data processing capabilities whose power surpassed what many of the original customers actually needed and desktop machines could eventually do that.
From a financial standpoint investing in disruptive innovations has its challenges. For example, many disruptive products are simpler and cheaper with a business model that delivers lower margins and profits. Compounding this is that sometimes disruptive technologies are first sold to emerging markets where consumers are relatively few and sales are limited. These same companies developing disruptive innovations may find that some of their most profitable and largest customers do not initially want these kinds of products. Conversely, sometimes the greatest interest income from a company’s least profitable customers.
This adds up to a potentially serious problem for companies. The author says, “most companies with a practice discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it’s too late.”
From this the author articulates five principles.
Principle one: companies depend on customers and investors for resources.
Within established businesses, it’s really customers and investors that determine how money will be spent because if investors and customers are not satisfied, they don’t survive.
This makes it very difficult for this model to support disruptive innovation until it’s too late.
The author states, “the only instances in which mainstream firms have successfully established a timely position in a disruptive technology were those in which the firm’s managers set up an autonomous organization charged with building a new and independent business around the disruptive technology. Such organizations, free of the power of the customers of the mainstream company, ensconce themselves among a different set of customers – those who want the products of the disruptive technology.”
Principle two: small markets don’t solve the growth needs of large companies.
Since disruptive technologies often start in small and emerging markets, when large established companies look at these kinds of opportunities as a potential source of growth, these opportunities look pretty puny. The author says, “the larger and more successful an organization becomes the weaker the argument that emerging markets can remain useful engines for growth.”
The author suggest how larger companies can be successful with these kinds of opportunities. “Those large established firms that have successfully seized strong positions in the new markets enabled by disruptive technologies have done so by giving responsibility to commercialize the disruptive technology to an organization whose size matched the size of the targeted market. Small organizations can most easily respond to the opportunities for growth in a small market.”
Principle number three: markets that don’t exist can’t be analyzed.
Market research and planning work for sustaining technologies in existing markets. These tools do not work well with disruptive technologies that lead to the creation of entirely new markets.
The author says, “companies whose investment processes demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies.”
The alternative is what the author calls “discovery-based planning.” It starts with the assumption that any forecasts you make now about a market that does not yet exist are probably wrong. In this approach “managers develop plans for learning what needs to be known, a much more effective way to confront disruptive technology successfully.
Principle number four: an organization’s capabilities defined its disabilities.
Companies need to be careful not to overvalue their capabilities when thinking about disruptive technology markets. Instead, they need to approach the market opportunity with a deep sense that they probably do not know important knowledge points and that they will need to develop new capabilities.
Principle five: technology supply may not equal market demand.
Understanding, estimating, and planning for demand in emerging markets can be a treacherous, risky undertaking.
Compounding this is what the author says is the situation: “when the performance of two or more competing products has improved beyond the market demands, customers can no longer base their choice upon which is the higher performing product. The basis of product choice often evolves from functionality to reliability, then the convenience and ultimately to price.”
Understanding this exceptionally critical insight is important for anyone listening to this podcast. The hierarchy of benefits that are most important to customers can change dramatically from performance to functionality to reliability to convenience, and price.
Here are a few insights that I think are relevant for virtually any business that come out of this podcast.
First, in developing a disruptive innovation it often needs to be done outside of an existing operational unit. Consider creating operational unit unto itself dedicated to this purpose. Recall the earlier podcast where major companies are attempting to create startup like units within the company but as independent operations.
Second, recognize that in new and emerging markets there is little to be learned from traditional research tools. Your research plan needs to be built around how you’re going to learn as you go.
Third, no matter how good you think your company is, a disruptive innovation is likely to require some new capabilities and probably letting go of certain existing capabilities that can get in your way.
