The Innovator’s Dilemma

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Clayton M Christensen Harper Business Essentials 2002 0060521996 Alistair Schofield, Managing Director, Extensor Limited

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I read this book as it came highly recommended by no lesser person than Andy Grove, the Chairman and CEO of Intel Corporation.  Grove is on record as having attributed a major change in their product development and marketing strategy to a presentation Clayton Christensen gave to Intel’s management team following the publication of his book. 

The book takes as its thesis the notion that great managers in top-performing companies can, and often do, lead their companies into financial disaster, even while adhering to what are generally considered to be best practices. 

To understand why this might be the case, Christensen conducted extensive research into three separate markets; data storage, earth moving equipment, and steel production.  In each of these markets, the established players had seen their domination of the sector be undermined by new entrants.
In each case, the new entrants undermined the incumbent suppliers with what Christensen terms ‘disruptive technologies’ – i.e. products that redefine the market.  Ironically, Christensen found that in most cases, the established companies had experimented with the disruptive technologies in their R&D labs ahead of their competitors but had dismissed them.

He attributes this oversight to two main reasons, both of which are established tenets of traditional management theory.  The first is that you should stay close to your customers.  The theory is that by listening to the needs of your customers you will sustain your business by always providing them with what they want.  The problem is that customers often don’t know what they will want in the future.  Their role is to buy in the present, not predict the future.  Furthermore, most disruptive technologies are not as good as the existing technologies when they are first launched, they therefore only find a market with a select group of buyers who either have very specialist needs or who value the newness of the offering.

For example, when the first 3½ inch disk drives were first launched in the computing industry they were more expensive and had a smaller capacity than the 5¼  inch disk drives that were the industry norm.  Why then would anyone want one?  

The early adopters of this technology were the laptop manufactures where the smaller size was a distinct advantage and where the capacity of the drive was not such an issue.  Since then 2½ inch and 1.8 inch drives have been introduced and today, disk drives themselves are under threat from flash memory that is, once again, currently slower, more expensive and offers lower capacity than disk drives.

This example provides a clue to the second reason many established firms overlook disruptive technologies; it is because the criteria against which they evaluate the business case is weighted against such innovations.

For example, imagine that you are a major corporation producing 5¼  inch disk drives and your shareholders expect you to grow the business by 10-15% per annum.  Your R&D team come to you with a new product, the 3½ inch disk drive.  Following careful analysis you conclude that it only serves a niche market, that the price/performance of the device will mean that you will not be able to sell it to your existing customers and the costs of developing new markets will be high.  Set against the option of improving your existing products in line with feedback from your existing customers who you know will benefit from improved price/performance, the likelihood is that you will chose the latter option and abandon your R&D investment in the new technology - which is exactly what one of the leading manufacturers of 5¼  inch disk drives chose to do.

To avoid these pitfalls, Christensen urges organisations to develop a strategy to address disruptive technologies.  He argues that every company should:

• Invest a proportion of their R&D budget in developing disruptive technologies
• Continuously search the market for the early signs of a threat from emerging disruptive technologies
• Be prepared to incorporate the standards associated with these disruptive technologies into their products/services even if the short-term business case is not as good as the option of doing nothing.

Coupled with this strategy, management must be willing to accept the higher probability of failure associated with disruptive technologies, established firms must be willing to find new markets for these products/services rather than pushing disruptive technologies towards existing customers and the passion to seek out new disruptive technologies and innovate must lie at the heart of the culture of the organisation.

The Innovator’s Dilemma is a fascinating book as it lays bare the reason why, under the guidance of their management, many previously successful companies fail.  It is therefore a ‘must read’ book for any senior executive or marketing manager.

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