“The Innovator’s Dilemma” book by Professor Clayton Christensen is one of the best books I have read regarding disruptive technologies and how can the management of established companies handle them properly since their early stages.
I will share in this post my main takeaways from the book.
The book explains the effects of disruptive technologies in the hard drive industry, mechanical excavators industry and insulin industry. The main conclusion of the book is that the very best management techniques, that brought established firms to the heights of their success, were the ones that made them fail while getting challenged by entrant firms introducing disruptive technologies.
In layman’s terms, a disruptive technology is
- A technology that initially does not meet the needs of the main established market, but has some other dimension which is favorable for a small different market of early adopters.
- A technology that its rate of progression is higher than the one of the established technologies. As a result, after some years this new disruptive technology will go upward markets and be able to take on the established companies!
As an example, let’s consider an illustrative one with electrical cars. In the established market, i.e. the market of diesel cars, the users need a car which can drive 150 miles without having to be refueled. While the early age of electric cars can only drive for 50 miles before they need to be charged. While the speed and maximum miles that can be driven without having to refuel do not change much in the established market, the progression of the electric cars technology is high enough that after some years they are going to fulfill the needs of the established market customers. As a result, the electric cars will challenge the established market of diesel cars and most probably convince customers from the established market into switching to electric cars.
When disruptive technologies are introduced, usually there is no existing market for them. The market is found by exploratory marketing (discovery-driven planning) and by introducing the product to the assumed early adopters. While this technique can be adapted by new entrant companies, this does not fit well with big organizations which have to satisfy their main customers and need a higher margin of profits in order to keep their earnings stable to satisfy the investors.
This brings us to the question:
Why do big established companies struggle to handle disruptive innovations?
The main reasons are as follows:
- Companies depend on customers and investors for resources. This means that they cannot invest resources in unknown markets that cannot be planned upon.
- Small markets don’t solve the growth needs of large companies. Big companies need a lot of earnings to keep their stock price growing and satisfy their goals. Small markets do not meet such goals.
- Markets that don’t exist can’t be analyzed. The market of disruptive technologies is not known initially and is found out by discovery planning and by observing the early adopters. Big companies used to take very carefully planned steps, cannot cope with such risks.
- An organization’s capabilities define its disabilities. The company processes that brought its success are very hard to be changed. More on this on the point “How to deal with disruptive technologies”.
- 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.
When can disruptive technologies be introduced?
There are some optional conditions in which disruptive technologies can be introduced and flourish.
One such condition is when the market over satisfies the primary product dimension, then another dimension starts to take priority.
For example, back then the capacity of the 14 inch disk drive achieved a point which was more than enough for the mainstream consumers. This allowed the disruptive technologies to produce hard drives with smaller capacities than those of 14 inch drives, but with lower physical size, 8 inch. So, convenience took over the size of the hard drive.
Another optional condition is as described before when the rate of progression of the disruptive technology is more than the one of the established technology. Only in this case, years later the disruptive technology can go upmarket and challenge the established companies.
How can companies cope with disruptive technologies?
Before answering the question, it is important to understand the organizational capabilities.
Three classes of factors affect what an organization can and cannot do:
- Resources – include people, equipment, technology, product designs, brands, information, cash and relationships with suppliers, distributors and customers.
- Processes – Organizations create value as employees transform inputs of resources, people, technology, cash into products and services of greater worth. The patterns of interaction, coordination, communication, and decision-making through which they accomplish these transformations are processes.
- Values – The values of an organization are the criteria by which decisions about priorities are made.
Out of these three factors, processes and values make big organizations rigid.
Three ways to cope with disruptive technologies are:
- Acquire another company – An established company can acquire an entrant company which is introducing the disruptive technology. The main advantage is that the entrant company has values and processes tailored into valuing and producing products that fulfill their smaller goals. In addition, their market needs are fulfilled by the smaller markets, as they have smaller initial goals. A small profit is very motivating for an entrant company, while means almost nothing for established companies. Another advantage is that resource allocation in smaller companies that value the disruptive technology will be fully supportive to this technology, as it is the only focus for achieving its goals.
- Create a separate department inside the established company – this strategy consists of allocating resources and teams inside the company to work with the disruptive technology. From the examples given in the book, usually this is the worst strategy to cope with disruptive technologies. The reasons are clear: big companies are not satisfied by small markets, resource allocation will be difficult because management will try to reach the main goals by earning more profit and this will lead to resources going to existing projects instead of the departments working with the disruptive technologies. Finally, processes and values are hard to change. A company specialized in distributing a particular product and having adopted its processes for one particular purpose, will have a hard time, if not impossible to change them.
- Establish a separate company – Big companies can establish another small company, in which they own the majority of the equity. The smaller company will have processes, values and resources tailored toward the disruptive technology that they are going to tackle.
From the above strategies, the first and the third one have been the most successful so far.
I highly suggest anyone interested in disruptive technologies and management to get a copy of the book. You can follow this link to get a copy on Amazon: “The innovator’s dilemma”
I would love to hear your opinions on this topic. Feel free to comment below.