Book: The Innovator's Dilemma

  • Read: February-March 2012
  • Rating: 8.0/10

The Innovator’s Dilemma by Clayton Christensen was an alright book. I really liked the concept, and how as companies and organizations become more successful, they’re actually incapable of dealing with disruptive technologies. Clayton makes great cases for why this is true, and his thesis is well backed. I would definitely recommend this book to managers of any level of every size organization. Worth a read through at least once.

My Notes

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

Failure Framework

  1. there is strategically important distinction between sustaining and disruptive technologies.
  2. pace of technological progress can and does outstrip what the markets need
  3. customers and financial structures of successful companies color heavily the sorts of investments that appear to be attractive to them

Sustaining Technologies

  • Foster improved product performance (of established products)

Disruptive Technologies

  • Innovations that result in worse product performance (at least in the near-term)
  • Simpler and cheaper
  • Lower margins, not greater profits
  • First commercialized in emerging or insignificant markets
  • Leading firms’ most profitable customers generally don’t want or need disruptive technologies

Five laws or principles of disruptive technology

  1. Companies depend on customers and investors for resources
  • Creating an independent organization, with a cost structure honed to achieve profitability at the low margins characteristic of most disruptive technologies, is the only viable way for established firms to harness this principle
  1. Small markets don’t solve the growth needs of large companies
  • Disruptive technologies typically enable new markets to emerge
  • Small organizations can most easily respond to the opportunities for growth in a small market
  1. Markets that don’t exist can’t be analyzed
  • It is in disruptive innovations, where we know least about the market, that there are such first-mover advantages
  1. An organization’s capabilities define its disabilities
  • Managers assume once they’ve found the right people (for an innovation problem), that the organization in which they’ll work will also be capable of succeeding at that task
  1. Technology supply may not equal market demand
  • When the performance of two or more competing products has improved beyond what the market demands, customers can no longer base their choice upon which is the higher performing product
  • The basis of product choice often evolves from functionality to reliability, then to convenience, and ultimately, to price

The innovator’s dilemma: Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake

Third theory of why good companies can fail: value network

  • The context within a firm identifies and responds to customers’ needs, solves problems, procures input, reacts to competitors, and strives for profit
  • Within a value network, each firm’s competitive strategy, and particularly its past choices of markets, determines its perceptions of the economic value of a new technology

Value network characteristics (one value network characteristic is different from another):

  • Difference of valuation of attributes
  • Overhead cost structure

The attractiveness of a technological opportunity is determined by the firm’s position in the relevant value network

Good managers do what makes sense, and what makes sense is primarily shaped by their value network

Six-step decision-making pattern:

  1. Disruptive technologies were first developed within established firms
  2. Marketing personnel then sought reactions from their lead customers
  3. Established firms set up the pace of sustaining technological development
  4. New technologies were formed, and markets for the disruptive technologies were found by trial and error
  5. Entrants moved upmarket
  6. Established firms belatedly jumped on the bandwagon to defend their customer base

When will the disruptive technology’s trajectory intersect with what the market needs?

Five implications of the value network framework:

  1. The value network in which a firm competes has a profound influence on its ability to marshal and focus the necessary resources and capabilities to overcome the technological and organizational hurdles that impede innovation
  2. Key determinant of the probability of innovative effort’s success is degree it addresses the well-understood needs of known actors within the value network
  3. Established firms’ decisions to ignore technologies that do not address their customers’ needs can become fatal
  4. Entrant firms have an attacker’s advantage with innovations because such technologies generate no value within the established value network
  5. Attacker’s advantage is in ease with which entrants can identify and make strategic commitments to attack and develop emerging market applications… it’s all about changing strategies and cost structures, not just technologies

Leading firms in established technology remain financially strong until the disruptive technology is in the midst of their mainstream market

It is by resource allocation processes that direct resources toward new product proposals that promise higher margins and larger markets

Established firms are captive to the financial structure and organizational culture inherent in the value network in which they compete

Resource dependence: companies’ freedom of action is limited to satisfying the needs of those entities outside the firm (customers and investors) that give it the resources it needs to survive

Firms that sought growth by entering small, emerging markets logged twenty times the revenues of the firms pursuing growth in larger markets

Market applications for disruptive technologies are unknown at the time of their development, and they are also unknowable

Experts’ forecasts will always be wrong

Rightly or wrongly, individual managers in most organizations believe that they cannot fail

Plan to learn rather than plan to execute

Agnostic Marketing: marketing under an explicit 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

Think rigorously whether your organization has the capability to successfully execute jobs that may be given to it

Organizational Capabilities Framework:

  • Resources
    • Most visible factor of what an organization can and cannot do
  • Processes
    • Patterns of interaction, coordination, communication, and decision making
    • Capability in executing a certain task concurrently defines disabilities in executing other tasks
    • Normally meant not to change- this means that the very mechanism through which organizations create value are intrinsically inimical to change
  • Values
    • Criteria by which decisions about priorities are made
    • One of the bittersweet rewards of success is, in fact, that as companies become large, they literally lose the capability to enter small emerging markets

Product Evolution model: aka the buying hierarchy… four phases:

  1. Functionality - when no available product satisfies the functionality requirements by which product choice is made
  2. Reliability - when two or or products credibly satisfy the market’s demand for functionality
  3. Convenience - when two or more vendors improve to the point that they more than satisfy reliability demanded
  4. Price - when multiple vendors offer a package of convenient products or services