In The Innovator’s Dilemma, Harvard Business School Professor Clayton Christensen argues that the very approaches that make companies successful in established markets can make it difficult for them to develop or fight against ‘disruptive’ technologies.
The book makes a distinction between two type of innovation: ‘sustaining’ and ‘disruptive’. Sustaining innovations improve features of products in ways that customers have historically found valuable. Disruptive innovations change the value proposition in a market, typically offering lower performance in one or more aspect that mainstream customers care about, but advantages in certain respects (they are often cheaper, simpler, smaller and more convenient) that are valued by some (often new) customers. Disruptive technologies are generally lower margin and commercialised in emerging markets or market niches. For example, within the film camera manufacturing sector in the 1970s a better sensor that improved the quality of photograph produced would represent a sustaining innovation, while digital cameras would be disruptive.
Established companies tend to be effective at developing sustaining innovations. Such companies are often well-managed and do what theory suggests they should: solicit feedback from their most important customers and base their decisions on this, stay abreast of industry trends and competitor movements, and pursue opportunities that offer the highest financial returns (i.e. develop higher-margin products and move into big markets). However, for a number of reasons, the capabilities and approaches that help them develop sustaining innovations can prevent exploration or hinder development of emerging disruptive innovations:
- By responding to customer feedback, companies cannot justify investing in low-margin alternatives until customers show signs that they want them.
- Large companies can only maintain growth rates (impacting share price, employee opportunities etc) by pursuing large markets. As they grow, it becomes increasingly difficult to enter emerging markets, even if these have vast future potential.
- Decisions based on quantification of opportunity and return, as well as careful planning, do not deal well with markets that do not yet exist.
- Large companies develop cost structures that make it difficult to achieve profitability in low-end markets.
- They focus on competing with established competitors rather than new entrants.
- The processes and values that emerge to make a company effective in what it does are hard to change (regardless of its resources and capabilities).
- The best staff do not want to be involved in initiatives that are not central to an organisation.
- An organisation is unlikely to persevere if it encounters difficulties in non-core initiatives, while these are the most likely to be scrapped if resources become constrained.
Established companies therefore find it difficult to commit resources to exploring disruptive innovations and naturally focus upmarket, developing higher performance products that tend to be more complex and more expensive.
However, the danger in this approach is that the functionality of their products can eventually exceed what the market needs or is willing to pay for. Over time, the performance of disruptive technologies can improve to deliver sufficient (even if lower) performance in traditionally valued aspects, alongside other benefits. The advantage of high-end solutions can thus be eroded, and buying decisions evolve to be based on new criteria, typically moving from functionality to reliability to convenience to price. By the time that markets for disruptive innovations become sufficiently attractive for large companies to enter, it is generally too late for them to successfully do so (first mover advantages are much stronger for disruptive than sustaining innovations).
The implication of this theory is that large companies are generally disrupted not because they lack resources, are lazy or poorly managed. In fact, disruptive technologies are often initially developed in large companies (e.g. Kodak invented the digital camera), even if mostly commercialised by new entrants (many of which are established by frustrated employees of incumbents). As Christiansen writes, ‘The very processes and values that constitute an organization’s capabilities in one context, define its disabilities in another context‘. Moreover, the theory suggests that many widely-held principles of good management (such as ‘always listen to your customers’) are only ‘situationally appropriate’.
Christensen suggests that disruptive technologies should be developed by focused organisations that are are aligned with the needs of target customers and small enough (and with appropriate cost structures) to value the market opportunity, otherwise resources are likely to be diverted elsewhere . Such entities (most likely autonomous spin-outs or startups) also offer the advantage of not being restricted by established values and processes.
He also advises that, in pursuing disruptive innovations, the best approach is to find or develop new markets that value the disruptive attribute, rather than wait for developments that allow them to compete as a sustaining technology in established markets. Organisations should plan to fail early and inexpensively on such initiatives – the final applications are typically unknown and so they must learn and conserve resources to be able to iterate towards a successful solution.