The Innovator’s Dilemma

by Clayton Christensen

Reading notes

This books talks about business strategy, widely named as one of the best book to build your company’s strategy. Very inspiring, it is not for large corporation strategy, but also applicable to team strategies at different levels. Related to Know Your Customers’ “Jobs to Be Done”. It approaches the challenge of dealing with disruptive innovations in established companies from a unique angle.

Instead of general leadership issues or resourcing issues, Clayton gets one level deeper and argues that many companies failed to adapt to disruptive because they are too “well managed”. However, disruptive technologies are distinctly different from sustaining technologies with drastically different customer or use cases. When they first appear, they almost always offer lower performance for the mainstream customers. But they have attributes that new customers value.

Prof. Christensen developed 4 principles of disruptive technology.

1. Companies Depend on Customers and Investors for Resources. In order to survive, companies must provide customers and investors with the products, services, and profits that they require. The highest performing companies, have well-developed systems for killing ideas that their current customers don’t want. When the customers started wanting the new technology, it is already too late.
2. Small Markets Don’t Solve the Growth Needs of Large Companies. To maintain their share prices and create internal opportunities for their employees, successful companies need to grow and that requires focusing on large markets.
3. Markets That Don’t Exist Can’t Be Analyzed. Sound market research and good planning followed by execution according to plan are the hallmarks of good management. But it doesn’t work disruptive technologies since the demand data on markets that don’t yet exist.
4. Technology Supply May Not Equal Market Demand. Although disruptive technology can initially be used only in small markets, they eventually become competitive in mainstream markets. This is because the pace of technological progress often exceeds the rate of improvement that mainstream customers want or can absorb.

Strategies towards disruptive technologies:

1. Give responsibility for disruptive technologies to organizations whose customers need them so that resources will flow to them.
2. Set up a separate org small enough to get excited by small gains.
3. Plan for failure. Don’t bet all your resources on being right the first time.
4. Don’t count on breakthroughs. Move ahead early and find the market for the current attributes of the technology.

Notes

Chapter 11 Summary

Managers of these companies simply need to recognize that these capabilities, cultures, and practices are valuable only in certain conditions.

Very important learning.. a strategy & culture combo works in solving one set of problems might not be applicable to another set of challenges.

Insights:
First, the pace of progress that markets demand or can absorb may be different from the progress offered by technology. This means that products that do not appear to be useful to our customers today may squarely address their needs tomorrow.

Second, managing innovation mirrors the resource allocation process: innovation proposals that get the funding and manpower they require may succeed; those given lower priority, whether formally or de facto, will starve for lack of resource and have little chance of success. A company’s executives may seem to make resource allocation decisions, but the implementation of those decisions is in the hands of a staff whose wisdom and intuition have been forged in the company’s mainstream value network: they understand what the company should do to improve profitability.

Third, just as there is a resource side to every innovation problem, matching the market to the technology is another. Successful companies have a practiced capability in taking sustaining technologies to market, routinely giving their customers more and better versions of what they say they want. Historically, the more successful approach has been to find a new market that values the current characteristics of the disruptive technology. Disruptive technology should be framed as a marketing challenge, not a technological one.

Fourth, the capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe. This is because capabilities are forged within value networks. Very often, the new markets enabled by disruptive technologies require very different capabilities along each of these dimensions.

Fifth, the information required to make large and decisive investments in the face of disruptive technology simply does not exist. It needs to be created through fast, inexpensive, and flexible forays into the market and the product.

Sixth, it is not wise to adopt a blanket technology strategy to be always a leader or always a follower. Companies need to take different postures depending on whether they’re addressing a disruptive or sustaining technology. Disruptive innovations entail significant first mover advantages: LEADERSHIP IS IMPORTANT. Sustaining situations, however, very often do not.

Seventh, there are powerful barriers to entry and mobility that differ significantly from the types defined and historically focused on by economists. Perhaps the most powerful protection that small entrant firms enjoy as they build the emerging markets for disruptive technologies is that they are doing something that it simply does not make sense for the established leaders to do.

Preface

That’s why we call it the innovator’s dilemma: doing the right thing is the wrong thing.

Introduction

Research shows — good management was the most powerful reason they failed to stay atop their industries. Precisely because these firms listened to their customers, invested aggressively in new technologies that would provide their customers more and better products of the sort they wanted, and because they carefully studied market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership.

Disruptive technologies bring to a market a very different value proposition than had been available previously. It underperform established products in mainstream markets. But they have other features that a few fringe customers value.

Similar to the discussion from Dan on product strategy, disruptive technologies changes competition basis.. like Amazon to adds shipping speed as a competition basis

Part 1 Why Great Companies Can Fail

Chapter 1 How Can Great Firms Fail?

This is one of the innovator’s dilemmas: Blindly following the maxim that good managers should keep close to their customers can sometime s be a fatal mistake.

The fear of cannibalizing sales of existing products is often cited as a reason why established firms delay the introduction of new technologies.
> Relevant to Leadership by Howard Schultz

It was as if the leading firms were held captive by their customers, enabling attacking entrant firms to topple the incumbent industry leaders each time a disruptive technology emerged.

Chapter 2 Value Networks and the Impetus to Innovate

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….. the primary purpose of this chapter, is to propose a 3rd 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.

Organizational and Managerial Explanations of Failure: When Tom West, Data General’s project leader and a former long time Digital employee, removed the cover of the DEC minicomputer and examine its structure, he saw “Digital’s organization chart in the design of the product”

Capabilities and Radical Technology As an Explanation: They found that firms failed when a technological change destroyed the value of competencies previously cultivated and succeeded when new technologies enhanced them.

Value Networks and New Perspective on The Drivers of Failure: the concept of the value network — the context within which a firm identifies and responds to customers’ needs, solves problems, procures input, reacts to competitors, and strives for profit — is central to this synthesis… 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.

Those technologies whose attributes make them valuable only in networks with lower gross margins, on the other hand, will not be viewed as profitable, and are unlikely to attract resources or managerial interest.

How Established Firms Approach Disruptive Tech:
Step 1. Disruptive Technologies Were First Developed within Established Firms
Step 2. Marketing Personnel Then Sought Reactions from Their Lead Customers.
Step 3. Established Firms Step Up the Pace of Sustaining Technological Development.
Step 4. New Companies Were Formed, and Markets for the Disruptive Technologies Were Found by Trial and Error.
Step 5. The Entrants Moved Upmarket.
Step 6. Established Firms Belatedly Jumped on the Bandwagon to Defend Their Customer Base.

This is not because the technology is too difficult or their organizational structures impede effective development, but because their resources will become absorbed in fighting for and defending larger chunks of business in the mainstream disk drive value networks in which they currently make their money.

“The most formidable barrier the established firms faced is that they did not want to do this.”

Chapter 3 Disruptive Technological Change in the Mechanical Excavator Industry

As a general rule, the established firms saw the situation the other way around: they took the market’s needs as the given. They consequently sought to adapt or improve the technology in ways that would allow them to market the new technology to their existing customers as a sustaining technology.

Each cable shovel manufacturer was one of at least twenty manufacturers doing everything they could to steal each others’s customers: if they took their eyes off their customers’ next-generation needs, existing business would have been put at risk… they did not fail because management was sleepy or arrogant. They failed because hydraulics didn’t make sense — until it was too late.

What Goes Up, Can’t Go Down

Rational managers, as we shall see, can rarely build a cogent case for entering small, poorly defined low-end markets that offer only lower profitability.

Moving upmarket toward higher-performance products that promised higher gross margins was usually a more straightforward path to profit improvement. Moving downmarket was anathema to that objective.

Bower notes that most proposals to innovate are generated from deep within the organization not from the top. Projects that fail because the market wasn’t there have far more serious implications for managers’ career.

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.

Part 2 Managing Disruptive Technological Change

The very decision-making and resource-allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: (1) listening carefully to customers; (2) tracking competitors’ actions carefully; (3) investing resources to design and build higher-performance, higher-quality products that will yield greater profit.

Chapter 5 Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them

Customer focused resource allocation and decision-making processes of successful companies are far more powerful indirecting investments than are executives’ decisions.
Reflecting on my case, it is quite similar. Regardless of exec asks, if resources are focused on current customers, there is no possibility for local leadership to invest at the exec’s wish on a strategic project.

Good resource allocation processes are designed to weed out proposals that customers don’t want. This is how things must work in great companies. They must invest in things customers want — and the better they become at doing this, the more successful they will be.

Non-executive participants make their resource allocation decisions based on their view of how their sponsorship of different proposals will affect their own career trajectories within the company. Individuals’ career trajectories can soar when they sponsor highly profitable innovation programs.

Managers harness, rather than fought, the forces of resource dependence: they spun out independent companies to commercialize the disruptive technology. The manager chose to fight these forces, and survived the project, exhausted.

Chapter 6 Match the Size of the Organization to the Size of the Market

The leadership is more crucial in coping with disruptive technologies than with sustaining ones, and that small, emerging markets cannot solve the near-term growth and profit requirements of large companies.

Good managers are driven to keep their organizations growing for many reasons…. company growth creates room at the top for high performing employees to expand the scope of their responsibilities. When companies stop growing, they being losing many of their most promising future leaders, who see less opportunities for advancement.

Chapter 7 Discovering New and Emerging Markets

Amid all the uncertainty surrounding disruptive technologies, managers can always count on one anchor: Experts’ forecasts will always be wrong. It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be. An important corollary is that, because markets for disruptive technologies are unpredictable, companies’ initial strategies for entering these markets will generally be wrong.

Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources so that new business initiatives get a second or third stab at getting it right.

Careful planning, followed by aggressive execution, is the right formula for success in sustaining technology. But in disruptive situations, action must be taken before careful plans are made. There must be plans for learning rather than plans for implementation.

Chapter 8 How to Appraise Your Organization’s Capabilities and Disabilities

To succeed consistently, good managers need to be skilled not just in choosing, training and motivating the right people for the right job, but in choosing, building, and preparing the right organization for the job as well.

Organizational Capabilities Framework
Three classes of factors affect what an organization can and cannot do: its resources, its processes, and its values.

• Resources, the most visible of the factors that contribute to what an org can and cannot do. Resources include people, equipment, tech, product designs, brands, info, cash, relationship. Resources are usually things or assets — they can be hired and fired, bought and sold, depreciated or enhanced.
• Processes. The patterns of interaction, coordination, communication, and decision-making through which they accomplish these transformations are processes. There are formal and informal processes — the habitual routines or ways of working that have evolved over time, which people follow simply because they work. Processes are defined de facto to address specific tasks. A process defines an ability in executing a certain task concurrently defines disabilities in executing other tasks. The very mechanism through which organizations create value are intrinsically inimical to change.
• Values. (ref Vision to values) The values of an organization are the criteria by which decisions about priorities are made. The larger and more complex a company becomes, the more important it is for senior managers to train employees at every level to make independent decisions about priorities that are consistent with the strategic direction and the business model of the company.

Once members of the organization being to adopt ways of working and criteria for making decisions by assumptions, rather than by conscious decision, then those processes and values come to constitute the organization’s culture. Culture enables employees to act autonomously and causes them to act consistently.

Managers who determine that an organization’s capabilities aren’t suited for a new task, are faced with three options through which to create new capabilities:

• Acquire a different organization whose processes and values are a close match with the new task.
• Try to change the processes and values of the current organization.
• Separate out an independent organization and develop within it the new processes and values that are required to solve the new problem.

Processes are very hard to change for two reasons:

• Organizational boundaries are often drawn to facilitate the operation of present processes.
• New process capabilities are hard to develop because managers don’t want to throw the existing processes out — the methods work perfectly well in doing what they were designed to do.

Chapter 9 Performance Provided, Market Demand, and the Product Life Cycle

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

Performance oversupply triggers a fundamental change in the basis of competition in the product’s market: the rank ordering of the criteria by which customers choose one product or service over another will change, signaling a transition from one phase to the next of the product life cycle.

In hard disk drive case, the smallness of the drive began to matter more than other features.

Buying Hierarchy

Product evolution in 4 phases: functionality, reliability, convenience, and price.

Characteristics of Disruptive Technologies

1. The weakness of disruptive technologies are their strengths. There is no known market for the disruptive technology and it doesn’t make sense for established companies to invest there.
2. Disruptive technologies are typically simpler, cheaper, and more reliable and convenient than established technologies. Established companies are so prone to push for high performance, high profit products and markets, they find it very difficult not to overload their disruptive products with features and functionality (like Apple’s Newton PDA).