The Innovator’s Dilemma

During your lifetime you’ve likely seen a big, successful company crumble, despite maintaining a lead for so long it looked impossible for them to be de-throned.

In the book, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Clayton Christensen shows us just how this happens.

In short, while the top companies in any given field have the resources to out-perform their competitors with sustaining technology, it’s the disruptive technologies that most often lead to their demise.

One of the standout characteristics of these large companies that fail is their delayed adoption of disruptive innovations -- their refusal to adapt, to change with the times.

Another common trait is these companies get so invested in sustaining technologies that their products and services often outlive the demand of their customers.

In order words, they continue to invest their resources into improving areas that no longer matter, missing they product-market fit all together.

However, not all good companies have to come to an end.

Christensen believes there are ways for big companies to stay agile and compete with the up-and-comers in disruptive innovations. In fact, he argues that management is the primary contributor to many companies failure and it has nothing to do with their engineering or tech teams.

Sustaining Innovations vs. Disruptive Innovations

Sustaining innovations are established technologies and features that mainstream customers in a given market expect from products and services.

Most established brands in an industry excel at sustaining technologies, making it difficult for new companies to jump in and compete directly, let alone differentiate themselves.

Let’s rewind to the 90s and imagine a company that makes home phones.

Home phones, a sustaining innovation at the time, were transforming from clunky contraptions with messy cords to slick, cordless versions with digital screens.

Simultaneously, cell phones were gaining more traction and by the time the decade was over, no one cared about the quality of their home phone. Many were dropping the landline and going 100% mobile.

Disruptive innovations, like the cell phone, start by capturing emerging markets with a new technology.

In general, disruptive innovations usually perform poorly at first because people are reluctant to change and often don’t trust the unknown.

They are also straightforward most of the time, typically providing a slight improvement or change to a sustaining innovation.

In the case of the cellphone, the change was small but very powerful.

Instead of having to be at home, you could place and receive calls from anywhere. This simple disruptive innovation transformed an entire industry, created several new industries, and pushed the world forward technologically.

Once the value proposition of a product or service exceeds market demand, it loses its value and becomes a commodity.

For example, for many years, Blackberry dominated the business market for cellphones, thanks to their full QWERTY keyboard that made texting and sending emails from a cellphone extremely easy.

However, once market demand shifted to the touch screen, no one cared how much Blackberry had improved their keyboard -- it became a commodity.

Jumping into emerging markets and adopting disruptive innovations, however, comes with a risk. There’s always a chance it won’t take off and this happens often, but if you wait too long, you also run the risk of increased competition and playing catch-up with early adopters. It’s a delicate balance.

The Five Principles of Disruptive Technologies

According to Christensen, management is responsible for maintaining their company’s competitive edge as the market changes.

The difference between companies that stand the test of time and those that fail has less to do with the technology itself and more to do with how the organization is run.

Below are Christensen’s five principles of how disruptive companies are run and why the are successful:

#1. Customers determine how resources are allocated

Well-run companies are driven by their customers and the needs of their buyer personas. As the demands of their customers evolve, disruptive companies follow their lead to accommodate.

There are three separate approaches to this principle that organizations can take:

1. Align the entire company with a disruptive innovation. This is risky for established companies because it often leads to losing market share of sustaining innovations. Plus,  most large firms are not willing to change their ways for something that may not work long term.
2. Align the entire company to split their focus between sustaining and disruptive innovations. The biggest problem with this approach is that it usually leads to underperformance in both areas because key team members are often forced to bounce back and forth between projects. Ideally, you want to give something your all before ruling it out.
3. Create a separate unit, spin-off brand, or acquire a new business that is solely dedicated to disruptive innovations. According to Christensen, this is the best option. It allows established firms to maintain their competitive position in sustaining innovations while still meeting new demands in emerging markets.

A company that has adopted the third approach is Google. The search engine giant has remained disruptive because they are quick to acquire the best and brightest in emerging markets while still maintaining their lead in sustaining technologies such as their search engine and email service.

#2. Small markets don’t solve the growth needs of large companies

Large companies are under tremendous pressure from shareholders to consistently grow. However, when you’re already a massive organization, small markets don’t provide enough opportunity to move the dial.

With this in mind, Christensen suggests management of large companies focus on growing profits and dominating the areas of sustaining innovations. Entering an emerging market will do little to nothing for the short-term growth of large companies.

However, to prevent the risk of entering an emerging market too late, large companies need to create a small unit dedicated to disruptive innovations or they should acquire a firm that is already doing so.

#3. Markets that don’t exist cannot be analyzed

Disruptive technologies require a high tolerance for failure because there is always a period of trial and error in the beginning. While succeeding in sustaining innovations is largely determined by execution, success with disruptive technologies requires discovery and learning.

(Think of it as conversion rate optimization. You’ll never know if you don’t test.)

In addition, to the lack of information, a challenge facing established brands is that disruptive technology often doesn’t fit into their current business model or the model of their distributors.

#4. An organization’s capabilities define its disabilities

According to Christensen, organizations consist of resources, values, and processes. The problem is companies focus too much on where they use their resources and don’t examine whether their values and processes for sustaining innovations are the best choices for disruptive innovations.

Christensen argues that managers are often great at figuring out whether an employee is the right fit for a particular project or not, but they don’t apply that same skill to deciding which values and processes will work for different innovations. Disruptive innovations require new processes and often new values, as well.

#5. Technology supply may NOT equal market demand

The strongest features or qualities of a disruptive technology in an emerging market are the exact same qualities that make it unattractive in an established market. According to Christensen, companies with disruptive innovations should look to find new markets that value the product, while ignoring established markets until the demand is there.