Innovators Dilemma

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Innovators Dilemma

• MAN 6721
• March 24, 2004

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IntroductionSlide 1 of 3

• The book examines the business failures of
  excellent companies, the kinds of companies
  respected for their abilities to innovate and
  execute.
• While companies stumble for many reasons,
  bureaucracy, arrogance, tired executive blood,
  poor planning, or even bad luck, that is not what
  the book is about.

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IntroductionSlide 2 of 3

• The book is about well-managed companies that
  have their competitive antennae up, that listen
  to their customers, invest aggressively in new
  technologies, and yet still lose market
  dominance.

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IntroductionSlide 3 of 3

• The cases of failure analyzed in the book include
  Sears (retailing), IBM (mainframes), DEC
  (mainframe computers), Xerox (copiers), the whole
  steel industry, and Bucyrus Erie (earthmoving
  equipment).

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Key Question

• In the Innovators Dilemma, Professor Christensen
  asks the question
• Why do well-managed companies fail?
• He concludes that they often fail because the
  very management practices that have allowed them
  to become industry leaders also makes it
  extremely difficult for them to develop the
  disruptive technologies that ultimately steal
  away their markets.

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Sustaining TechnologiesSlide 1 of 2

• Sustaining technologies improve something a firm
  is already doing. They also represent changes a
  customer can readily accept.
• Well managed companies are excellent at
  developing sustaining technologies that improve
  the performance of their products.
• For example, U.S. Steel will naturally develop
  better ways of delivering the products it
  currently makes. However successful companies
  will hardly ever develop completely new
  technologies.

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Sustaining TechnologiesSlide 2 of 2

• This is because their management practices are
  biased toward
• Listening to customers
• Investing aggressively in technologies that give
  those customers what they say they want
• Seeking higher margins
• Targeting larger markets rather than smaller ones

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Disruptive TechnologiesSlide 1 of 3

• Disruptive technologies, however, are distinctly
  different from sustaining technologies. They are
  new technologies that most customers see as being
  more trouble than they are worth.
• When they first appear, they almost always offer
  lower performance in terms of the attributes that
  mainstream customers care about.
• Steel minimill example.

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Disruptive TechnologiesSlide 2 of 3

• In computer disk drives, for example, disruptive
  technologies have always had less capacity than
  the old technologies.
• But disruptive technologies have other attributes
  that a few fringe (generally new) customers
  value. They are typically cheaper, smaller,
  simpler and more convenient to use. Therefore,
  they open new markets.

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Disruptive TechnologiesSlide 3 of 3

• Further, because with experience and sufficient
  investment, the developers of disruptive
  technologies will always improve their products
  performance, they eventually are able to take
  over the older markets.
• This is because they are able to deliver
  sufficient performance on the old attributes, and
  they add some new ones.

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Essence of BookSlide 1 of 3

• The Innovators Dilemma describes both the
  processes through which disruptive technologies
  supplant older technologies and the powerful
  forces within well-managed companies that make
  them unlikely to develop those technologies
  themselves.

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Essence of BookSlide 2 of 3

• Prof. Christensen offers a framework of four
  Principles of Disruptive Technology to explain
  why the management practices that are the most
  productive for exploiting existing technologies
  are anti-productive when it comes to developing
  disruptive ones.

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Essence of BookSlide 3 of 3

• And, finally, he suggests ways that managers can
  harness these principles so that their companies
  can become more effective at developing for
  themselves the new technologies that are going to
  capture their markets in the future.

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Four Principles of Disruptive Technology
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1 Companies Depend on Customers and Investors
for ResourcesPart 1 of 2

• In order to survive, companies must provide
  customers and investors with the products,
  services, and profits that they require.
• The highest performing companies, therefore, have
  well-developed systems for killing ideas that
  their customers dont want.

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1 Companies Depend on Customers and Investors
for ResourcesPart 2 of 2

• As a result, these companies find it very
  difficult to invest adequate resources in
  disruptive technologies until their customers
  want them.
• And by then, its too late.

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2 Small Markets Dont Solve the Growth Needs of
Large CompaniesPart 1 of 2

• To maintain their share prices and create
  internal opportunities for their employees,
  successful companies need to grow.
• And as they grow, they need increasing amounts of
  new revenue just to maintain the same growth rate.

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2 Small Markets Dont Solve the Growth Needs of
Large CompaniesPart 2 of 2

• Therefore, it becomes progressively more
  difficult for them to enter the newer, smaller
  markets that are destined to become the large
  markets of the future.
• To maintain their growth rates, they must focus
  on large markets.

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3 Markets That Dont Exist Cant Be
AnalyzedPart 1 of 2

• Sound marketing research and good planning
  followed by execution according to plan are the
  hallmarks of good management.

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3 Markets That Dont Exist Cant Be
AnalyzedPart 2 of 2

• But, companies whose investment processes demand
  quantification of market size and financial
  returns before they can enter a market get
  paralyzed when faced with disruptive technologies
  because they demand data on markets that dont
  yet exist.

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4 Technology Supply May Not Equal Market
DemandPart 1 of 3

• Although disruptive technologies can initially be
  used only in small markets, they eventually
  become competitive in mainstream markets.
• This is because the pace of technological
  progress often exceeds the rate of improvement
  that mainstream customers want or can absorb.

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4 Technology Supply May Not Equal Market
DemandPart 2 of 3

• As a result, the products that are currently in
  the mainstream eventually will overshoot the
  performance that mainstream markets demand, while
  the disruptive technologies that underperform
  relative to customer expectations in the
  mainstream market today, may become directly
  competitive tomorrow.

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4 Technology Supply May Not Equal Market
DemandPart 3 of 3

• These criteria tend to move toward reliability,
  convenience and price, all of which are areas in
  which the newer technologies often have an
  advantage.

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Impact of These FactorsSlide 1 of 3

• While these principals may seem obvious, their
  implications are profound.
• For example, the book notes that the conventional
  solutions to companies problems, planning
  better, working harder, and becoming more
  customer driven, all exacerbate the problems when
  firms are faced with disruptive change.

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Impact of These FactorsSlide 2 of 3

• Think about trying to sell such heresy to your
  sales manager of VP or Marketing. Sorry, Ted,
  the worse thing you can do is to listen too much
  to your customers.
• Still, the cases in the book prove that that
  premise is sometimes true, when your industry is
  faced with disruptive change.

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Impact of These FactorsSlide 3 of 3

• Customers dont ask for new things like cell
  phones, CDs, or digital photography, instead they
  ask for refined versions of what they have been
  getting.

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So, whats the solution to the Innovators
Dilemma?
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Managers Faced With Disruptive Technologies
ShouldPart 1 of 3

• Give responsibility for disruptive technologies
  to organizations whose customers need them so
  that resources will flow to them.
• Set up a separate organization small enough to
  get excited by small gains.

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Managers Faced With Disruptive Technologies
ShouldPart 2 of 3

• Plan for failure. Dont bet all your resources
  on being right the first time.
• Think of your initial efforts at commercializing
  a disruptive technology as learning
  opportunities. Make revisions as you gather data.

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Managers Faced With Disruptive Technologies
ShouldPart 3 of 3

• Dont count on breakthroughs. Move ahead early
  and find the market for the current attributes of
  the technology. You will find it outside the
  current mainstream market.
• You will also find that the attributes that make
  disruptive technologies unattractive to
  mainstream markets are the attributes on which
  the new markets will be built.