Or why entire industries can be wiped out with new entrants?
Curious to know the answer, I read Clayton Christensen’s epic business bestseller “The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business” and was blown away by its brilliance. Backed by rigorous research, Christensen’s premise is that well-managed companies that watch competitors, listen to customers, and invest heavily in new technologies can still lose market dominance.
The reason? Disruptive innovations.
Contrary to popular belief, a disruptive technology or innovation isn’t the latest, most cutting-edge or radical invention. Rather, it is “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” Its humble beginnings contrasts significantly with sustaining innovations developed to provide better value to existing markets.
This can be visualiszd by the chart below:
Courtesy of Lubor on Tech
A disruptive innovation creates a new value network (defined by Investopedia as “a set of connections between organizations and/or individuals interacting with each other to benefit the entire group”) in an emerging market. As the speed of technological advancements outpaces customer expectations, it eventually moves upstream to “disrupt” a higher value, larger and more market.
Note that disruptive innovations aren’t necessarily revolutionary or transformative. They normally start out being simpler, cheaper, more reliable or convenient than established ones. Initially, these technologies are unable to meet the minimal needs of existing markets. Over time however, they can supplant sustaining technologies with other competitive variables once the performance hurdle is crossed.
This idea can be represented by the diagram below:
Courtesy of Bikewriter.com
Using detailed examples from the disk drive, mechanical excavator, steel milling and retail industries, The Innovator’s Dilemma provides compelling scenarios for businesses to think differently about innovation. Key lessons from these case studies are summarized by the following principles of disruptive innovation:
Principle #1: Companies Depend on Customers and Investors for Resources.
The theory of resource dependence stipulates that existing customers and shareholders ultimately dictate where funds, manpower and other resources are channeled to. Thus, managers in a large mainstream organization find it difficult to justify pumping in human or financial resources to smaller new markets where disruptive technologies first emerge.
Principle #2: Small Markets Don’t Solve the Growth Needs of Large Companies.
Disruptive technologies normally lead to the growth of nascent emerging markets. Unfortunately, such markets are usually not “large enough to be interesting” and cannot meet the needs of large companies to grow their market, maintain share prices (via quarterly growth forecasts) or provide adequate opportunities for employees to grow.
Principle #3: Markets that Don’t Exist Can’t Be Analyzed.
As emerging markets are highly unpredictable, traditional market research and planning activities are ill-suited to forecast them accurately. Unlike sustaining technologies, markets created by disruptive technologies require a discovery based planning approach. Here, managers assume that forecasts are wrong (rather than right) and develop iterative plans for learning and testing. This principle is later popularized by Eric Ries’ “The Lean Startup“.
Principle #4: An Organization’s Capabilities Define Its Disabilities.
Organizational capabilities are embedded in its processes, values and culture. These are often fairly rigid as they are formulated to achieve very specific purposes in an efficient and effective manner. They are also more than the sum of the capabilities of its employees. A process that is effective at managing and selling a luxury car (e.g. Mercedes E Class), for example, may not be effective for smaller urban vehicles.
Principle #5: Technology Supply May Not Equal Market Demand.
As earlier mentioned, disruptive technologies in emerging markets eventually become fully performance-competitive in mainstream markets. This is because the rate of technological progress in products leapfrogs the rate of performance improvements mainstream customers demand or can absorb. Once this happens, the basis of product choice evolves from functionality to reliability, then convenience, and ultimately price (that’s also when it becomes commodified).
This can be represented by the chart below:
Courtesy of Alec Saunders
Against this backdrop, how should managers in incumbent companies act? Here, Christensen proposes the following:
1) Give responsibility for disruptive technologies to new organizations serving new customers that need them. This would then allow adequate resources to be apportioned to emerging markets.
2) Set up a separate organization away from the mainstream organization. One which is small enough to be excited about the initial modest gains in sales, profitability and market share.
3) Plan for failure and learning. Hedge small bets on commercializing disruptive technologies and make rapid revisions as data on customer needs and market responses are obtained.
4) Rely less on technological breakthroughs and more on discovering new markets outside current mainstream markets. By doing so, you may find that the very attributes which make disruptive technologies unattractive to mainstream markets are those from which new markets can be built.
Towards the end of the book, Christensen elaborated on a hypothetical case study of the electric car and how the principles of disruptive innovation could be applied. His ideas include creating a different distribution network (consumer electronic stores?), designing for crowded Asian cities (rather than sprawling Western ones), and emphasizing simplicity and convenience (as opposed to performance). Following his arguments on the need for existing automakers to think of new markets rather than serve the old, I couldn’t help nodding my head in agreement.
Overall, “The Innovator’s Dilemma” is a “must read” for business leaders, managers and entrepreneurs keen to make an impact. It’s central thesis of searching new markets for disruptive innovations (as opposed to shoehorning them to current customers) is a novel idea worthy of consideration.