The Innovator's Dilemma: The Revolutionary Book that Will Change the Way You Do Business (Collins Business Essentials)

Along with Crossing the Chasm, this book will be a classic on managing innovation. Crossing the Chasm looks at innovation from the perspective of the upstart. The Innovator's Dilemma looks at it from the current market leader. If these two books don't get your entrepreneurial juices flowing, do something else.

This is a book is about successful, well-led companies -often market leaders- that carefully pay attention to what customers need and that invest heavily in new technologies, but still loose their market leadership suddenly. This can happen when disruptive technologies enter the stage. Most technologies improve the performance of existing products in relation to the criteria which existing customers have always used. These technologies are called sustaining technologies. Disruptive technologies do something different. They create an entirely new value proposition. They improve the performance of the product in relation to new performance criteria. Products which are based on disruptive technologies are often smaller, cheaper, simpler, and easier to use. However, the moment they are introduced, they can not at once compete against the traditional products and so they cannot directly reach a big market. Christensen researched how disruptive technologies have developed in the computer disk industry, an extremely rapid evolving industry. He identified six steps in the emergence of disruptive technologies:

1. Disruptive technologies often are invented in traditional large companies. Example: at Seagate Technology, the biggest producer of 5,25 disks, engineers in 1985 designed the first 3,5 disk.

2. The marketing department examines first reactions from important customers to the new technology. Then they notice that existing customers are not very interested and they conclude that not a lot of money can be made with the new product. Example: this is what happened at Seagate. The 3,5 disk's were put upon the shelf.

3. The company keeps on investing in the traditional technology. Performance improvement of the traditional technology is highly appreciated by existing customers and a lot of money is being made. Example: Seagate invested in the 5,25 disk technology. This led to considerable improvement of the technology and to a considerable improvement of sales.

4. New companies are started up (by ex-employees of the traditional companies) and markets for the new technology emerge by trial and error. Example: ex-Seagate people started up Corner Peripherals. This company focused on the small emerging market for 3,5 inch disks. In the beginning this was only for the laptop market.

5. The new players move up in the market. The performance of the new technologies gets better after some time, enabling them to compete better and better with the traditional companies and products. Example: the performance of the 3,5 disks improved drastically. The 3,5 inch disk moved up in the market, to the personal computer market. Corner pushed Seagate out of the PC market for 3,5 inch disk drives.

6. Traditional companies try to defend their market position and to get along in the new market. Often they notice that they have fallen behind so far, that they cannot keep up. Example: Seagate did not succeed in capturing a significant part of the new market for 3,5 inch disk drives for PC's.

The events described above can be understood by the four principles of disruptive technologies which Christensen formulates:

1. In well-led companies it is customers, not managers, who actually determine resources allocation. This is a proposition of the resources dependence theory (Pfeffer & Salancik, 1978) which is supported strongly by the research of Christensen. In essence: middle managers will not tend to invest in technologies that are not directly appreciated by important (large) clients, because they will not be able to get quick financial gains by doing this.

2. Small markets can not fulfil the growth need of large companies. For several reasons, growth is important for companies. Unfortunately, the bigger the company, the harder it is to continue growth. A small company (40 million sales) with a growth target of 20%, must achieve 8 million extra sales. A large company (4 billion sales), has to achieve 800 million of extra sales! Emerging markets often simply are not large enough to fulfil such growth needs. They can, however, fulfil the growth needs of new small companies.

3. Markets that do not exist can not be analysed. The ultimate applications of disruptive technologies can not be foreseen on forehand. Failure is an intrinsic unavoidable step to success.

4. Technology supply does not always equal the market demand. The speed of technological progress is often bigger than the speed with which the customer demand develops. By improving the performance of the disruptive technologies (for instance the 3,5 inch disks, first only used in the laptop market), they became suitable for the larger PC-market.

These steps explain why traditional companies are often not capable of applying disruptive technologies. Christensen argues that you can not resist these four principles. What you can do however, is use them to your advantage. For instance: in a large company you can create an 'island' where the new technology is developed for the new market. Also it is possible get an ownership in emerging companies which develop the new technologies (several companies have done this successfully).

I think the innovator's Dilemma is an excellent book. The ideas are empirically foudend and together they form a coherent theoretical framework. The examples from the computer disk industry, the steel industry and others, are very well-documented and interesting. The book is logically structured and reads easily.

The Innovator's Dilemma explores how the creation of new technologies can cause companies to lose market share or their markets entirely, even companies that do everything right such as listening to their customers, watching the marketplace, and investing in research and development. The author argues that, while existing thriving companies can be successful with sustaining technologies, these same companies often falter with the advent of disruptive technologies. They either often do not want to put their resources into developing the new technology, because their existing customer do not want it or they attempt to fit the new technology into the existing market instead of looking to create new markets for the new product which generally doesn't work. Both of these decisions cause the company to lag in the development of the disruptive technology and eventually wither away to the competition of smaller companies that focused on developing the eruptive technology.

The dilemma examined is, while it is important for companies to give their customers what they want to be successful in the present, they need to know when to begin to move their resources into technologies or services t hat represent the moneymakers and markets of tomorrow. Though concentrating mainly on the disk drive industry, the author also looks at the retailing industry, pharmaceutical industry, and automobile industry including the development of the electric car, among others. Examples of disruptive technologies include the evolution of disk drives from 14 inch to 8 inch to 5.25 inch to 3.5 inch to 1.8 inch, the introduction of off-road motorcycles to North America. The replacement of transistors by vacuum tubes, and the creation of discount retailers such as K-Mart. Sustaining technologies are those that improve upon existing products or technologies 'along the dimensions of performance that mainstream customers in major markets have historically valued'. Most advances in technology have been sustaining in nature, which may very well be one reason why, when faced with a disruptive technology, ordinarily successful companies fail with regards to those disruptive technologies. Another reason for successful firms failing to capitalize on disruptive technologies, this goes against what is normally considered 'rational financial decision-making'.

Generally, disruptive technologies have low profit margins, are geared to 'emerging or insignificant markets', and a company's best customers usually do not want, need, or cannot use the disruptive technology. The author outlines four basic principles to successfully deal with disruptive innovations which he likened to man first learning how to fly. In the introduction, he wrote that when man first learned to fly, he ignored the basic principle of physics. Once the basics principles of physics were recognized and put to use, man was able to fly. Similarly, he argues that once managers recognize and utilize the principles of disruptive innovation, they will be able to successfully deal with such innovations. These principles are: Companies Depend on Customers and Investors for Resources. Small Markets Don't Solve the Growth Needs of Large Companies. Markets That Don't Exist Can't Be Analyzed. Technology Supply May Not Equal Market Demand. These four principles are discussed in the firs half of the book. The author argues that if managers can understand and use these four principles when faced with disruptive technologies, they then can and will be able to effectively navigate through those unknown waters. One of the reasons put forth for repeated failures is that the then-successful companies focused solely on providing what their customers wanted and neglected to look to or invest in nascent technologies. Their total customer focus caused them to lose sight of new and potentially lucrative markets and products. Also put forth as a reason for these failures is the companies' fears of cannibalization; that us is, the companies feared that the new disruptive technology would be purchase at the expense of their more successful products. However, as he points out, disruptive technology never initially replaces and existing technology, and , as such , the short term fear of cannibalization of existing high profit products is unfounded. When and established company waits to introduce a disruptive technology until the market for that product is already established, then the fear of cannibalization is much more real.

The author looks also to value networks to determine whether or not a company will be successful with regards to disruptive technologies. A value network is essentially the framework that a company uses to solve problems, deal with its customers, and generally do its business. It is from within this network that marketing decisions and 'perceptions of the economic value of a new technology' are formulated. As can be deduced, a large, established firm will have different marketing plans and value perceptions of a new product for a small or unknown market than would startup or smaller company. Often times it is through this value network that the decisions to pas on a new technology are made. Shadow prices are discussed in relation to how different value networks view the varying characteristics of the product. The author outlines six steps in the evolution of a disruptive technology: Disruptive technologies were first developed within established firms. Established firms may have chosen not to market the technology, but they knew how to develop it. Marketing personnel then sought reactions from their lead customers. The most important customers have no use at the moment for the new technology and, therefore, show little interest in it. Established firms step up the pace of sustaining technological development. They do this in order to keep up with the needs of their current customers and thereby 'win the competitive wars against other established firms which were making similar improvements'. By taking this tack, established firms neglect possible competition from entrant companies with disruptive technologies. New companies were formed, and markets for the disruptive technologies were found by trial and error.

Often the people who developed the disruptive technologies at the established firms would leave and form their own companies to market their innovations. In the process, they would develop and new market. The entrants moved up-market. Once these new companies developed their own markets, they were able to make some changes to their products and begin to move in on the established firms. Established firms belatedly jumped on the bandwagon to defend their customer base. By this point, it is generally too late for the established firms. Those that succeed in getting the new technology to market generally don't get any significant market share. They basically just hang on. The author examined companies such as Apple, Hewlett-Packard, Kresge, Woolworth's, and Honda. He concluded that the successful managers took the following steps when faced with disruptive technologies. They embedded projects to develop and commercialize disruptive technologies within an organization whose customers needed them. When managers aligned a disruptive innovation with the 'right' customers, customer demand increased the provability that the innovation would get the resources it needed. They placed projects to develop disruptive technologies in organizations small enough to get excited about small opportunities and small wins. They planned to fail early and inexpensively in the search for the market for a disruptive technology. They found that their markets generally coalesced through an iterative process of trial, learning and trial again. When commercializing disruptive technologies, they found or developed new markets that valued the attributes of the disruptive products, rather than search for a technological breakthrough so that the disruptive product could compete as a sustaining technology in mainstream markets. The decision making process that the MBA students learn at Business Schools, including decisions under risk, the minimization of regret, etc., would be among the proper and useful methods to use when making decisions regarding sustaining innovations according to the book. However, it seems that the author is arguing that it is these exact decision analyses that often cause firms to fail when faced with disruptive technologies.

Disruptive technologies have to be analyzed using different decision models and that is what The Innovator's Dilemma sets out to demonstrate. The Innovator's Dilemma shows that, if addressed properly, disruptive technologies can prove highly successful and profitable. If addressed using the common decision-making approach best geared for everyday issues and sustaining technological improvements. Then disruptive technologies could prove to be a disaster for the existing staid corporation

The Innovator's Dilemma offers a compelling explanation forwhy large and well-respected firms lose their dominant positionswithin a market, following what Christensen styles as `disruptive innovation'.

Innovation takes two forms: sustaining and disruptive. Competition in oligopolistic markets is manifest in continuous product improvement, or sustaining innovation. This contrasts with a disruptive innovation, which fundamentally changes a product's nature, offering new functionality, although often at the expense of performance.

Typically, when disruptive innovation occurs, incumbents will reject the new technology; where markets do exist for such innovative products, they tend to be small and offer slim margins. Despite this, the book cites evidence of upstart firms with a low cost configuration and lower profit expectations, which have successfully exploited these marginal opportunities.

Refinement of the innovative product to a standard acceptable to traditional customers coupled with additional functionality enables the niche player to compete head on with established firms. They do so by pricing aggressively. Market incumbents typically respond by quickly incorporating the innovative technology into their products, only to find that they are able to make little impact in the developing new market (weak brand name) and cannibalise their existing customer base at lower margins. A new technology standard has been set.

The few firms that have survived a disruptive innovation have embraced the new technology early and recognised the need for a different approach to operation within the market. This demands a different corporate mentality and ultimately, organisational design, which is only possible by establishing a virtually autonomous and sometimes geographically separate subsidiary. Eventually, this may reverse acquire the parent.

The Innovator's Dilemma provides an interesting perspective on a seemingly recurrent problem. It does so in a fashion that is both insightful and easy to read. The main themes in the book are qualified with numerous examples and some rudimentary analysis, whilst avoiding being unduly repetitive.

This book clearly deserves more than five stars. It has positively influenced more technology executives than any other book.

The book does a wonderful job of explaining how traditions, bureaucracy, disbelief about the potential of new technologies, and misconceptions about the market hurt companies. Professor Christensen is a Boston Consulting Group alum, as am I, and that firm has been very interested in the question of why dominant firms lose out to new entrants featuring innovative technologies. Professor Christensen has written the best work on this subject that it has been my pleasure to read. Unlike most academics, he is rigorous without being dull or irrelevant to those who must operate businesses. I particularly found his exploration of the differences between a sustaining and a disruptive technology to be very useful. His insights into how accounting and financial concerns can "stall" organizational progress were also valuable.

His cases (especially the hard disk ones) accurately capture many of the classic "stalls" that delay organizational progress. For example, tradition says that everyone focuses on serving the current customers. That's where the bread and butter are. Also, the overhead structure is established to serve those current needs.

Both perspectives no longer serve when a disruptive technology is involved, and he persuasively argues that being first with disruptive technologies is usually very important.

Bureaucracy comes into play because the authorization process requires a lot of confidence by those who will bet their careers that the market and financial projections will be achieved. The bureaucracy also increases the likelihood that an error will be made, or an unnecessary delay will occur.

Disbelief comes from the tendency to misdefine who the customers will be and to underestimate the long-term potential of the technology. Professor Christensen puts in some nice technology development/time charts in to show how to better anticipate a new technology expanding from a lower need-defined market into the mainstream market.

Misconception comes in because people misunderstand the danger of the disruptive technology, and how to manage it. THE INNOVATOR'S DILEMMA is very hepful here because it provides a model of best practices to cure the misconception stall here.

Three other stalls are often important: Procrastination (delaying when delay is costly); Ugly Ducklings (avoiding what is unattractive, physically or financially); and Communications (not getting the message or not understanding the message). I suspect all 3 play a big role in the cases here, but I could not tell from the way the cases were written. I hope in his future work, Professor Christensen will also tie his thinking into the idea of innovation itself.

I personally favor an 8 step process for improving innovation. One, measure everything you can in an area to understand how the measurements can help you improve. Two, apply the same approach to your most important activities. Be sure to consider how and why noncustomers do not find your offerings appealing. Three, seek out the best practices in other industries in these important activities, and estimate where these best practices will be in five years. Four, assemble a new combination of best practices from these cases that goes beyond what any one company will be doing in five years. Five, imagine the best that anyone will ever be able to do, ever, as the ideal best practice. In the case of disruptive technologies this would involve spotting them well in advance and being able to pursue them without pain to the rest of the organization, and pursuing very rapid adoption that leads to dominating the new marketplace. Six, find ways to approach the ideal best practice. Seventh, put the best people, resources, and incentives together to create great success in exceeding the future best practice and approaching the ideal best practice. Eight, repeat steps one through seven.

Do buy, read, and apply the lessons of THE INNOVATOR'S DILEMMA. This is pure gold. Also, send Professor Christensen a friendly note to encourage him to do more studies like this one on innovation. He deserves our support.

I also suggest that you set up some skunk works to advance potentially disruptive technologies, as a way to develop more experience in improving your innovative potential. You may also wish to study Cisco's attempt to be technology agnostics, to see what you can learn from their experience as well.

Let innovation reign supreme!