Companies much like humans seem to have a life of their own, new ones are born and some old ones go bankrupt or disappear under the fold of other companies. A few die premature deaths. There seems to be some method to this madness. Many a times these bankruptcies and closures are easily explained as cases of bad management. And sure there are plenty of them out there.
But ever so often we come across companies that were once highly regarded and studied as examples of companies with great management.
Ones that have played by the well established theories of competition and management. Companies like Nokia that were once leaders in their space, companies whose leaders were smart and cannot be faulted.
In his book ‘The Innovators’ dilemma, Clayton M Christensen explores the reasons behind the failure of these well managed companies that were once at the top of their game. He explores the disk drive industry in great detail in an effort to find answers, choosing this industry in particular for its high velocity changes; the technology evolution, the number of companies that have been in and out of this industry.
We have often heard of the adage, Customer is king. And indeed customer is king, companies exist to satisfy customer needs, listen to customer requirements and base investment and development decisions on their requirements. Without customers companies would not exist, and well run companies have perfected the art of listening to customers and delivering goods and services tailored to meet the needs of their most profitable customers. Understanding the product or service attributes that customers most value and improving upon them has been a source of competitive advantage for incumbent companies.
Interestingly Clayton argues that this very process of good management, that puts customers at the centre and encourages companies to be guided by them , that makes them vulnerable to certain kind of industry developments he calls ‘disruptive innovations’. He cites examples from the disk drive industry to prove that in the face of disruptive innovations the very sound management principles, like listening to customers, letting their needs dictate their investment decisions are the ones that eventually lead them down the path of destruction.
And therein lies the dilemma for managers; listening to customers is good management advice, but listening to them also makes them vulnerable to disruptive innovations’.
The book is divided into two sections, the first uses the case of the disk drive industry to make the point about disruptive innovations and the danger it poses to established companies. It explores the linkages between customer centricity and management decisions that effectively de priorities investments in and focus on disruptive innovations; decisions that eventually puts the established companies in a difficult spot.
Having made his case for an alternate mechanism to deal with disruptive innovations, the second part explores ways and means by which managers / leaders can spot disruptive innovations and ensure that they are not derailed by them.
Disruptive innovation
So what is disruptive innovation? Can the iPhone the considered a disruptive innovation? Is Tesla, the electric car a disruptive innovation? How about AirBnB or Amazon, are they disruptive innovations? Clayton in his book makes the distinction between ‘Sustaining Innovation’ and ‘Disruptive Innovation’.
| Existing | Disruptor |
| Main frames / Mini computers | Personal computers |
| Personal computers | Laptops |
| Integrated steel mills | Mini Mills |
| Fixed line telephony | Mobile telephony |
| Bick and motor retailers | E commerce |
Disruptive innovation is an innovation (a technology, product, service, process or even a business model) that starts life as a simple, convenient to use and cost effective option that appeals only to the bottom most part of the customer segment; segments who are not in the radar of the established players. Established players ignore the emerging disrupt-ors primarily because their offering don’t meet the requirement of their profitable main stream customers. Over time however, these disruptors, through a process of sustaining innovation, improve the performance of the products to a point where they become viable alternatives to the offerings of the established companies. When this happens the established companies have one of two options, move further upstream to more profitable customer segments or fight the battle. Most established companies choose the upstream option when one is available; but when it is not, they are forced to fight the battle. This fight between the David and Goliath is an asymmetric one because the disruptors on the back of their experience and cost advantage are better positioned to beat down the incumbent on cost. Incumbents with their bloated cost structure and processes will find a tough challenge to meet.
Why do established companies ignore disruptive innovations?
If disruptive innovations threaten the very existence of established companies, why do they so often ignore them? The authors offers two broad reasons for this:
1. The processes and the values of established companies are tuned for incremental & sustaining innovation targeted predominately at the requirements of their existing customers. The very same processes that help them excel at catering to the needs of the main stream customers prevent them from investing in disruptive technologies. Processes such as the internal metrics on profitability and size of the market that helps them decide where investments are made. These metrics set a very high bar for profitability and revenue, criteria that disruptive technologies cannot meet.
2. The rapid improvements in technologies both in the established and new entrants. While the established companies , improve technology to the point where they offer more than the market demand; the disruptive innovators start off with an inferior product that is unsuitable for the main stream market , but over time through sustaining innovations improve the products to the point where there meet the requirements of the main stream customer. It is at this point of intersection of the trajectories of customer demand and technology improvement that the main stream market becomes accessible to the disrupters.
What can established companies do to deal with disruptive Innovations?
If disruptive innovations are the single biggest threat established companies face and if the very same processes, values, customer focus and management styles are responsible for their downfall, how can managers overcome this dilemma. The authors offer two solutions that hold most promise.
- Set up an independent company with its own processes and systems that are appropriate for the value network that they will be operating in.
- Invest in start-ups that are operating in the disruptive space, but don’t try to integrate them into the parent company.
Innovators dilemma is one of the best management books I have read, it provides a superb framework to analyse disruptive innovations and their effect on established companies. Recently however, there has been some criticisms of the concept and its inability to convincingly explain the iPhone phenomenon and the fall of Nokia. Was iPhone a disruptive innovation? Some critics have argued that Clayton’s concepts apply to B2B cases and are not well suited for the B2C segment where factors other than cost have a big influence.
Despite all these criticism, I think this is an excellent book and a must read for anyone wondering about companies and how great companies suddenly find themselves powerless in competing with nimble start-ups.
