: The Innovator’s Dilemma
Author: Clayton M. Christensen
Immaculately researched business book exploring answers to the question of why successful well-managed business fail to adapt to innovative technology. The author primarily uses data from the disk drive industry, where, in just over three decades, hundreds of companies rose to power and were defeated by new companies employing the next wave of technology. Why did this happen, over and over again? For instance, all the makers of the 14” drives were killed by the 8” drive makers, and those were killed by the 5.25” manufacturers, and only a few of them survived to make 3.5” drives. Why?
Christensen discovers that lack of managerial or technical skill was not the problem: rather it was the ironic fact that the companies were well-managed that killed them! Let me explain. In successful companies, the entire company, from CEO to managers to the lowest manual laborer, instinctively know to operate in a manner that maximizes profit for the company. Everyone wants to work on projects that will bring in significant growth, so managers approve resources for projects that customers want. The problem is that innovative technologies, while simpler, cheaper, smaller, and more convenient, are initially of limited utility. Their initial markets are small. Being cheaper, they have smaller margins of profit. For example, the first 3.5” disk drives could only hold 10 megabytes while the top 5.25” drives held 100 MB. When successful drive makers went to their customers and said, “Do you want a 10MB drive?” the customers said, “No, we want a 250MB drive!” The smaller drives, while cheaper in total cost, were much more expensive on a cost-per-megabyte basis. The businesses buying storage wanted the cheapest cost-per-megabyte possible. So was there no market for the 3.5” drive? Of course there was! The problem was that the established companies could only look for a market within their existing market. New companies looked for any market, and quickly discovered an emerging market for laptop computers in which the smaller size of the 3.5” drives was an incredible asset and the higher cost per megabyte didn’t matter. The bigger, established companies couldn’t see the laptop market because it was too small for them to consider: for them a successful product sold hundreds of millions of dollars, not a few million. In a sense, this makes sense: emerging markets are not a huge source of profit, especially considering the lower margins on the cheaper products. But eventually, as the innovative technology improves, it pushes the older technology out of the market and takes over: no 5.25” drives are made today, for instance.
The way Christensen explains this process is to divide technology into two types: sustaining and disruptive. Sustaining technology is an improvement that makes an existing product better. Disruptive technology is a simpler version of existing technology that isn’t initially comparable in features, but has the advantage of being simpler and more efficient: in the long run it will take over. Initially it has its own market, but once features and specs improve to be competitive with its larger cousin, it takes over. For example, look at photocopiers: Xerox, long the leader in huge business-oriented monsters, completely missed out on the personal copier market. Obviously, this was good business: why would Xerox, who’s business was tailored to huge customers buying extremely expensive machines want to bother with small sales to individuals? But of course we all know in retrospect that the personal copier market is much, much larger than the big copier market! (Xerox’s mistake meant they came into the personal copier market very late, and thus they are not the leader.) Christensen shows statistical evidence to show that being first in sustaining technology isn’t much of an advantage, but that being first in disruptive technology has tremendous advantages. In hundreds of cases, the makers of the older technology eventually shifted to the disruptive technology, but they were late and slow, and never regained the leadership position they originally had.
Fascinating, excellent, book, with lots of interesting stories and examples. My only criticism is that Christensen tends to repeat himself. For instance, in several places he points out that “successful” businesses are judged by their growth rate, not actual profit. The larger the company, the more new business must be generated. i.e. a $10 million company must earn only $2 million of new business to maintain a 20% growth rate, but the $100 million company needs $20 million and the $10 billion company needs $2 billion! Since there are no emerging markets of $2 billion, a huge company tends to avoid and thus miss emerging markets. This is an excellent point, but I can’t figure out why Christensen needs to repeat it over and over, almost word for word, in different chapters. He does this with other key points as well, and while that might be helpful for busy business execs just browsing through a few key chapters, it makes the book awkward for the ordinary reader. I’d like to see Christensen write a much shorter version of the book suitable for a mass audience: the book’s issues are important for anyone involved in society as they demonstrate how technology infiltrates our everyday lives. Fascinating and highly recommended.
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