The Innovator's Dilemma, Clayton Christensen (8/10)

Rating: 8/10
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🚀 The Book in 3 Sentences

1. There are two kinds of technologies: disruptive and sustaining
2. For the precise reasons industry-leaders excel at bringing to market sustaining technologies, they fail at bringing to market disruptive technologies
3. Industry leaders can solve the innovator’s dilemma by acquiring or founding subsidiaries whose resources, process and values are better aligned with the market associated with the disruptive technology

🎨 Impressions

The Innovator’s Dilemma is one of the most influential business books of all time. But having been published in 1997, I was initially sceptical of its present-day relevance and in search of something more pertinent to the technological environment of 2020.

Indeed, many of the examples and case studies Professor Christensen draws upon are out-dated and difficult for me to entirely appreciate. Moreover, the structural breakdown of the book and the tone Professor Christensen deploys has a very old-school academic feel.

Nevertheless, the book is a business classic and helps provide insights into the strategies that’ve shaped companies including Apple and Amazon into what they are today. I would recommend this book to anyone interested in learning more about disruptive technologies and innovations and how businesses can outlast their competitors. Though, for someone looking to save time, I would probably recommend reading Chapter 1, 2, 10 and 11 only.

🔍 How I Discovered It

Famous business book used by various CEOs. Known and recommended on Goodreads. Sheerwan read and recommended.

🥰 Who Would Like It?

I would recommend this book to anyone interested in learning more about disruptive technologies and innovations and how businesses can outlast their competitors. Though, for someone looking to save time, I would probably recommend reading Chapter 1, 2, 10 and 11 only.

☘️ How the Book Changed Me

Helped me recognise how quickly and easily industry leaders can fall apart and are susceptible to disruption, but similarly how the current business and industry leaders in tech seem to be an exception to this book from now on having mastered these tools and strategies

📒 Summary + Notes

Key Takeaways

Most new technologies foster improved product performance. I call these sustaining technologies. Some sustaining technologies can be discontinuous or radical in character, while others are of an incremental nature. What all sustaining technologies have in common is that they improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued. Most technological advances in a given industry are sustaining in character.

Occasionally, however, disruptive technologies emerge. Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

Principle #1: Companies Depend on Customers and Investors for Resources

Customers and investors dictate how money will be spent because companies with investment patterns that don’t satisfy their customers and investors don’t survive. The highest-performing companies, in fact, are those that are the best at this, that is, they have well-developed systems for killing ideas that their customers don’t want. As a result, these companies find it very difficult to invest adequate resources in disruptive technologies—lower-margin opportunities that their customers don’t want—until their customers want them. And by then it is too late.”

With few exceptions, the only instances in which mainstream firms have successfully established a timely position in a disruptive technology were those in which the firms’ managers set up an autonomous organization charged with building a new and independent business around the disruptive technology.

Principle #2: Small Markets Don’t Solve the Growth Needs of Large Companies

Small organizations can most easily respond to the opportunities for growth in a small market. The evidence is strong that formal and informal resource allocation processes make it very difficult for large organizations to focus adequate energy and talent on small markets, even when logic says they might be big someday.

Principle #3: Markets that Don’t Exist Can’t Be Analyzed

Companies whose investment processes demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies. They demand market data when none exists and make judgments based upon financial projections when neither revenues or costs can, in fact, be known.

Principle #4: An Organization’s Capabilities Define Its Disabilities

An organisation’s capabilities reside in two places. 1) Its processes—the methods by which people have learned to transform inputs of labour, energy, materials, information, cash, and technology into outputs of higher value. 2) Its values—the criteria managers and employees in the organisation use when making prioritisation decisions. The Processes and Values that constitute an organisation’s capabilities in one context, define its disabilities in another.

Principle #5: Technology Supply May Not Equal Market Demand

Disruptive technologies, though initially only used in small, remote markets are disruptive because they can subsequently become fully performance-competitive within the mainstream market against established products. Consequently, products whose features and functionality closely match market needs today often follow a trajectory of improvement by which they overshoot mainstream market needs tomorrow.

Part One: Why Great Companies Can Fail

Chapter 1: How Can Great Firms Fail? Insights from the Hard Disk Drive Industry

The best firms succeeded because they responsively listened to customers and aggressively invested in the technology, products, and manufacturing capabilities that satisfied their customers’ next-generation needs. But, paradoxically, when the best firms subsequently failed, it was for the same reasons. This is one of the innovator’s dilemmas: Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake.

Chapter 1 Summary

Several patterns to be drawn from the history of innovation in the disk drive industry:

1. disruptive innovations were technologically straightforward
2. the purpose of advanced technology development in the industry was always to sustain established trajectories of performance improvement
3. the firms that led the industry in every instance of developing and adopting disruptive technologies were entrants to the industry, not its incumbent leaders

Chapter 2: Value Networks and the Impetus to Innovate

Rather than explain why leading firms frequently stumble when confronting technology change through managerial, organisational, and cultural responses to technological change, or focus on the ability of established firms to deal with radically new technology, this chapter proposes a third theory based value networks.

A value network is the context within which a firm identifies and responds to customers’ needs, solves problems, procures input, reacts to competitors, and strives for profit. Within a value network, each firm’s competitive strategy determines its perception of the economic value of a new technology. In turn, these perceptions shape the rewards firms expect to gain through pursuit of sustaining and disruptive innovations. In established firms, expected rewards drive the allocation of resources toward sustaining innovations and away from disruptive ones.

The way value is measured differs across networks. The unique rank-ordering of the importance of various product performance attributes partly defines the boundaries of a value network. Parallel value networks, each built around a different definition of what makes a product valuable, may exist within the same broadly defined industry.

Generally, a set of competing firms, each with its own value chain, is associated with each box in a network diagram, and the firms supplying the products and services used in each network often differ. As firms gain experience within a given network, they are likely to develop capabilities, organisational structures, and cultures tailored to their value network’s distinctive requirements. Manufacturing volumes, the slope of ramps to volume production, product development cycle times, and organisational consensus identifying the customer and the customer’s needs may differ substantially from one value network to the next.

The attractiveness of a technological opportunity and the degree of difficulty a producer will encounter in exploiting it is determined by, among other factors, the firm’s position in the relevant value network.

The technology S-curve forms the centrepiece of thinking about technology strategy. It suggests that the magnitude of a product’s performance improvement in a given time period or due to a given amount of engineering effort is likely to differ as technologies mature. The theory posits that in the early stages of a technology, the rate of progress in performance will be relatively slow. As the technology becomes better understood, controlled, and diffused, the rate of technological improvement will accelerate. But in its mature stages, the technology will asymptotically approach a natural or physical limit such that ever greater periods of time or inputs of engineering effort will be required to achieve improvements.

A disruptive innovation, however, cannot be plotted in a figure such as 2.5, because the vertical axis for a disruptive innovation, by definition, must measure different attributes of performance than those relevant in established value networks. Because a disruptive technology gets its commercial start in emerging value networks before invading established networks, an S-curve framework such as that in Figure 2.6 is needed to describe it. Disruptive technologies emerge and progress on their own, uniquely defined trajectories, in a home value network. If and when they progress to the point that they can satisfy the level and nature of performance demanded in another value network, the disruptive technology can then invade it, knocking out the established technology and its established practitioners, with stunning speed.

“Competition within the value networks in which companies are embedded defines in many ways how the firms can earn their money. The network defines the customers’ problems to be addressed by the firm’s products and services and how much can be paid for solving them. Competition and customer demands in the value network in many ways shape the firms’ cost structure, the firm size required to remain competitive, and the necessary rate of growth. Thus, managerial decisions that make sense for companies outside a value network may make no sense at all for those within it, and vice versa.”

Good managers do what makes sense, and what makes sense is primarily shaped by their value network.

Steps to Commercialise a Disruptive Technology:

1. Disruptive Technologies Were First Developed within Established Firms
2. Marketing Personnel Then Sought Reactions from Their Lead Customers
3. Established Firms Step Up the Pace of Sustaining Technological Development
4. New Companies Were Formed, and Markets for the Disruptive Technologies Were Found by Trial and Error
5. The Entrants Moved Upmarket
6. Established Firms Belatedly Jumped on the Bandwagon to Defend Their Customer Base

Chapter 2 Summary

1. Value networks strongly define and delimit what companies within them can and cannot do.
2. The context, or value network, in which a firm competes has a profound influence on its ability to marshal and focus the necessary resources and capabilities to overcome the technological and organizational hurdles that impede innovation.
3. A key determinant of the probability of an innovative effort’s commercial success is the degree to which it addresses the well-understood needs of known actors within the value network.
4. Established firms’ decisions to ignore technologies that do not address their customers’ needs become fatal when two distinct trajectories interact. The first defines the performance demanded over time within a given value network, and the second traces the performance that technologists are able to provide within a given technological paradigm.
5. Entrant firms have an attacker’s advantage over established firms in those innovations—generally new product architectures involving little new technology per se—that disrupt or redefine the level, rate, and direction of progress in an established technological trajectory.
6. In these instances, although this “attacker’s advantage” is associated with a disruptive technology change, the essence of the attacker’s advantage is in the ease with which entrants, relative to incumbents, can identify and make strategic commitments to attack and develop emerging market applications, or value networks.

Chapter 3: Disruptive Technological Change in the Mechanical Excavator Industry & Chapter 4: What Goes Up, Can’t Go Down

The patterns of success and failure we see among firms faced with sustaining and disruptive technology change are a natural or systematic result of good managerial decisions. That is, in fact, why disruptive technologies confront innovators with such a dilemma. Working harder, being smarter, investing more aggressively, and listening more astutely to customers are all solutions to the problems posed by new sustaining technologies. But these paradigms of sound management are useless—even counterproductive, in many instances—when dealing with disruptive technology.

Indeed, disruptive technologies have such a devastating impact because the firms that first commercialised each generation of disruptive disk drives chose not to remain contained within their initial value network. Rather, they reached as far upmarket as they could in each new product generation, until their drives packed the capacity to appeal to the value networks above them. It is this upward mobility that makes disruptive technologies so dangerous to established firms—and so attractive to entrants.

Part Two: Managing Disruptive Technological Change

Chapter 5: Give responsibility for Disruptive Technologies to Organisations Who Customers Need Them

There were 5 fundamental principles of organisational nature that managers of successful firms consistently recognised and harnessed:

1. Resource dependence: Customers effectively control resource allocation patterns in well-run companies.
2. Small markets don’t solve the growth needs of large companies.
3. The ultimate uses or applications for disruptive technologies are unknowable in advance. Failure is an intrinsic step toward success.
4. 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—and the very processes and values that constitute their core capabilities within the current business model also define their disabilities when confronted with disruption.
5. Technology supply may not equal market demand. The attributes that make disruptive technologies unattractive in established markets often are the very ones that constitute their greatest value in emerging markets.

How did the successful managers harness these principles to their advantage?

1. 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 probability that the innovation would get the resources it needed.
2. They placed projects to develop disruptive technologies in organizations small enough to get excited about small opportunities and small wins.
3. 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.
4. They utilized some of the resources of the mainstream organization to address the disruption, but they were careful not to leverage its processes and values. They created different ways of working within an organization whose values and cost structure were turned to the disruptive task at hand.
5. 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.

Chapters 5 through 9 describe in more detail how managers can address and harness these principles. The sum is that while disruptive technology can change the dynamics of industries with widely varying characteristics, the drivers of success or failure when confronted by such technology are consistent across industries.

Chapter 6: Match the Size of the Organisation to the Size of the Market

In contrast to the evidence that leadership in sustaining technologies has historically conferred little advantage on the pioneering disk drive firms, there is strong evidence that leadership in disruptive technology has been very important.

It is not crucial for managers pursuing growth and competitive advantage to be leaders in every element of their business. In sustaining technologies, in fact, evidence suggests that companies who focus on extending the performance of conventional technologies and choose to be followers in adopting new ones can remain strong and competitive. This is not the case with disruptive technologies, however. There are enormous returns and significant first-mover advantages associated with early entry into the emerging markets in which disruptive technologies are initially used.

Chapter 7: Discovering New and Emerging Markets

Markets that do not exist cannot be analysed: Suppliers and customers must discover them together. Not only are the market applications for disruptive technologies unknown at the time of their development, but they are also unknowable. The strategies and plans that managers formulate for confronting disruptive technological change, therefore, should be plans for learning and discovery rather than plans for execution.

Research has shown, in fact, that 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. 9 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.

Chapter 8: How to Appraise Your Organisation’s Capabilities and Disabilities

Three classes of factors affect what an organization can and cannot do: its resources, its processes, and its values.

An organization’s values are the standards by which employees make prioritization decisions—by which they judge whether an order is attractive or unattractive; whether a customer is more important or less important; whether an idea for a new product is attractive or marginal; and so on.

One reason that many soaring young companies flame out after they go public based upon a hot initial product is that whereas their initial success was grounded in resources— the founding group of engineers—they fail to create processes that can create a sequence of hot products.

Chapter 8 Summary

Managers whose organizations are confronting change must first determine that they have the resources required to succeed. They then need to ask a separate question: does the organization have the processes and values to succeed?

Are the processes by which work habitually gets done in the organization appropriate for this new problem? And will the values of the organization cause this initiative to get high priority, or to languish?

Chapter 9: Performance Provided, Market Demand, and the Product Life Cycle

Chapter 10: Managing Disruptive Technological Change: A Case Study

Chapter 11: The Dilemmas of Innovation: A Summary of The Innovator’s Dilemma

1. The pace of progress that markets demand or can absorb may be different from the progress offered by technology. Thus, products that do not appear to be useful to our customers today (disruptive technologies) may squarely address their needs tomorrow. Recognizing this, we cannot expect customers to lead us toward innovations. Therefore, keeping close to our customers may provide misleading data for handling disruptive innovations.
2. Managing innovation mirrors the resource allocation process: Innovation proposals that get the funding and manpower they require may succeed; those given lower priority will starve and have little chance of success. One major reason for the difficulty of managing innovation is the complexity of managing the resource allocation process. A company’s executives may seem to make resource allocation decisions, but the implementation of those decisions is in the hands of a staff whose wisdom and intuition have been forged in the company’s mainstream value network.
3. Matching the market to the technology is another problem to every innovation. Successful companies have a capability in taking sustaining technologies to market, routinely giving their customers more and better versions of what they say they want. This is valued for handling sustaining innovation, but will not help handling disruptive technologies. If a company stretches or forces a disruptive technology to fit the needs of current, mainstream customers 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.
4. The capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe. This is because capabilities are forged within value networks. Hence, organizations have capabilities to take certain new technologies into certain markets. They have disabilities in taking technology to market in other ways. Organizations have the capability to tolerate failure along some dimensions, and an incapacity to tolerate other types of failure. They have the capability to make money when gross margins are at one level, and an inability to make money when margins are at another. They may have the capability to manufacture profitably at particular ranges of volume and order size, and be unable to make money with different volumes or sizes of customers. Typically, their product development cycle times and the steepness of the ramp to production that they can negotiate are set in the context of their value network. All of these capabilities—of organizations and of individuals—are defined and refined by the types of problems tackled in the past, the nature of which has also been shaped by the characteristics of the value networks in which the organizations and individuals have historically competed. Very often, the new markets enabled by disruptive technologies require very different capabilities along each of these dimensions.
5. In many instances, the information required to make large and decisive investments in the face of disruptive technology simply does not exist. It needs to be created through fast, inexpensive, and flexible forays into the market and the product. The risk is very high that any particular idea about the product attributes or market applications of a disruptive technology may not prove to be viable. Failure and interative learning are, therefore, intrinsic to the search for success with a disruptive technology. Successful organizations, which ought not and cannot tolerate failure in sustaining innovations, find it difficult simultaneously to tolerate failure in disruptive ones.

Although the mortality rate for ideas about disruptive technologies is high, the overall business of creating new markets for disruptive technologies need not be inordinately risky. Managers who don’t bet the farm on their first idea, who leave room to try, fail, learn quickly, and try again, can succeed at developing the understanding of customers, markets, and technology needed to commercialize disruptive innovations. 6. it is not wise to adopt a blanket technology strategy to be always a leader or always a follower. Companies need to take distinctly different postures depending on whether they are addressing a disruptive or a sustaining technology. Disruptive innovations entail significant first-mover advantages: Leadership is important. Sustaining situations, however, very often do not. The evidence is quite strong that companies whose strategy is to extend the performance of conventional technologies through consistent incremental improvements do about as well as companies whose strategy is to take big, industry-leading technological leaps. 7. 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. Economists have extensively described barriers to entry and mobility and how they work. A characteristic of almost all of these formulations, however, is that they relate to things, such as assets or resources, that are difficult to obtain or replicate. 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 it 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. It is powerful and pervasive.

Established companies can surmount this barrier, however. The dilemmas posed to innovators by the conflicting demands of sustaining and disruptive technologies can be resolved. Managers must first understand what these intrinsic conflicts are. They then need to create a context in which each organization’s market position, economic structure, developmental capabilities, and values are sufficiently aligned with the power of their customers that they assist, rather than impede, the very different work of sustaining and disruptive innovators. I hope this book helps them in this effort.