If you scan the Internet for the best business books, you’d invariably find late Prof Clayton Christensen’s The Innovator’s Dilemma on almost every list.
A business classic in its own right, this book is a required reading across many business schools even today. A great testament to its timeless wisdom.
My first tryst with The Innovator’s Dilemma happened in 2004 when my business statistics professor recommended it to the class.
The heavy business writing and all the graphs and charts in the book forced me into submission back then. After a few days of lugging through it, I deposited it back in the library.
Little did I know then that I would have a 2nd tryst with the book some 16 years later.
What is the Innovator’s Dilemma?
When The Innovator’s Dilemma came out in 1997, it upended the entire conventional managerial paradigm.
Prof Christensen’s thesis was that most well-managed companies flounder in the face of disruptive technology precisely because they are well-managed.
This is a cause of dilemma for those who think that age-old paradigms stand pivotal to a company’s success.
In order to find proof-of-concept for his thesis, Prof Christensen investigated diverse industries such as disk-drive, integrated steel mills, ground excavation, computer hardware and software.
The Innovator’s Dilemma consists of several case-studies from these industreis – all of which point towards the validity of Prof Christensen’s thesis.
Disruptive Innovation
The success of established firms predicates on doing things in ways that they have grown accustomed to doing over the yars.
When competition comes along, these firms up the ante by offering better products or services to their customer base. These new offerings manifest incremental and sometimes, radical improvements which their existing customers appreciate.
The problems arise when a disruptive innovation emerges on the scene.
The key characteristic of a disruptive tech is its ability to change the basis of competition given the fast speed of technological improvement it possesses.
Though affordable and easy to use, such a technology often appears unfit for existing set of customers.
As a result, most incumbent firms either fail to pay it the attention it deserves or deal with it in an ineffectual manner.
The startups or small firms, owing to the low entry barriers, pick it up, attack the mainstream competition and gradually, overthrow it.
The moot question and the one that Prof Christensen answers in this book is why established firms fail when confronted with a disruptive technology.
Why do established firms fail at disruptive technology?
Prof Christensen declares that the guiding actions that are responsible for a company’s ascension are also instrumental in its failure.
“Sound managerial decisions are at the very root of their impending fall from industry leadership.”
Prof Clayton Christensen
The underlying reason why big firms fail is that their managers play from the existing rulebook.
The thorny issue with disruptive tech is that when it comes up, the exact market for it is hard to predict. So for the management of most established firms, going after an undefined customer base is akin to jumping off the deep end.
There are other impediments, too.
Entering an emerging market requires an established firm to attune itself to the cost structure of a market that does not exist.
If you are the CEO of a firm whose existing cost structure is adjusted to higher margins from a profitable customer base, why would you climb down to the other end to tap an undefined market? Doesn’t make business sense, does it?
Would you alienate a customer base that gives you 30% gross margin per unit to pursue a vague market that might give you only 15%?
Then, there is the issue of getting adequate resources to pursue a disruptive innovation.
When the internal jostling for resources (people, cash, equipment) happens, projects targeted at current customers would beat those targeted at markets that do not exist yet. This further deters managers.
Finally, there is the risk of taking on the ire of the C-suite in case the project fails.
All these reasons dissuade managers in the established firms from foraying into disruptive technology.
Is it always advantage small firms?
When large firms don’t dive into the disruption space, small firms or startups – for whom the entry barriers are low – do. Unlike their bigger counterparts, the prospects of lower margins don’t deter them.
Interestingly, however, entrant firms also suffer the same fate when they become big, entrenched players.
“Small markets cannot satisfy the near-term growth requirements of big organizations.”
Prof Clayton Christensen
Prof Christensen’s example of Newton – Apple’s PDA launched in 1993 is a good case in point. Despite the fact that Newton sold 140000 units within a year of its launch, it was widely considered a failure.
He explains that if it were the smaller Apple of 1979, selling 140000 units would have been seen as a victory, but for the giant Apple of the 90s, it was a thumping defeat. After all, it was no longer an entrant operating from the playbook of a startup.
“Smallness and independence confer certain advantages in innovation.“
Prof Clayton Christensen
How can big firms avoid failure?
It may appear to the reader that there is a biased argument against large organizations in the book.
In one of the chapters, Prof Christensen even declares that as companies become large, they literally lose the capability to enter small emerging markets.
However, in the later part of the book, he makes some important recommendations to big firms. These ideas could help them succeed as they venture into building a disruptive product. He instructs:
- Setup an autonomous unit for the commercialization of disruptive technology. IBM after having lost out the mincomputers battle to the entrant firm DEC, chose to embed desktop innovation in an autonomous vertical.
- Acquire early stage tech startups whose main currency is their resources (engineers).
- No market research can tell how big the market for a disruptive product can be. Thus, plan for learning, don’t plan for executing a preconceived strategy.
- Failure is inherent to disruptive innovation. You may not get it right the first time. Hence, conserve enough resources to have a second or third go at getting it right.
Is the book relevant today?
It’s been more than two decades when the first edition of The Innovator’s Dilemma was published and close to a decade, since the last updated edition came out. A lot has changed since.
Disruption is no longer the buzzword it used to be.
The phrase disruptive innovation has been bastardized. It is used in ways no way closer to the original theory of Prof Christensen.
Today any innovation that is doing the rounds is a disruptive innnovation in local parlance. I have heard people labeling some internet fads as disruptions.
In the recent years, the theory of The Innovator’s Dilemma has also come in for criticism from a few authors and journalists. Most of the criticism centres around the fact that the triumphant entrant firms mentioned in the book no longer exist, which proves Prof Christensen’s thesis faulty.
If you ask me, that is a flimsy ground on which to criticize him.
Those firms don’t exist because they became a victim of their own success. They metamorphosed from nimble units into entrenched companies with rigid values and processes. That’s what happend with Micropolis and Kmart.
Christensen himself asserts, most people claiming to understand disruptive innovation simply don’t get it:
“In our experience, too many people who speak of ‘disruption’ have not read a serious book or article on the subject … Many researchers, writers, and consultants use disruptive innovation to describe any situation in which an industry is shaken up and previously successful incumbents stumble.”
Conclusion
I believe this is still a significant book for any manager – newbie or seasoned. His lessons are still relevant, especially, in this age of near-constant innovation and rapid technological advancement. He showed how difficult it is to create a formula of success with innovation.
You can expect to finish the book with greater knowledge of the business world.
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