Book Report: the Innovator S Dilemma

Book Report: The Innovator’s Dilemma

Ms.G[at]NoitacudE.com INF385q March 24, 2005

Book Report: The Innovator’s Dilemma

This book is “scary”

That’s a quote form the CEO of Intel. The reason the CEO of a large, successful, and technologically innovative company is scared is because this presents strong evidence that great companies can steer straight into their own demise by doing what they do best and doing what usually is exactly what they should do. The threat that looms for large successful companies is not that they will fail to innovate; it is that they will fail to establish themselves in the seemingly trivial markets that emerge due to certain kinds of technological innovations—and then fail when the larger markets eventually shift as well. The kinds of technological innovations that cause these disruptions are named disruptive technologies.

What is the Dilemma?

The “innovator’s dilemma” referred to by Christensen in this book is the dilemma of recognizing when to respond to technological change in a way that is fundamentally different from that which usually works for large, successful businesses. The dilemma is that of recognizing which of two types of technological innovations are looming on the horizon for a particular industry. The two types of technological innovations posited by Christensen are sustaining technologies and disruptive technologies. For each of these, the “threats” posed to an industry, and the potentially successful responses to them, differ in fundamental ways. Christensen analyzes cases in recent history where industry giants have been toppled by disruptive technologies, and seeks insights from the cases of those who have successfully exploited disruptive technologies. Ultimately, Christensen presents a model for recognizing the advent of disruptive technologies and choosing responses that are most likely to succeed.

What are Disruptive Technologies?

According to Christensen, sustaining technologies are innovations that large businesses can, and often do, take advantage of to increase product performance, to meet or surpass the rising demands of their existing customers, and thus to increase or at least sustain large profit margins. Sustaining technologies may be true innovations and may be quite challenging to achieve, requiring substantial investments in R&D. The difference between these and disruptive technologies is not one of degree of innovation. In fact, Christensen identifies disruptive technologies as those which, at the outset, offer lower performance but are typically cheaper, smaller, simpler, and more convenient to use. Disruptive technologies are often an innovation in assembling readily-available components. Another critical defining aspect of disruptive technologies is that they initially penetrate small markets that are outside of the mainstream (and thus beyond the attention) of the large markets that they ultimately disrupt.

A Graphic Example—Downmarket vs. Upmarket

[source: http://web.mit.edu/6.933/www/Fall2000/teradyne/clay.html]

The graph above depicts a fundamental idea in the book, and one that is relatively simple to understand. Most technologies enable incremental improvements in product performance over time. Markets also typically demand incremental improvements in products over time (not properly indicated in the graph).

There are two additional aspects of market demands that also matter. One is that there is usually a “high end” and a “low end” of any market (in terms of the level of performance demanded and concomitant profit margins), and most companies are striving towards the higher end over time. As companies strive “upmarket” and compete aggressively, technological improvements often outpace the increase in market demand and eventually “overshoot” the market. Meanwhile, the low end of the market becomes open to those who can sell simple products that meet basic needs cheaply.

This might not be such a big problem if things stood still there. The scary prospect is that the demands of the low end of the market could be met with a new technology that is simpler, more convenient, smaller, and easier to make—and this technology will also be improved upon over time. Eventually, the market is overthrown “from below,” from where no one expected it to come. Worse still, the companies that were first to implement the disruptive technology in the emerging market have an almost-magical advantage that enables them to grow in this market faster than any late-comers—even big companies that belatedly scramble to offer equally-good products.

Thus, the “innovator’s dilemma” is the challenge of seeing these threats coming, and knowing to respond to them with an entirely different kind of innovation. Furthermore, the appropriate response to disruptive technologies, according to Christensen, has little to do with technology so much as with organizational structure and marketing habits. That’s also scary.

What are the Two Different Responses?

Christensen’s theory is that there are different strategies that are likely to succeed in the face of disruptive technologies as compared to sustaining technologies. Briefly, they are summarized as follows:

Sustaining technologies—look “upmarket”

· Listen to existing customers.

· Invest aggressively in technologies that give those customers what they want.

· Seek higher margins.

· Target larger markets over smaller ones.

· Being good matters more than being first.

These are strategies that large, successful companies do well and should keep doing as long as there is still room “upmarket.”

Disruptive technologies—look “downmarket”

· Recognize a disruptive technology emerging.

· Create a smaller, separate organization to match emerging and unique market(s).

· Plan for trial and error. Be able to modify products and explore the market(s).

· Expect low margins, small market(s), and slow growth.

· The weaknesses of the disruptive technology in the mainstream market may be its strengths in an emerging market.

· Being first matters more than being good.

These strategies are generally antithetical to large, successful companies, and could indeed be the wrong thing to do in the face of sustaining—rather than disruptive—technologies. Therein lies the dilemma.

Why Size Matters

One more important concept to understand in Christensen’s theory—and one that is not so new—is that of the value network. Essentially, a value network is the context in which a company identifies and responds to its customers, acquires resources, competes, and strives for profit. Christensen explains:

Within a value network, each firm’s competitive strategy, and particularly its past choices of markets, determines its perceptions of the economic value of a new technology. These perceptions, in turn, shape the rewards different firms expect to obtain through pursuit of sustaining and disruptive innovations. 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. [page 36]

Historical Evidence

Christensen presents enough historical evidence, from a variety of industries, to make a compelling case. He presents the computer hard-disk-drive industry in the greatest depth, recounting how several different sizes and types of drives were invented, introduced, improved, and abandoned between the 1970s and 1990s. Each new type of drive was smaller but lower-performing than the dominant drives at the time. Each new size of drive entered into the marketplace through applications that were far outside the customer base of the dominant drive manufacturers. But eventually, each new size of drive moved “upmarket,” meeting the performance needs of the mainstream markets, and outselling the previously-mainstream drives. Also, in all but a few cases, small, independent companies pioneered the newer-sized drives and generally took over the markets. When the large companies tried to make their own versions of the new drives, they were usually too late—even if they made better drives than the pioneer companies did.

Christensen finds this pattern repeating so many times that he likens it to a natural force—such as gravity—that we are powerless to fight and ought to learn to work with.

Christensen includes these other examples of disruptive technologies in history:

· Hydraulic excavators

· Steel minimills

· Discount retailers (such as Walmart)

· Honda motorcycles (initially, the Supercub)

· Several waves of Japanese cars

· Insulin injection pens for diabetics

Christensen also includes these examples of failed attempts by large companies to implement disruptive technologies with the wrong strategies:

· DEC’s personal computers

· CDC’s 8-inch hard drives

· IBM’s Kittyhawk 1.8-inch hard drive

· Woolworth’s “discount” retail chains (Woolco)

· Harley Davidson’s small Italian motorcycles

· Apple’s Newton

· Eli Lilly’s genetically-engineered insulin

· DaimlerChrysler merger

· Large automakers’ electric cars

In every case, Christensen shows that these companies’ value networks conflicted with their ability to match the opportunities of the emerging disruptive-technology markets.

What Does All This Have to Do with Knowledge Management?

I asked myself that question about halfway through this book (because the book was assigned in a Knowledge Management course). This simple answer is a recurring refrain in the class: “knowledge management is often just good management.” The deeper answer is that when and how to cultivate innovation is fully a knowledge management problem, and the problem is a different one when dealing with sustaining versus disruptive technologies. Many cases we’ve studied in the class relate the success of knowledge management initiatives to the receptiveness of an organization’s culture. Putting this in Christensen’s perspective, companies are strongly controlled by their value networks, and addressing disruptive technologies means no less than changing the nature of a company. That’s why it’s such a dilemma.

What to Do?

What does one do if one is worried about this? Well, read the book. Which is to say that the ideas seem too simple and abstract to be useful until you’ve read the repeated and wide-ranging cases in the book. I recommend the book anyway, because it passes one of my measures for a good book—it immediately made me think and begin to see new connections all around me. And by the end of it, I had really begun to think about the industry that I currently work within.

Should the Textbook Industry Be Worried?

I can’t help but wonder if the textbook industry should be worried about threats from disruptive technologies. Granted, there are many peculiarities about the industry that make it not quite like a typical “market” for cars or computers. (The textbook industry is highly regulated, occasionally politically charged, and derives much of its income from public funds.) Furthermore, schools have resisted change quite well for decades. But there is now palpable upheaval now in schools are managed and funded in the US and other developed countries.

So, as prompted by Christensen, I’ve considered the following:

What disruptive technologies might confront the textbook industry?

· The Internet (seems obvious and belated, but it’s just starting to really penetrate schools)

· E-publishing, e-books (anyone can “publish” online)

· Handhelds, laptops, ubiquitous computing (most people are “plugged in” in some way and “online” regularly)

· Online direct-ordering (such as the Dell or Amazon models; people begin to expect such convenience of all businesses, and turn first to the Net for their needs)

· Online, open content-sharing repositories (such as Wikipedia or e-libraries; non-profits and non-professionals with good intentions can do a lot through collaborative community websites)

What off-the-radar, low-end markets might there be for whatever-will-replace-textbooks?

· Small schools, charter schools, private schools, experimental and “laboratory” schools

· International schools (especially if language translations were provided)

· Tutors and parents who want to supplement or supplant a child’s schooling

· Teachers who are very concerned and involved in customizing their own curricula

· State agencies that want to determine baseline curricula while allowing teachers flexibility

· Kids

If there are disruptive technologies looming (if my hunches above are not, rather, sustaining technologies), the question is then whether any of the large textbook companies can effectively rise—er, lower—to meet the challenge. Or, perhaps, are there new markets already being forged? I do certainly sense that if the industry wants to reinvent itself for the digital age, it will need to change a lot more than software. It may even change customers.

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