The Innovator's Dilemma by Clayton ChristensenDate read: 2014-03-09.
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How cash cows incentives companies to ignore disruptive technologies at their own peril. Discovering new markets also involves failure. Optimize plans for learning and discovery rather than execution.
- The Failure Framework:
- Two Types of technologies:
- Five Laws of Disruptive Technologies
- How successful managers harness five Principles of Disruptive Technologies to their advantage:
Companies fail because of: listening to customers, investing heavily in new technologies, being well-managed and competitive.
What it means is that widely accepted principles of good management are flawed.
The Failure Framework:
- There is a strategically important distinction between: sustained and disruptive technologies
- The pace of technological progress can and often does outstrip what market needs (this means that the relevance and competitiveness of different technological approaches can change with respect to different markets over time)
- Customers and financial structures of successful companies cover heavily the sorts of investments that appear attractive to them relative to certain types of entering firms.
Two Types of technologies:
- Sustained technologies - most new technologies foster improved product performance (valued historically by mainstream customers in major markets).
- Disruptive technologies - innovations that result in worst product performance (in the near term). They under-perform established products in mainstream markets but they have other features that new customers value. They are typically cheaper, simpler, smaller and frequently more convenient to use.
Established companies don’t want to invest in disruptive technologies because:
- Disruptive products are simpler and cheaper (lower margins)
- Disruptive technologies are first commercialized in emerging/insignificant markets
- Leading firms most profitable customers generally don’t need or can’t use products based on disruptive technologies. So they ‘listen to their customers’ until it’s too late.
Five Laws of Disruptive Technologies
1. Companies depend on customers and investors for resources.
The theory of resource dependence: while managers may think they control the flow of resources in their firms, in the end it’s really customers and investors who dictate how money will be spend (because companies with investment patterns that don’t satisfy their customers and investors don’t survive).
The highest performing companies are those that are the best at this: they have well developed systems for killing ideas that their customers don’t want (as a result they find it difficult to invest in disruptive technologies).
2. Small Markets don’t solve the growth needs of large companies.
Disruptive technologies typically enable new markets to emerge. Companies that enter early have a first move advantage. And yet as they succeed and grow larger it becomes difficult for them to enter even newer, smaller markets that may become big in the future.
Successful companies must continue to grow. But larger companies adopt an unsuccessful strategy of waiting till new markets become large enough to be interesting.
3. Markets that don’t exist can’t be analysed.
- The only thing we know for sure when reading the experts analysis of emerging markets is that they are wrong.
- The Innovator’s Dilemma: companies whose investment processed demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies. They demand market data when none exists. Using planning and marketing techniques that were developed for sustaining technologies in the context of disruptive ones is useless.
- Discovery based planning recognizes the law that the right markets and the right strategy for exploiting them cannot be known in advance. It suggest that managers assume that forecast are wrong and the strategy they chose to pursue may also be wrong. Investing and planning under such assumptions drives managers to develop plan for learning what needs to be known.
4. An organizations capabilities define its disabilities.
The capabilities of an organization are in two places:
- The processes (the methods by which people have learned to transform inputs of labor, energy, materials, information, cash and technology into outputs of higher value),
- The values (the criteria that managers and employees use to make prioritization decisions).
But the processes and values are not flexible (hence their disadvantages).
5. Technology supply may not equal market demand.
Disruptive technologies although initially may only be used in small markets are disruptive because they can become fully performance competitive within a mainstream market against established products.
This happens because the pace of technological progress in products frequently exceeds the rate of performance improvement that mainstream customers demand and can absorb.
How successful managers harness five Principles of Disruptive Technologies to their advantage:
- They invented projects to develop and commercialized disruptive technologies within a organization whose customers needed them.
- They placed projects to develop disruptive technologies in organizations small enough to get excited about small opportunities and small wins
- They plan to fail early and inexpensively in search of a market for a disruptive technology.
- They utilize some of the resources of a mainstream organization to address the disruption but they were careful not to leverage its processes and values.
- When commercializing disruptive technologies they found or developed new markets that value the attributes of the disruptive products rather than search for a technological breakthrough so that the disruptive product can compete as a sustaining technology in mainstream markets.
Give responsibility for disruptive technologies to organizations whose customers need them.
- Resource Dependence - companies freedom of action is limited to satisfying the needs of those entities outside the firm that give it the resources it needs to survive (customers and investors). The organization can survive only if their stuff and systems serve the needs of customers and investors by providing them with the products, services and profit they require.
- Resource Allocation Process - the mechanism through which the customers control the investments of a firm. The patterns of innovation of a company will mirror quite closely the patterns in which resource are allocated. Good RAP are designed to weed out proposals that customers don’t want. This is how things must work in a successful companies.
Match the size of the Organization to the size of the Market.
- Managers must be leaders (not followers) in commercializing disruptive technologies. Doing so requires implanting the project that are to develop such technologies in commercial organizations that much in size the market they are to address.
- Creating new markets is significantly less risky and more rewarding than entering established markets.
- Larger companies must keep growing and so they underestimate the smaller, emerging markets
- 3 Approaches to this problem:
- Try to affect the growth rate of a emerging market so that it becomes big enough fast enough to make a meaningful dent on the potential revenue growth.
- Wait until the market emerged and enter after it’s larg enough to be interesting
- Place responsibility to commercialize disruptive technologies in organizations small enough that their performance will be meaningfully affected by the revenues, profits and small orders in its early years.
Discovering new and emerging markets
- Markets that don’t exist can’t be analysed.
- Suppliers and customers must discover them together.
- The strategy and plans that managers formulate should be plans for learning and discovery rather than execution.
As a manager think “How to discover markets that don’t already exist?”
Discovering markets involves failure, because action must be taken before careful planing (since all plans are wrong), so managers need an approach to minimize it.
- Plans must serve a different purpose - they must be used for learning
- Mindset: we can’t know where the market is, so we must identify what information about the new market is the most necessary and in what sequence it is needed (projects must mirror those priorities)
- Discovery Driven Planing - requires managers to identify the assumptions upon which their business plans or aspirations are based works well in addressing disruptive technologies
- markets for disruptive technologies often emerge from unanticipated successes such discoveries often comes by watching How People Use Products rather than listening to what they say = the process of Agnostic Marketing - no one, not even our customers know whether, how or in what quantities the disruptive product can or will be used before they will be using it.
- so managers must get ‘out of the building’ on discovery driven expeditions