The Innovator’s Dilemma

Key Concepts

Principles that drive the innovator’s dilemma

Principle #1: Companies Depend on Customers and Investors for Resources—so effort is directed toward what existing customers need rather than disruptive technologies)

Principle #2: Small Markets Don’t Solve the Growth Needs of Large Companies—“As a consequence, the larger and more successful an organization becomes, the weaker the argument that emerging markets can remain useful engines for growth.”

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—”The very processes and values that constitute an organization’s capabilities in one context, define its disabilities in another context.”

Principle #5: Technology Supply May Not Equal Market Demand—”In their efforts to stay ahead by developing competitively superior products, many companies don’t realize the speed at which they are moving up-market, over-satisfying the needs of their original customers as they race the competition toward higher-performance, higher-margin markets, In doing so, they create a vacuum at lower price points into which competitors employing disruptive technologies can enter.” 

Incumbent firms innovate, but focus on sustaining technologies rather than disruptive ones

“The pattern is stunningly consistent. Whether the technology was radical or incremental, expensive or cheap, software or hardware, component or architecture, competence-enhancing or competence-destroying, the pattern was the same. When faced with sustaining technology change that gave existing customers something more and better in what they wanted, the leading practitioners of the prior technology led the industry in the development and adoption of the new.” (Chapter 1)

Value networks cause firms to optimize around customers’ needs

“Within a value network, each firm’s competitive strategy, and particularly its past choices of markets, determines its perceptions of the economic value of a new technology. These perceptions, in turn, shape the rewards different firms expect to obtain through pursuit of sustaining and disruptive innovations. In established firms, expected rewards, in their turn, drive the allocation of resources toward sustaining innovations and away from disruptive ones.” (Chapter 2)

The cost structures characteristic of each value network can have a powerful effect on the sorts of innovations firms deem profitable. Essentially, innovations that are valued within a firm’s value network, or in a network where characteristic gross margins are higher, will be perceived as profitable. Those technologies whose attributes make them valuable only in networks with lower gross margins, on the other hand, will not be viewed as profitable, and are unlikely to attract resources or managerial interest. (Chapter 2)

The dilemma is driven by resource allocation and decision-making throughout the organization

“My findings consistently showed that established firms confronted with disruptive technology change did not have trouble developing the requisite technology: Prototypes of the new drives had often been developed before management was asked to make a decision. Rather, disruptive projects stalled when it came to allocating scarce resources among competing product and technology development proposals....” (Chapter 2)

Steps in the process of disruption (Chapter 2)

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—“Once the start-ups had discovered an operating base in new markets, they realized that, by adopting sustaining improvements in new component technologies, they could increase the capacity of their drives at a faster rate than their new market required.”

Step 6: Established Firms Belatedly Jumped on the Bandwagon to Defend Their Customer Base—”Although some established manufacturers were able to defend their market positions through belated introduction of the new architecture, many found that the entrant firms had developed insurmountable advantages in manufacturing cost and design experience, and they eventually withdrew from the market.”

What successful managers did to overcome the dilemma (introduction to Part 2)

1. “They embedded projects to develop and commercialize disruptive technologies within an organization whose customers needed them.”

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.”

Going after disruptive technologies and emerging markets requires a different approach to planning than traditional technologies

“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.” (Chapter 7)

Processes are hard to change

“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.” (Chapter 8)

The economic decisions that lead to the dilemma are part of the values of incumbent firms

“The values of successful firms tend to evolve in a predictable fashion in at least two dimensions. The first relates to acceptable gross margins. ...The second dimension along which values predictably change relates to how big a business has to be in order to be interesting.” (Chapter 8)

Quotables

“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 became 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.” (Introduction)

“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)

“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.” (Chapter 2)

“But it is a seductive logic [of waiting until a market is large enough] that can backfire, because the firms creating new markets often forge capabilities that are closely attuned to the requirements of those markets and that later entrants find difficult to replicate.” (Chapter 6)

“Another way of matching the size of an organization to the size of the opportunity is to acquire a small company within which to incubate the disruptive technology.” (Chapter 6)

“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.” (Chapter 7)

“Most marketers, for example, have been schooled extensively, at universities and on the job, in the important art of listening to their customers, but few have any theoretical or practical training in how to discover markets that do not yet exist.” (Chapter 7)

“There is a big difference between the failure of an idea and the failure of a firm.” (Chapter 7)

“Unfortunately, processes are very hard to change—for two reasons. The first is that organizational boundaries are often drawn to facilitate the operation of present processes. Those boundaries can impede the creation of new processes that cut across those boundaries.” (Chapter 8)