The Innovator’s Dilemma by Clayton Christensen [Book Review]

I’m trying to become more well read on the world of business. I found the Innovator’s Dilemma by Clayton M Christensen thanks to Data Elixr newsletter. I said to myself that any book recommended to a bunch of data enthusiasts should be good, and I love Data Exlir’s content, so I decided to give it a try. This post is mostly a summary of each chapter, with some comments mixed in.

Part 1: Why Great Companies Fail

Ch 1: How Can Great Firms Fail?

Christensen opens by making a parallel between the studies of genetics and firms. He says that drosophila (fruit flies) is to the study of human genetics as the disk drive industry is to the study of firm success and failure. As a former biologist (well, I can claim that since it was my minor!), I love this analogy. The disk drive industry, like drosophila, provides a model for studying firm success and failure, due to its short timeline. Let’s use the example of the 14-inch disk drive, and its disruption by the 8-inch disk drive. The leading firms didn’t fail due to a failure to improve their 14-inch disk drives. In fact, the 14-inch disk drives were sustaining technologies, ones which the firms were able to improve in storage capacity year by year. The architecturally disruptive 8-inch disk drives first entered niche, emerging markets, then took over the 14-inch market. This pattern repeated over and over again in the disk drive industry, and is explored in great lengths by Christensen throughout the course of the book.

Ch 2: Value Networks and the Impetus to Innovate

The author begins with a review of the usual explanations for failure. One explanation says failure is due to organizational and managerial nature: the structure of a company dictates its products and its ability to innovate (through collaboration of different subgroups). Another explanation blames capabilities and radical change: a firm will fail if a radical technology destroys the value of its previously built competencies. The author contradicts these ideas, then proposes a novel reason for why great firms fail: value networks. Each firms’ strategy and past choices determines its perception of a new technology. As firms increase in experience, they develop capabilities tailored to its distinct value network. And this can be problematic. Disruptive technology is notably valuable in networks with lower gross margins, and therefore will not be taken on by established firms, who have cultivated value networks with larger gross margins.

 

The author goes on to discuss the technology S-curve, which suggests that the magnitude of a product’s performance improvement in a given time period will differ as technology matures. Most theory states that when the S-curve reaches an inflection point, a new technology will come in. However, the author notes, this assumes that the vertical axis measures the same attributes for the old and new technology. In other words, this assumes that the new technology enters the exact same market as the old one. While correct for sustaining technologies, this is incorrect for disruptive technologies. Christensen then goes on to discuss the managerial decisions of established firms that fail, in 6 sequential steps.

  1. Disruptive technologies were first created in established firms.
  2. Marketing personnel seek reactions from their lead customers on this technology.
  3. Since the customers don’t appreciate the disruptive technology, the firm then increases its effort of developing sustaining technology, in response to the customers desires.
  4. New companies are then formed by the engineers who originally develop the technology, and a new market is eventually created.
  5. The entrants adopt sustaining technologies on top of their disruptive technology, and become more profitable, moving upmarket.
  6. The established firms jump on the bandwagon, since customers now desire the disruptive technology, but it’s too late.

The author notes that of firms that do successfully establish the disruptive technology early on, they do not actually get the market share of the new technology. The new technology cannibalizes the market share of the older technology.

Ch 3: Disruptive Technology Change in the Mechanical Excavator Industry

Chapter 3 is a case study of how mechanical shovel manufacturers were wiped out by hydraulics.

Ch 4: What Goes Up Can’t Go Down

In this chapter the author explores the northeastern pull (NEP) which is the question of why leading companies move upmarket but do not move downmarket, to where the disruptive technologies originally live. Christensen considers the NEP in the context of the disk drive market. Essentially, companies will always gravitate to where the money is. It’s hard for managers to even make a case for getting into poorer emerging markets. For managers, their reputation and job is on the line when they approve projects. Projects that fail because a market does not exist is worse than a failure to deliver a product. Christensen goes over the 3 barriers to downward mobility: the promise of upmarket margins, the simultaneous upmarket movement of many customers, and the difficulty in cutting costs to move downmarket in a profitable manner. He ends this chapter, and this first part of the book, with a case study of the minimill in steel making.

Part 2: Managing Disruptive Technological Change

The second section of the book is opened by the assertion that good management is the cause of firms failing when disruption is ripe. Managers listen carefully to customers, track competitors’ actions carefully, and invest resources to improve the existing technology, i.e. put their efforts into sustaining technologies to make higher quality products and higher profits, and this is all good management. But then firms fail. Christensen introduces the five principles of organizational nature of successful firms, and how managers can harness these principles in the face of disruption. These principles are considered in turn in the following chapters.

Ch 5: Give Responsibility for Disruptive Technology to Organizations Whose Customers Need Them

Principle 1: Resource Dependence, i.e. customers control resource allocation in well managed firms.

The concept of resource dependence is very well recognized. If this is true, then when faced with disruptive technologies (ones that customer’s don’t want), managers can convince the company to do it anyway, or they can make spin out organizations whose customers do want the tech. Managers are not powerless in these situations, the author says. Managers can harness resource dependence by choosing to spin out and work with a different value network, one where customers need the disruptive product. The author uses the disk drive industry and discount retailers disrupting department stores as examples.

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

Principle 2: A large company needs to grow, and entering a small market won’t help this.

Good managers are driven to keep their organizations growing. Entering emerging markets doesn’t immediately allow for this. It’s important, though, for managers to enter these markets quickly. The author notes that companies that entered new value markets made from disruptive generations of disk drivers in the first two years were six times more likely to succeed, compared to those that entered later. For sustaining technologies, such a head start did not give an advantage. For good managers to harness this principle, there are three options. The manager can first attempt to increase the growth rate of the emerging market, or second, can wait for the market to grow. These two options have been problematic in the past, Christensen argues. The third and better option, he says, is to create a spin out organization that is still mainly controlled by the larger organization, but where its size matches the size of the emerging market. The smaller organization will be able to explore the disruptive technology, which avoiding the need to keep up the same growth of the larger organization. Choosing the right size is key.

Ch 7: Discovering New and Emerging Markets

Principle 3: You can’t know the use of a disruptive technology in advance. Failure is a step towards success.

Market applications for disruptive technologies are not just unknown at the time of their development, but they can’t be known. When making forecasts, the same techniques cannot be used for both sustaining and disruptive technologies. The market for a disruptive technology will be discovered, but it won’t be the first one that’s proposed by consultants. Successful new businesses need to be comfortable with abandoning their original plan when they learn what does and doesn’t work in the market. A fun example of marketing is the slogan for Honda’s motorcycles, which were a disruptive product, that was made up by a university student. “You meet the nicest people on a Honda,” worked, and helped Honda unexpectedly find its niche market. The author proposes that disruptive technologies require “agnostic marketing,” where you watch how people use the product, rather than listen to their comments on it. No one knows what they want before they try it.

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

Principle 4: Organization’s capabilities differ from the capabilities of the individuals in them.

It’s important for managers to make sure both individuals and organizations are suited to a job. There are three factors that affect what an organization can and cannot do: resources, processes, and values. The first two, resources and values, come together to form company culture. Culture is a powerful management tool that enables employees to work autonomously and consistently. An organization can create capabilities within it, the author notes, through acquisitions, internal creation, or through creating a spin out organization. The author also notes that it’s important to understand that what is disruptive to one company may be sustaining to another company. Knowing your company’s capabilities will help you make this distinction.

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

Principle 5: Technology supply may not equal market demand. A technology’s weakness in an established market is often its strength in an emerging market.

This chapter begins with a discussion of performance oversupply, which I found to be the biggest take away in diagnosing a market that’s at risk of disruption. When there is performance oversupply, i.e. a technology is improving faster than the market demand for it, two things happen. There is the opportunity for disruption (pictured below), and the rank order by which customers choose a product changes.

The reason for the possibility of disruption is that in this situation, there is so much demand that even an “inferior” product will capture some of the market. The reason for the change in rank order of a product is that if people come to value the disruptive product, they won’t mind paying a small premium for it.

Ch 10: Managing Disruptive Technological Change: A Case Study

Christensen concludes his book with a hypothetical discussion on the disruptive capability of electric cars, and goes through two step. The first step is to determine if electric cars have the power to be disruptive. This is accomplished by plotting figures like the one above, by using an agnostic approach to measure the presence or absence of performance oversupply. He determines in his analysis that electric cars are disruptive, and then goes on to step two, which is to determine the market. Within this second step, he states there are three important points to consider in market finding. First, completely avoid any markets that current automakers heavily focus on. Second, remember that early findings will be wrong. And third, remember that a business plan in this situation must be one of learning. This chapter, in my opinion, is the most informative yet, and nicely ties together all the concepts mentioned in the preceding chapters.

Overall Thoughts

The Innovator’s Dilemma is the question of why well managed firms fail. Christensen’s voice makes for an easy read that answers this question while being informative and fun. My only grief is that I would’ve liked there to be more examples mentioned. He heavily focussed on the disk drive industry, which I understand since it’s the drosophila of the business world. However, more examples would’ve strengthened his argument. And I would’ve loved a bit of math, too, since I am a math person after all! I think the most important takeaway message for me is that a great way to determine if a market is at risk of disruption is to consider performance oversupply. Throughout the first few chapters I kept wondering how one would identify a market that might be disrupted. Being a mathematical person, once I saw the figure in his book like my figure above, it made everything so much clearer. Overall, I really enjoyed this book. I certainly learned a lot, and am looking forward to reading more on the topic. During parts of my reading, I even found myself wondering if I should go for an MBA! Thanks, Clayton M Christensen for getting me interested in business an innovation!

Rating for The Innovator’s Dilemma: 4 out of 5. I could give it a 5, but I’m hesitant. I want to save 5 stars for a book I absolutely love and can’t put down.

Leave a Reply

Your email address will not be published. Required fields are marked *