March 27, 2022
The Innovator’s Dilemma is a business classic by Clayten M. Christensen. Why do so many good companies consistently fail to deal with certain kinds of technological change? Precisely because good companies are good, explains Christensen. Good companies invest in sustaining technologies, which are generally high-functioning, high-margin, and demanded by customers, instead of disrupting technologies, which start out relatively low-functioning, low-margin, and not demanded by customers.
Christensen:
…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 antennae up, listen astutely to their customers, invest aggressively in new technologies, and yet still lose market dominance.
Such seemingly unaccountable failures happen in industries that move fast and in those that move slow; in those built on electronics technology and those built on chemical and mechanical technology; in manufacturing and in service industries.
Christensen gives the example of Sears Roebuck. At one point, more than 2 percent of all retail sales went to Sears. Sears pioneered important innovations in retailing, such as supply chain management, store brands, catalogue retailing, and credit card sales.
At the very time Sears was being praised as one of the best-managed companies in the world — in the mid 1960’s — the company was ignoring the rise of discount retailing and home centers. Sears also let Visa and MasterCard chip away at the huge lead Sears had in the use of credit cards in retailing.
Christensen offers more examples:
In some industries this pattern of leadership failure has been repeated more than once. Consider the computer industry. IBM dominated the mainframe market but missed by years the emergence of minicomputers, which were technologically much simpler than mainframes. In fact, no other major manufacturer of mainframe computers became a significant player in the minicomputer business. Digital Equipment Corporation created the minicomputer market and was joined by a set of other aggressively managed companies: Data General, Prime, Wang, Hewlett-Packard, and Nixdorf. But each of these companies in turn missed the desktop personal computer market. It was left to Apple Computer, together with Commodore, Tandy, and IBM’s stand-alone PC division, to create the personal-computing market. Apple, in particular, was uniquely innovative in establishing the standard for user-friendly computing. But Apple and IBM lagged five years behind the leaders in bringing portable computers to market. Similarly, the firms that built the engineering workstation market — Apollo, Sun, and Silicon Graphics — were all newcomers to the industry.
Christensen observes that many of these top computer manufacturers were at one point regarded as among the best-managed companies in the world. Yet they failed to invest in disruptive technologies precisely because these leaders focused on the high-performing, high-margin products their customers wanted. Why wouldn’t you focus on the most popular and profitable products?
Christensen says Xerox missed huge growth and profit opportunities in the market for small tabletop photocopiers. And not a single integrated steel company had by 1995 built a plant using minimill technology, even though steel minimalls just two years later captured 40 percent of the North American steel market. Finally, of the thirty manufacturers of cable-actuated power shovels, only four survived the multi-decade transition to hydraulic excavation technology. Christensen comments:
As we shall see, the list of leading companies that failed when confronted with disruptive changes in technology and market structure is a long one. At first glance, there seems to be no pattern in the changes that overtook them. In some cases the new technologies swept through quickly; in others, the transition took decades. In some, the new technologies were complex and expensive to develop. In others, the deadly technologies were simple extensions of what the leading companies already did better than anyone else. One theme common to all of these failures, however, is that the decisions that led to failure were made when the leaders in question were widely regarded as among the best companies in the world.
Christensen asks: Were these firms never well-managed? Quite the opposite:
…in the cases of well-managed firms such as those cited above, 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.
Here’s the lesson:
There are times at which it is right not to listen to customers, right to invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small, rather than substantial, markets.
Christensen defines “technology” broadly as “the processes by which an organization transforms labor, capital, materials, and information into products and services of greater value.”
Part One, chapters 1 through 4, explains why seemingly good decisions lead to failure when it comes to disrupting technologies. Part Two, chapters 5 through 10, offers potential solutions to the innovator’s dilemma — how managers can do the best thing for their company’s near-term health while also investing sufficient resources in potentially disruptive technologies.
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