The Innovators Dilemma - A TMC Must Read

Doug Lawson signing back in to kick off the new series of TMC Must Read reviews.  I’ll be discussing The Innovator’s Dilemma By Clayton M. Christensen.  I look forward to some good blog discussions of this classic.

This book was first published in 1997 and its primary data source revolves around the disk drive industry and the mainframe, mini-computer, and early PC days.  This all seems quaint and antique-like when read in the age of the iPhone, Macbook Air, and the $200 TB drive, but the main premise, key concepts, and proposed solutions still ring true today.  The thesis of this book can be simply stated – “If your company has become big and hugely successful you’re screwed…unless…”.   

Christensen suggests that great companies can fail due to their inability to easily invest in disruptive technologies.  This investment difficulty is driven by current customer requirements that encourage the company to allocate its resources to areas of high interest of the customer.   These areas of interest are often sustaining technologies versus disruptive technology.  This investment strategy is reinforced by investors that require a short-term return on investment that is only possible by supporting the requirements of large current customers.  By not investing in the disruptive technology the company has opened the door for a future competitor with a superior technology.  All is not lost however; Christensen identifies several approaches that large successful companies can take to avoid this innovator’s dilemma.

Christensen discusses two distinct types of technology in this book.  He states that most new technologies are sustaining technologies; they can be discontinuous, radical, or incremental in nature, but all improve the performance of established products in a direction valued by current customers.  Disruptive technologies on the other hand underperform the current products, but offer features that a new group of customers value, they are also often cheaper, simpler, smaller, and more convenient to use.

Large companies usually have established processes that would include methods to assess market potential for different technology and resulting products.  This might include the Voice of the Customer technique discussed in the TMC vocabulary.  There are a couple of problems with applying this approach to disruptive technologies.  The company would likely apply the VoC to large existing customers and the results would probably steer the company back toward sustaining technologies.  Somehow the company would need to identify some early adopters from the community that see value in this new “underperforming” technology.  Unfortunately, even then the results could still steer the company away from the disruptive technology.   These new customers would represent a group of small unknown companies in a nascent market, understood only by a technology opinion leader, and most importantly as Christensen states markets that do not exist can’t be analyzed, they must be discovered, something that doesn’t easily happen in the structured environment of a large successful company.  This last fact would usually steer a large established company away from the technology.

Christensen offers several suggestions for overcoming this dilemma.   They are all based on a couple of key concepts.  The organization and its goals must be sized appropriately for the market, and since the market for disruptive technology is nascent, unknown and therefore difficult to analyze, you must create plans to learn versus plans to execute.   Additionally, customer product decision criteria changes overtime as a market matures.  Initially focused on functionality (ideal for disruptive technology), then moving to reliability, convenience, and finally price.  Current customers of the large company have likely progressed along this curve and therefore are unlikely to have significant interest in the new functionality of an under-performing new technology.   The new customer base seeking the disruptive technology is always looking at the functionality and is especially interested in specific functionality aspects of the new technology.  This customer and market is likely to be smaller and behave quite differently than the “current customer” of the company.  An organization must be created with a structure that allows it to utilize its resources, processes and values to learn quickly and respond to this nascent market without internally competing for resources or being compared on market sizes, revenues and profits. 

Christensen suggests that it is extremely difficult for this to happen successfully inside the current organizational structure of a large successful company.  The existing customer base and current measurement criteria are too powerful to allow even the strongest of CEO’s a high probability of successfully incubating and growing the new market.  He suggests several methods that have shown success.  These include; a spinout strategy in which a new company is created to support the new market and technology.  The large company would retain a majority stake in the new company with the potential to buy it out in the future.  The company could also create a separate division remotely located so that it would not be easily compared with or compete with the existing organization for resources.  Lastly the company could utilize an acquisition strategy by identifying interesting technology in small companies and acquiring them before they grow too large.  All of these strategies still require the CEO maintain a significant strategic perspective and commitment otherwise none of them will work.

In recent years other techniques for incubating and developing these disruptive technologies and markets have been encouraged.  At companies like Google and 3M employees are encouraged to spend a portion of their time working on projects of interest that are outside of their normal job scope.  Both of these companies have show strong abilities to innovate and develop new technologies and markets.

My experience has suggested that the CEO commitment and the presence of an executive/champion responsible for the effort are the most important elements for a large company to successfully develop and significantly benefit from a disruptive technology.  With these people behind the project it must then be separated in some manner from the internal organization it will compete with.  Only then does it truly have a chance.

In closing I will go back to the time frame from which most of the data for this book was gathered.  While working at Digital in the 80’s it was commonly discussed that “Ken (Olsen – CEO) did not believe that people needed or wanted a computer in their home”.   Whether this was true or folklore didn’t matter, it weighed in on every decision that involved a PC project within the company, and we all know the fate of the once great DEC.

For links to other “Must Reads” at the TMC website visit http://www.technologymarketingcenter.com/must-reads.php

Comments

[Chris Halliwell]

Doug,
Thank you for kicking off our series of book reviews at Technology Marketing Center. Your review of The Innovator's Dilemma was thorough, thoughtful, and very helpful. I would like to hear your thoughts on the seemingly inherent assumption of the book: that long term consistently successful technology companies must learn to cultivate disruptive technologies sold to new customer sets. At Intel, where I cut my marketing teeth, there was a sort of schitzophrenia on this subject: while Intel's founders would certainly have agreed with Christensen, those same founders set about to build the biggest and most successful semiconductor company ever, on the basis of continuous investments in adjacent technologies and customer sets. Your views?

Thanks again Doug for kicking off out series of book reviews over the next 8 weeks. You've set a high bar for the rest of the TMC Leaders.

[Art Swift]

Dear Doug:

Thanks for the insightful review of a great book.

In 1993, I had the opportunity to sit down with Ken Olsen to try to learn about the history of DEC as a company and as a technology leader. You'll recall that at time Bob Palmer had just taken over as CEO of DEC, and as such, Ken had time on his hands and a willingness to share his experiences. He indeed verified that the PC story as you related it was basically true.

In my meetings with Ken, he also related many other experiences, both positive and negative. Most interesting to me, though, was his approach to shepherding a start-up from $0 to $14B of revenues. He said that he saw himself as being in charge of project funding -- any entrepreneur in the company could have a business idea, gather a team with energy and qualifications, and seek funding from the CEO. He had no qualms about creating competing teams pursuing similar products and markets, and thought that the model worked well until people figured out how to game the system. I thought it was a really interesting approach.

Thanks again and best regards,
Art Swift