Home > Poslovno svetovanje > Področja dela > Finančno prestrukturiranje > Clayton M. Christensen: The Innovator’s Dilemma; When new technologies cause great firms to fail

Clayton M. Christensen: The Innovator’s Dilemma; When new technologies cause great firms to fail

Why is success so difficult to sustain? Is successful innovation really as unpredictable as the data suggests? The innovator’s dilemma is when doing the right thing is the wrong thing. The dilemma rears its head when a type of innovation that we’ve termed disruptive technology arises at the low end of the market, in the simplest, most unassuming applications. Thomas Kuhn taught us that the key to proving any theory is to surface anomalies – events or phenomena that the theory cannot explain. It is only by seeking to account for outliers, that researchers can improve the theory.

Principles of disruptive innovations are not to listen to your customer, develop lower-performing products that promise lower margin and aggressively pursue small, rather than substantial, markets.

There is a strategically important distinction between what author call sustaining technologies and those that are disruptive. The pace of technological progress can, and often does, outstrip what market need. Most new technologies foster improved product performance. They can be called sustaining technologies. On the other hand, disruptive technologies bring to a market a very different value proposition than had been available previously. Disruptive technologies underperform established products in mainstream markets. Disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Disruptive technologies typically are first commercialized in emerging or insignificant markets. Leading firms’ most profitable customers generally don’t want, and indeed initially can’t use, products based on disruptive technologies.

Great managers that are faced with disruptive technologies, should be aware of their shortcoming in dealing with those changes:

  • Companies depend on customers and investors for resources.
  • Small markets don’t solve the growth needs of large companies.
  • Market that don’t exist, can’t be analyzed.
  • An organization’s capabilities define its disabilities.
  • Technology supply may not equal market demand.

If you want to understand why something happens in business, study the disk drive industry. Those companies are the closest things to fruit flies that the business world will ever see. Analyzing this industry, you can see when keeping your customers close is a good call. Industry had two types of changes: sustaining and disruptive and two types of companies: established and entrants.

Established firms were leading innovators in every sustaining innovation. The most important disruptive technologies were the architectural innovations that shrunk the size of drives. Disk drives size change was influenced by type of usage. From mainframe to minicomputers, to desktop PC, to portables, to notebooks, … The problem established firms seem unable to confront successfully is that of downward vision and mobility, in terms of the trajectory map. Finding new applications and markets for these new products seems to be a capability that each of these firms exhibited once, upon entry and then apparently lost it.

The fear of cannibalizing sales of existing products is often cited as a reason why established firms delay the introduction of new technologies. Theories about why leading companies stumble when confronting technology change either focus on managerial, organizational or cultural responses to technological change or focus on the ability of established firms to deal with radically new technology. Third theory is based upon the concept of a value network.

Value network – is the context within which a firm identifies and respond to customers’ needs, solves problems, procures input, reacts to competitors and strives for profit. 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. As firms gain experience within a given network, they are likely to develop capabilities, organizational structures and cultures tailored to their value network’s distinctive requirements. The definition of a value network includes also cost structure.

The technology S-curve forms the centerpiece of thinking about technology strategy. The challenge is to successfully switch technologies at the point where S-curves of old and new intersect. A disruptive technology gets its commercial start in emerging value networks before invading established networks.

Competition and customer demands in the value network in many ways shape firms’ cost structure, the firm size required to remain competitive and the necessary rate of growth. Sustaining projects addressing the needs of the firms’ most powerful customers almost always preempted resources from disruptive technologies with small markets and poorly defined customer needs. Characteristic pattern of decision is summarized in the following:

  • 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

The popular slogan “stay close to your customers” appears not always to be robust advice. The value network suggests that technology S-curves are useful predictors only with sustaining technologies. Disruptive technologies generally improve at a parallel pace with established ones – their trajectories do not intersect. The S-curve framework, therefore asks the wrong question when it is used to assess disruptive technology. Value networks strongly define and delimit what companies withing them can and cannot do.

When we think about attacker’s advantage, it is more about flexibility they have in changing strategies and cost structures than technology.

Another industry where we could see how disruptive technologies change the landscape of companies working in the industry is industry of the Mechanical Excavators. First major change was transition to gasoline-powered engines from steam power. This transition was quite successful for established firms. But next major transition was not about power source it was about new lift mechanism, from cables to hydraulic. Entrant firms find new markets, for smaller jobs like sewer and pipeline contracts. After they have taken over that market, they started to push into main market for major construction jobs.

That same model when established firms didn’t pursue disruptive technologies and did not enter into lower markets until that technologies didn’t start to jeopardize their market, can be seen also in steel industry, computers and electric cars.

The boundaries of value network do not completely imprison the companies withing them: There is a considerable upward mobility into other networks. It is in restraining downward mobility into the markets enabled by disruptive technologies that the value networks exercise such unusual power. Moving upmarket toward higher-performance products that promised higher gross margins was usually a more straightforward path to improvement.

To understand limitations in mobility, we should check two different models of resources allocation. First is about top-down, rational decision-making process of resource allocation. Second one is first articulated by Joseph Bower. He notes that most proposal to innovate are generated from deep withing the organization not from the top. As these ideas bubble up from the bottom, the organization’s middle managers play a critical but invisible role in screening these projects. In most organizations, managers’ careers receive a big boost when they play a key sponsorship role in very successful projects. On the other hand, projects that fail because the market wasn’t there have serious implications for managers’ careers.

The most vexing managerial aspect of problem of asymmetry, where the easiest path to growth and profit is up, and the deadliest attacks come from bellow, is that “good” management – working harder and smarter and being more visionary – doesn’t solve the problem. Established firms can be hold captive by customers, financial structure and organizational structure inherent in the value network in which they compete. Downward mobility is hard because of: the promise of upmarket margins, the simultaneous upmarket movement of many of a company’s customers and the difficulty of cutting costs to move down-market profitability.

In steelmaking minimill steelmaking is disruptive technology, because it used scrap steel to produce steel of marginal quality. In 1987 Schloemann-Siemag developed thin-slab casting. It was another disruptive technology.

Good managers:

  • Listen carefully to the customers
  • Track competition
  • Invest resources to design and build higher-performance and higher-quality products that will yield greater profit

This is why great companies failed when confronted with disruptive technological change. There are few principles that you should be aware when faced with disruptive technologies:

  • Resource dependence.
  • Small markets don’t solve the growth needs of large companies.
  • The ultimate uses or applications for disruptive technologies are unknowable in advance.
  • Organizations have capabilities that exist independently of the capabilities of the people who work within them. Organizations’ capabilities reside in their processes and their values.
  • Technology supply may not equally market demand.

Successful managers harness these principles by:

  • They embedded projects to develop and commercialize disruptive technologies within an organization whose customers needed them.
  • 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 utilized some of the resources of the mainstream organization to address the disruption.
  • When commercializing disruptive technologies, they found or developed new markets.

A somewhat controversial theory called resource dependence posits that companies’ freedom of action is limited to satisfying the needs of those entities outside the firm (customers and investors, primarily) that give it the resources it needs to survive. Because they provide the resources upon which the firm is dependent, it is the customers, rather than the managers who really determine what a firm will do. Managers are because of that faced with difficult decision how to face disruptive technology, if customers don’t want it. One of the options is to create an independent organization and embed it among emerging customers that do need the technology. It is very hard to manage coexistence of two cost structures and two models for how to make money, within a single company.

In a few industries has the impact of disruptive technology been felt so pervasively as in retailing, where discounters seized dominance from traditional department and variety stores. Their model is disruptive because their quality of service and selection offered played havoc with the accustomed metrics of quality retailing.

First discount store was Korvette’s in the mid-1950s. They offered known brands at 20 to 40 percent below department store prices. Discounters profit margin was lower, but absolute profit stayed the same, because their turnover was higher. Turn around was about 4 times yearly. Discounters took advantage of their cost structure to move upmarket and seize share from competing traditional retailers at a stunning rate. Kresge (with its Kmart chain) and Dayton Hudson (with the Target chain) succeeded. They both created focused discount retailing organizations that were independent from their traditional business. By contrast, Woolworth failed in its venture (Woolco), trying to launch it from within the F. W. Woolworth variety store company.

In printing ink-jet printing was disruptive technology to laser printing and HP tried to established autonomous organizational unit.

Managers who confront disruptive technological change must be leaders, not followers, in commercializing disruptive technologies. But because of growth demands in established firms, chasing small markets is something managers find hard to decide on. Leadership in sustaining technologies is not as important as in disruptive. Leadership is more important than organizational form in disruptive technologies. Growth is important for managers because of share price, share price is important for motivation through stock plans and for investment capabilities of the company.

Why it is important to look also at small markets, where disruptive technologies can fit: small markets can grow faster, emerging markets are small by definition, the organization competing in them must be able to become profitable at small scale.

Another way how large companies are trying to respond to disruptive technology is to wait for emerging markets to get large enough to be interesting before they enter.

Spinning out business to be small enough so that they chase small opportunities is another response. It can be done in a way to either set up small firm or acquire it.

Markets that do not exist cannot be analyzed. Suppliers and customers must discover them together. Managers who believe they know a market’s future will plan and invest very differently from those who recognize the uncertainties of a developing market. Creating forecast that worked for sustaining technologies, failed badly in disruptive environment. Two important cases where problems of forecasting were visible HP project of Kittyhawk and Honda move into America. Honda wrongly estimated North America market need and after some failures, they actually moved with 50cc motorbike for off-road activities. It was disruptive technology.

Having in mind that in disruptive environment, experts’ forecasts will always be wrong. So, it is important to distance failure of idea from failure of firm. The vast majority of successful new business ventures abandoned their original business strategies when they began implementing their initial plans and learned what would and would not work in the market. Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources (or having a relationship with trusting backers or investors) so that new business initiatives get a second or third stab at getting it right. Those that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail. In disruptive environments they must be plans for learning rather than plans for implementation.

Discovery-driven planning, which requires managers to identify the assumptions upon which their business plans or aspirations are based, works well in addressing disruptive technologies. Markets for disruptive technologies often emerge from unanticipated successes. They often come from watching how products are used and not what customers are saying. Author is calling such approach of discovering agnostic marketing, you will know it, when you experience it.

If employee is capable of successfully executing a job, managers will assess what kind of knowledge, judgement, skill, perspective and energy, is needed to do it. The hallmark of a great manager is the ability to identify the right person for the right job, and to train his or her employees so that they have the capabilities to succeed at the jobs they are given. Organizations also have capabilities, independent of the people and other resources in them.

Three classes of factors affect what an organization can and cannot do:

  • Resources – (people, product designs, brands, information, cash, relationships with suppliers, distributors and customers).
  • Processes – (patterns of interaction, coordination, communication and decision-making). They are formal, informal and cultural.
  • Values – they are criteria by which decisions about priorities are made. They are standards by which employees make prioritization decisions.

The disruptive innovations occurred so intermittently that no company had a routinized process for handling them. In the start-up stages of an organization, much of what gets done is attributable to its resources – its people. Over time, however, the locus of the organization’s capabilities shifts toward its processes and values. At highly successful firms such as McKinsey and Company, the processes and values have become so powerful that it almost doesn’t matter which people get assigned to which project teams. The location of the most powerful factors that define the capabilities and disabilities of organizations migrates over time – from resources toward visible, conscious processes and values, and then toward culture.

Despite beliefs spawned by popular change-management and reengineering programs, processes are not nearly as flexible or “trainable” as are resources – and values are even less so.

Possible ways of handling culture, values and processes change to adjust them to disruptive technologies: acquiring potential companies with such a culture, values and processes; change them internally and spin out new company. Doing it internally is the most difficult way. Spinning out is important to create new values and adjust cost structure to new technologies.

Some have suggested that Wal-Mart’s strategy of managing its on-line retailing operation through and independent organization is not the right way, since they could not leverage Wal-Mart’s logistic. But on-line venture logistic is very different. It is a question of small pick-ups towards mass transportation.

In many ways, the disruptive technologies model is a theory of relativity, because what is disruptive to one company might have a sustaining impact on another.

Historically, when this performance oversupply occurs, it creates an opportunity for a disruptive technology to emerge and subsequently to invade established markets from below. A product becomes a commodity within specific market segment when the repeated changes in the basis of competition, as described above, completely play themselves out, that is, when market needs on each attribute or dimension of performance have been fully satisfied by more than one available product. Differentiation loses its meaning when the features and functionality have exceeded what the market demands. Evolving pattern in the basis of competition – from functionality, to reliability and convenience and finally price.

A key characteristic of a disruptive technology is that it heralds a change in the basis of competition. The attributes that make disruptive products worthless in mainstream markets typically become their strongest selling point in emerging markets. Disruptive products tend to be simpler, cheaper and more reliable and convenient than establish products. A product whose performance exceeds market demands suffers commodity-like pricing, while disruptive products that redefine the basis of competition command a premium.

When looking at what managers can do when facing disruptive technologies, some steps to follow are:

  • How can we know if a technology is disruptive? Watch what customers do.
  • Where is the market for disruptive technology?
  • What should be our product, technology or distribution strategies? We should hit a low price point. Disruptive technologies are usually not new, they consist of components build around proven technologies and put together in a novel product architecture that offers the customer a set of attributes never before available.

Some of important things to remember are:

  • The pace of progress that markets demand or can absorb may be different from the progress offered by technology.
  • Managing innovation mirrors the resource allocation process.
  • Just as there is a resource allocation side to every innovation problem, matching the market to the technology is another.
  • The capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe.
  • In many instances, the information required to make large and decisive investments in the face of disruptive technology simply does not exist.
  • It is not wise to adopt a blanket technology strategy to be always a leader or always a follower.
  • The research summarized in this book suggests that there are powerful barriers to entry and mobility that differ significantly from the types defined and historically focused on by economists.

Well managed companies are excellent at developing the sustaining technologies. They do that by managers focusing on:

  • Listening to the customers.
  • Investing aggressively in technologies that give those customers what they say they want.
  • Seeking higher margins.
  • Targeting larger markets.

Disruptive technologies change the value proposition in a market. Four principles of Disruptive technologies and why establishing companies can deal with it.

  • 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.

What those managers should do is:

  • Give responsibility for disruptive technologies to organizations whose customers need them.
  • Set up a separate organization small enough to get excited by small gains.
  • Plan for failure.
  • Don’t count on breakthroughs.
You may also like
Innovator's solution
Clayton M. Christensen, Michael E. Raynor: The Innovator’s Solution; Creating and sustaining successful growth
Can sales innovations occur inside existing sales organization?
Gerald C. Kane, Nguyen Phillips, Jonathan R. Copulsky and Garth R. Andrus: The Technology Fallacy; How people are the real key to digital transformation
Tom Goodwin: Digital Darwinism; Survival of the fittest in the age of business disruption

Leave a Reply