Innovators Dilemma

Book: Innovators Dilemma
Writer:  Clayton M. Christensen
Subject: The book investigates why great companies fails to adapt disruptive technologies.
My Rating:  4_star (4/5)

Very good book, reviews the subject objectively. Must read for managers. One thing I didn’t like is writer mostly focused on production industries. The ides are questionable when you apply to service or software industries. Lets look at important concepts of book:

innovators-dilemma
“Technology means the process by which an organization transforms labor, capital, materials, and information into products and services of greater value. Innovation refers to change in one of these technologies.”
 
The writer argues that when we look at history, we see that the best managed companies can completely fail in a few years. May be you should always make the best moves.
“Most new technologies foster improved product performance. I call these sustaining technologies. Some sustaining technologies can be discontinuous or radical in character, while others are of an incremental nature. What all sustaining technologies in common is that they improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.” 
 
“… an important finding revealed in this book is that rarely have even the most radically difficult sustaining technologies precipitated the failure of leading firms… Ironically in each of the instances studied in this book, it was disruptive technology that precipitated the leading firms failure.”
 
In introduction, writer gives an analogy about ancients who attempted to fly by strapping feathered wings to their arms and flapping  with all their might as they leap from high places invariably failed. They were fighting against some very powerful forces of nature. Flight became possible only after people come to understand the relevant natural laws and principles that defined how the world worked. Based on this analogy writer propose 5 laws that are so strong, like natural laws, that managers who ignore or fight them are nearly powerless to pilot their companies through a disruptive technology storm. The principles:
  1. Companies depend on customers and investors for resources.
  2. Small markets don’t solve the growth needs of large companies.
  3. Markets that don’t exist can’t be analyzed.
  4. An organization’s capabilities define its disabilities. “Organizations have capabilities that exist independently of the people who work within them. An organization’s capabilities reside in two places. The first is in its process -the methods by which people have learned to transform inputs of labor, energy, materials, information, cash and technology into outputs of higher value. The second is in the organization’s values, which are the criteria that managers and employees in the organization use when making prioritization decisions.”
  5. Technology supply may not equal market demand.
Why great companies can fail? 
“The pattern is stunningly consistent. Whether the technology was radical or incremental, expensive or cheap, software or hardware, component or architecture, competence enhancing or competence destroying, the pattern was same. When faced with sustaining technology, change that gave existing customers something more and better in what they wanted, the leading practitioners of the prior technology led the industry in the development and adoption of the new. Clearly, the leaders in this industry did not fail because they became passive, arrogant, or risk-averse or because they couldn’t keep up with stunning rate of technological change. Disruptive technologies were the changes that toppled the industry’s leaders. Generally disruptive innovations were technologically straightforward, consisting of  off-the-shelf components put together in a product architecture that was often simpler than prior approaches. They offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from ,and unimportant to, the mainstream.
 
Value Networks and The Impetus to Innovate
Three theories are proposed to answer why successful companies fail.
  1. Organization’s structure and the way its groups learn to work together can then affect the way it can and can not design new products.
  2. The magnitude of the technological change relative to the companies’ capabilities will determine which firms triumph after a technology invades an industry.
  3. Value network. The context within which a firm identifies and solves problems, procures inputs, react to competitors, and strives for profit.
The Decision Making Pattern
  1. Disruptive technologies were first developed withing established firms.
  2. Marketing personnel then sought reactions from their lead customers.
  3. Established firms step up the pace of sustaining technological development.
  4. New companies were formed, and markets for the disruptive technologies were found by trial and error.
  5. The  entrants moved upmarket
  6. Established firms belatedly jumped on the bandwagon to defend their customer base.
“By this time, of course, the new architecture had shed its disruptive character and become fully performance competitive. The firms attacking from value networks below brought with them cost structures set to achieve profitability at lower gross margins. The attackers therefore were able to price their products profitably, while defending, established firms experienced a severe price war. For established manufacturers that did succeed in introducing the new architectures, survival was only reward.”
 
Five fundamental principles of organizational nature that managers, in the successful firms consistently recognized and harnessed.
The firms that lost their battles with disruptive technologies chose to ignore or fight them. These principles are:
  1. Resource dependence: Customers effectively control the patterns of resource allocation in well-run companies.
  2. Small markets don’t solve the growth needs of large companies.
  3. The ultimate users or applications for disruptive technologies are unknowable in advance. Failure is an intrinsic step toward success.
  4. Organizations have capabilities that exist independently of the capabilities of the people who work within them. Organizations’ capabilities reside in their process and their values -and the way process and values that constitute their core capabilities within the current business model also define their disabilities when confronted with disruption.
  5. Technology supply may not equal market demand. The attributes that make disruptive technologies unattractive in established markets often are the very ones that constitute their greatest value in emerging markets.
How did the successful managers harness these principles to their advantage?
  1. They embedded projects to develop and commercialize disruptive technologies within an organization whose customers needed them. When managers aligned a disruptive innovation with the ‘right’ customers, customer demand increased the probability that the innovation would get the resource it needed.
  2. They placed projects to develop disruptive technologies in organizations small enough to get excited about small opportunities.
  3. They planned to fail early and inexpensively in the search for the market for a disruptive technology. They found that their markets generally coalesced through an iterative process of trial, learning and trial again.
  4. They utilized some the resources of the mainstream organization to address the disruption, but they were careful not to leverage its process and values. They created different ways of working within an organization whose values and cost structure were turned to the disruptive task at hand.
  5. When commercializing disruptive technologies, they found or developed new markets that valued the attributes of the disruptive products, rather than search for a technological breakthrough so that the disruptive product could compete as a sustaining technology in mainstream markets.
What should managers do when faced with a disruptive technology that the company’s customers explicitly do not want?
One option is to convince everyone in the firm that the company should pursue it anyway, that it has long term strategic importance despite rejection by the customers who pay the bills and despite lower profitability than the upmarket alternatives. The other option would be to create an independent organization and embed it among emerging customers that do need the technology. Managers who choose the first option essentially are picking fight with a powerful tendency of organizational nature -that customers, not managers, essentially control the investment patterns of a company. By contrast, managers who choose the second option align themselves with this tendency, harnessing rather than fighting its power.
Leadership in sustaining technologies may not be essential
There is no evidence that any of the leaders (companies) in developing and adapting sustaining technologies developed a discernible competitive advantage over the followers. Leadership in disruptive technologies creates enormous value.

When we look at Apple’s Newton PDA, we see that small markets can not satisfy the near-term growth requirements of big organizations.
Johnson&Johnson has with great success followed a strategy of having independent companies in dealing with disruptive technologies. Though its total revenues amount to more than $20 Billion, J&J comprises 160 autonomously operating companies. J&J’s strategy is to launch products of disruptive technologies through very small companies acquired for that purpose.
Discovering the emerging markets for disruptive technologies (called ‘agnostic marketing’ by writer) is an assumption that no one -not us, not our customers- can know whether, how, or in what quantities a disruptive product can or will be used before they have experience using it. Some managers, faced with such uncertainty, prefer to wait until others have defined the market. Given the powerful first mover advantages at stake, however, managers confronting disruptive technologies need to get out of their laboratories and focus groups and directly create knowledge about new customers and new applications through discovery driven expeditions into marketplace.
Unfortunately, some managers don’t think as rigorously about whether their organizations have the capability to successfully execute jobs that may be given to them. Frequently they assume that if the people working in the project individually have required capabilities to get the job done well, then the organization in which they work will also have the same capability to succeed. This often is not the case.
A process that defines a capability in executing a certain task concurently defines disabilities in executing other tasks.
One of the dilemmas of management is that, by their very nature, processes are established so that employees perform recurring tasks in consistent way, time after time. To ensure consistency, they are meant not to change -or if they must change, to change through tightly controlled procedures. This means that the very mechanisms through which organizations create value are intrinsically inimical to change.
The values of an organization are the criteria by which decisions about priorities are made. Prioritization decisions are made by employees at every level. A key metric of good management, in fact, is whether clear and consistent values are permitted the organization. Clear, consistent and broadly understood values, however, also define what an organization can not do.
Managers who determine that organization’s capabilities aren’t suited for a new task, are forced with three options through which to create new capabilities. They can:
  1. Acquire a different organization whose process and values are a close match with the new task.
  2. Try to change the process and values of the current organization
  3. Separate out an independent organization and develop within it the new processes and values that are required to solve the new problem.
Managers whose organizations first determine that they have the resources required to succeed. They then need to ask a separate question: Does the organization have the process and values to succeed?
SUMMARY
  • The pace of progress tat markets demand or can absorb may be different from the progress offered by technology. This means that products do not appear to be useful to our customers today (that is, disruptive technologies) may squarely address their needs tomorrow. Recognizing this possibility, we cannot expect our customers to lead us toward innovations that they do not now need. Therefore, while keeping close to our customers is an important management paradigm for handling sustaining innovations, it may provide mislead data for handling disruptive ones.
  • Managing innovation mirrors the resource allocation process: Innovation proposals that get the funding and manpower they require may succeed; those given lower priority, whether formally or de facto, will starve for lack of resources and have little chance of success. Until other alternative that appear to be financially more attractive have disappeared or been eliminated, managers will find it extraordinarily difficult to keep resources focused on the pursuit of a disruptive technology.
  • Disruptive technology needs a new market. Old customers are less relevant. Disruptive technology is a marketing problem, not a technological one.
  • The capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe. This is because capabilities are forged within value networks. Hence, organizations have capabilities to take certain new technologies into certain markets. They have disabilities in taking technology to market in other ways. These types of differences exist in other areas such as failure toleration, gross margin toleration, volume toleration, development cycles etc. Very often, the new markets enabled by disruptive technologies require very different capabilities along each of these dimensions.
  • Information required to make investment decisions does not exist. Failure and iterative learning are required. Successful organizations which can not tolerate failure in sustaining innovations, find it difficult simultaneously to tolerate failure in disruptive ones.
  • It is not wise to always be a leader or always a follower. Disruptive innovations reward leaders. Sustaining  innovations, however, very often do not
  • Small entrant firms enjoy as they build the emerging markets for disruptive technologies that they are doing something that is simply does not make sense for the established leaders to do.