“The Innovator’s Dilemma” by Clayton M. Christensen

It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.

—Steve Jobs

This book is about how technology is driven forward by small companies while larger firms often become bloated and obsolete. Even though the companies with the most money and employees might make a discovery it’s oftentimes not in their best interest to make a business off of this new technology.

Oftentimes, innovations aren’t immediately profitable and their utility isn’t immediately apparent. The book heavily influenced Steve Jobs, Jeff Bezos and many other technology entrepreneurs of the past couple decades. This is why newer technology companies are so segmented and have divisions in so many different products, both mature and developing. Google is in effect run more like a conglomeration of many smaller business (advertising, search, maps, flying cars) than a single entity.

Giant companies have a tough time competing with smaller, more flexible companies. I found this quote from the book I’m currently reading, Nonzero: The Logic of Human Destiny” by Robert Wright, to do a good job putting this phenomenon into a larger historical context:

When a civilization such as Rome dominates its neighbors, it typically possesses some sort of cultural edge: better weapons, say, or better economic organization. Yet this dominance is hard to maintain precisely because these valuable memes tend naturally to spread beyond its borders, empowering its rivals. In the case of Rome, the barbarian-empowering memes included military strategy. But the exact memes will differ from case to case. As the historian Mark Elvin has observed, the diffusion of Chinese iron-making technology to the Mongols during the thirteenth century would come back to haunt China. Elvin was among the first to clearly see that this is a general dynamic in history: the very advancement of advanced societies can bring the seeds of their destruction. As Elman Service put the matter: “The precocious developing society broadcasts its seeds, so to speak, outside its own area, and some of them root and grow vigorously in new soil, sometimes becoming stronger than the parent stock, finally to dominate both their environments.”

Companies, just like countries, face growing pains from competition.

Further links:
MIT Summary
Farnam Street: “Escape The Innovator’s Dilemma”
Clayton Christensen Talks About The Innovator’s Dilemma
Buy from Amazon:The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business

Interesting anecdotes and new vocabulary:

The first hard drive
Bernoulli’s Principal: The physical law that liquid flows faster the less constricted it is.
Joseph Schumpter ‘creative destruction’: “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
Early retail innovators: John Wanamaker, George Hartford (A&P), Frank Woolworth, W.T. Grant, General Wood (Sears), Michael Cullen (supermarkets), and Eugene Ferkauf.
locus—Latin for ‘place’ SEE: locus of control
collocated—to be placed side by side.
Technology: as used in this book, means the processes by which an organization transforms labor, capital, materials, and information into products and services of greater value.
Sustaining Technology: Radically or incrementally improving the performance of existing products along the dimensions of performance that mainstream customers in major markets value.
Disruptive Technology: A completely different kind of technology that typically takes a while to catch on and match the performance of the previous technologies in place but eventually comes to dominate the market.

Highlighted passages:

Introduction
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 a minicomputer market and was joined by a set of other aggressively managed companies: Data General, Prime, Wang, Hewett-Packard, and Nixdorf. But each of these companies in turn missed the desktop personal computer 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.

The list of leading companies that failed when confronted with disruptive technologies 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. There are two ways to resolve this paradox. One might be to conclude that firms such as Digital, IBM, Apple, Sears, Xerox, and Bucyrus Erie must never have been well managed. Maybe they were successful because of good luck and fortuitous timing, rather than good management. Maybe they finally fell on hard times because their good fortune ran out. Maybe. An alternative explanation, however, is that these failed firms were as well-run as one could expect a firm managed by mortals to be—but that there is something about the way decisions get made in successful organizations that sows the seeds of eventual failure.
The research reported in this book supports the latter view: It shows that 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.
What this implies at a deeper level is that many of what are now widely accepted principals of good management are, in fact, only situationally appropriate. 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.

What often causes this lagging behind are two principals of good management taught in business schools: that you should always listen to and respond to the needs of your best customers, and that you should focus investments on those innovations that promise the highest returns. But these two principals, in practice, actually sow the seeds of every successful company’s ultimate demise. That’s why we call it the innovator’s dilemma: Doing the right thing is the wrong thing. This dilemma rears its ugly 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.
When the performance of two or more competing products has improved beyond what the market demands, customers can no longer base their choice upon which is the higher performing product. The basis of product choice often evolves from functionality to reliability, then to convenience, and, ultimately, to price.

Ch.1 ‘How Can Great Firms Fail? Insights From The Hard Disk Drive Industry

When I began my search for an answer to the puzzle of why the best firms can fail, a friend offered some sage advice. “Those who study genetics avoid studying humans,” he noted. “Because new generations come along only every thirty years or so, it takes a long time to understand the cause and effect of any changes. Instead, they study fruit flies, because they are conceived, born, mature, and die all within a single day. 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.”
Indeed, nowhere in the history of business has there been an industry like disk drives, where changes in technology, market structure, global scope, and vertical integration have been so pervasive, rapid, and unrelenting.

This book began by posing a puzzle: Why was it that firms could be esteemed as aggressive, innovative, and customer-sensitive organizations could ignore or attend belatedly to technological innovations with enormous strategic importances? The established firms were, in fact, aggressive, innovative, and customer-sensitive in their approaches to sustaining innovations of every sort. But the problem established firms seemed 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 was as if the leading firms were held captive by their customers, enabling attacking entrant firms to topple the incumbent industry leaders each time a disruptive technology emerged.

Ch.3 Disruptive Technological Change In The Mechanical Excavator Industry

What went wrong within the companies that made cable-actuated excavators? Clearly, with the benefit of hindsight, they should have invested in hydraulics machines and embedded that piece of their organizations charged with making hydraulic products in the value network that needed them. But the dilemma in managing the disruptive technology in the heat of the battle is that nothing went wrong inside these companies. Hydraulics was a technology that their customers didn’t need—indeed, couldn’t use. Each cable shovel manufacturer was one of at least twenty manufacturers doing everything they could to steal each other’s customers: If they took their eyes off their customers’ next-generation needs, existing business would have been put at risk. Moreover, developing bigger, better, and faster cable excavators to steal share from existing competitors constituted a much more obvious opportunity for profitable growth than did a venture into hydraulic backhoes, given how small the backhoe market was when it appeared in the 1950s. So, as we have seen before, these companies did not fail because they lacked information about hydraulics or how to use it; indeed, the best of them used it as soon as it could help their customers. They did not fail because management was sleepy or arrogant. They failed because hydraulics didn’t make sense—until it was too late.

Makers of early hybrid ocean transports, which were steam-powered but still outfitted with sails, used the same rationale for their design as did the Bucyrus Erie engineers: Steam power was still not reliable enough for the transoceanic market, so steam power had to be backed up by conventional technology. The advent of steam-powered ships and their substitution for wind-powered ships in the transoceanic business is itself a classic study of disruptive technology. When Robert Fulton sailed the first steamship up the Hudson River in 1819, it underperformed transoceanic sailing ships on nearly every dimension of performance: It cost more per mile to operate; it was slower; and it was prone to frequent breakdowns. Hence, it could not be used in the transoceanic value network and could only be applied in a different value network, inland waterways, in which product performance was measured very differently. In rivers and lakes, the ability to move against the wind or in the absence of a wind was the attribute most highly valued by ship captains, and along that dimension, steam outperformed sail. Some scholars have marveled at how myopic were the makers of sailing ships, who stayed with their aging technology until the bitter end, in the early 1900s, completely ignoring steam power. Indeed, not a single maker of sailing ships survived the industry’s transition to steam power. The value network framework offers a perspective on this problem that these scholars seem to have ignored, however. It is not a problem of knowing about steam power or of having access to technology. The problem was that the customers of the sailing ship manufacturers, who were transoceanic shippers, could not use steam-powered ships until the turn of the century. To cultivate a position in steamship building, the makers of sailing ships would have had to engineer a major strategic reorientation into the inland waterway market, because that was the only value network where steam-powered vessels were valued throughout most of the 1800s. Hence, it was these firms’ reluctance or inability to change strategy, rather than their inability to change technology, that lay at the root of their failure in the face of steam-powered vessels.

Ch.4 What Goes Up, Can’t Go Down

Other scholars have found evidence in other industries that as companies leave their disruptive roots in search of greater profitability in the market tiers above them, they gradually come to acquire the cost structures required to compete in those upper market tiers. This exacerbates their problem of downward mobility.

In the tug-of-war for development resources, projects targeted at the explicit needas of current customers or at the needs of existing users that a supplier has not yet been able to reach will always win over proposals to develop products for markets that do not exist. This is because, in fact, the best resource allocation systems are designed precisely to week out ideas that are unlikely to find large, profitable, receptive markets. Any company that doesn’t have a systematic way of targeting its development resources toward customers’ needs, in fact, will fail.

Three factors—the promise of upmarket margins, the simultaneous upmarket movement of many a company’s customers, and the difficulty of cutting costs to move downmarket profitably—together create powerful barriers to downward mobility. In the internal debates about resource allocation for new product development, therefore, proposals to pursue disruptive technologies generally lose out to proposals to move upmarket. In fact, cultivating a systematic approach to weeding out new product development initiatives that would likely lower profits is one of the most important achievements of any well-managed company.

During the process of growth the institution rapidly becomes respectable in the eyes of both consumers and investors, but at the same time its capital investment increases and its operating costs tend to rise. Then the institution enters the stage of maturity… The maturity phase soon tends to be followed by topheaviness…and eventual vulnerability. Vulnerability to what? Vulnerability to the next fellow who has a bright idea and who starts his business on a low-cost basis, slipping in under the umbrella that the old-line institutions have hoisted.

Pt. 2 Managing Disruptive Technological Change

Managers played the game the way it was supposed to be played. The very decision-making and resource-allocation processes that are key to the success of established are the very processes that reject disruptive technologies: listening carefully to customers; tracking competitors’ actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technological change.

The notion that we exercise power most effectively when we understand the physical and psychological laws that define the way the world works and the position or align ourselves in harmony with those laws, is of course not new to this book. At a light-hearted level, Stanford Professor Robert Burgelman, whose work is extensively cited in this book, once dropped his pen onto the floor in a lecture. He muttered as he stooped to pick it up, “I hate gravity.” Then, as he walked to the blackboard to continue his line of thought, he added, “But do you know what? Gravity doesn’t care! It will always pull things down, and I may as well plan on it.”
At a more serious level, the desirability of aligning our actions with the more powerful laws of nature, society, and psychology, in order to lead a productive life, is a central theme in many works, particularly the ancient Chinese classic, Tao te Ching.

Ch.6 Match the Size of the Organization to the Size of the Market

Unfortunately, companies that become large and successful find that maintaining growth becomes progressively more difficult. The math is simple: a $40 million company that needs to grow profitably at 20 percent to sustain its stock price and organizational vitality needs an additional $8 million in revenues the first year, $9.6 million the following year, and so on; a $400 million company with a 20 percent targeted growth rate needs new business worth $80 million in the first year, $96 million in the next, and so on; and a $4 billion company with a 20 percent goal needs to find $800 million, $960 million, and so on, in each successive year.

As we have seen, a project to commercialize a disruptive technology in a small, emerging market is very unlikely to be considered essential to success in a large company; small markets don’t solve the growth problems of big companies. Rather than continually working to convince and remind everyone that the small, disruptive technology might someday be significant or that it is at least strategically important, large companies should seek to embed the project in an organization that is small enough to be motivated by the opportunity offered by a disruptive technology in its early years. This can be done either by spinning out an independent organization or by acquiring an apparently small company. Expecting achievement-driven employees in a large organization to devote a critical mass of resources, attention, and energy to a disruptive project targeted at a small and poorly defined market is equivalent to flapping one’s arms in an effort to fly: It denies an important tendency in the way organizations work.

Johnson & Johnson has with great success followed a strategy similar to Allen Bradley’s in dealing with disruptive technologies such as endoscopic surgical equipment and disposable contact lenses. Though its total revenues amount to more than $20 billion, J&J comprises 160 autonomously operating companies, which range from its huge MacNeil and Janssen pharmaceuticals companies to small companies with revenues of less than $20 million. Johnson & Johnson’s strategy is to launch products of disruptive technologies through very small companies acquired for that purpose.

Ch.7 Discovering New and Emerging Markets

Markets that do not exist cannot be analyzed: Suppliers and customers must discover them together. Not only are the market applications for disruptive technologies unknown at the time of their development, they are unknowable.

The dominant difference between successful ventures and failed ones, generally, is not the astuteness of their original strategy. Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources (or having the relationships 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.

When demand for an innovation was assured, as was the case with sustaining technologies, the industry’s established leaders were capable of placing huse, long, and risky bets to develop whatever technology was required. When demand was not assured, as was the case in disruptive technologies, the established firms cold not even make the technologically straightforward bets required to commercialize such innovations. That is why 65 percent of the companies entering the disk drive industry attempted to do so in an established, rather than emerging market. Discovering markets for emerging technologies inherently involves failure, and most individual decision makers find it very difficult to risk backing a project that might fail because the market is not there.

But as Honda’s experience in the North American motorcycle market illustrates, markets for disruptive technologies often emerge from unanticipated successes, on which many planning systems do not focus the attention of senior management. Such discoveries often come by watching how people use products, rather than by listening to what they say.

Amos Tversky and Daniel Kahneman, for example, have shown that people tend to regard propositions that they do not understand as more risky, regardless of their intrinsic risk, and to regard things they do understand as less risky, again without regard to intrinsic risk.

Ch.8 How to Appraise Your Organization’s Capabilities and Disabilities

One of the dilemmas of management is that, by their very nature, processes are established so that employees perform recurrent tasks in a consistent way, time after time. To ensure consistency, they are meant not to change—or if they must change, to change through tightly controlled procedures. This means that the very mechanisms through which organizations create value are intrinsically inimical to change.

As companies grow from a few employees to hundreds and thousands, the challenge of getting all employees to agree on what needs to be done and how it should be done so that the right jobs are done repeatedly and consistently can be daunting for even the best managers. Culture is a powerful management tool in these situations. Culture enables employees to act autonomously and causes them to act consistently.

If the acquired company’s processes and values are the real drivers of its success, then the last thing the acquiring manager wants to do is to integrate the company into the new parent organization. Integration will vaporize many of the processes and values of the acquired firm as its managers are required to adopt the buyer’s way of doing business and have their proposals to innovate evaluated according to the decision criteria of the acquiring company. If the acquiree’s processes and values were the reason for its historical success, a better strategy is to let the business stand alone, and for the parent to infuse its resources into the acquired firm’s processes and values. This strategy, in essence, truly constitutes the acquisition of new capabilities.
If, on the other hand, the company’s resources were the primary rationale for the acquisition, then integrating the firm into the parent can make a lot of sense—essentially plugging the acquired people, products, technology, and customers into the parent’s processes, as a way of leveraging the parent’s existing capabilities.

Processes and values define how resources—many of which can be bought and should, hired and fired—are combined to create value.

The reasons why innovation often seems to be so difficult for established firms is that they employ highly capable people, and then set them to work within processes and values that weren’t designed to facilitate success with the task at hand.

Ch.11 The Dilemmas of Innovation: A Summary

To measure market needs, I would watch carefully what customers do, not simply listen to what they say. Watching how customers actually use a product provides much more reliable information than can be gleaned from a verbal interview or a focus group.

Historically, disruptive technologies involve no new technologies; rather, 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.

If, as most successful companies try to do, a company stretches or forces a disruptive technology to fit the needs of current, mainstream customers—as we saw happen in the disk drive, excavator, and electric vehicle industries—it is almost sure to fail. Historically, the more successful approach has been to find a new market that values the current characteristics of the disruptive technology.Disruptive technology should be framed as a marketing challenge, not a technological one.

Perhaps the most powerful protection that small entrant firms enjoy as they build the emerging markets for disruptive technologies is that they are doing something that simply does not make sense for the established leaders to do. Despite their endowments in technology, brand names, manufacturing prowess, management experience, distribution muscle, and just plain cash, successful companies populated by good managers have a genuinely hard time doing what does not fit their model for how to make money. Because disruptive technologies rarely make sense during the years when investing in them is most important, conventional managerial wisdom at established firms constitutes an entry and mobility barrier that entrepreneurs and investors can bank on.

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