The Innovator’s Dilemma

About the Author – Clayton Christensen Professor at Harvard Business School Introduced Disruptive Innovation Theory Most Influential Business Thinker in the World, 2011 & 2013 The London Times “One of Most Influential Business Theorists of the Last 50 Years” - Forbes

Thesis Question: Why do well-managed companies fail? How can industry leaders fail so predictably to new entrants? Well known examples: Sears IBM BlackBerry Nokia

Example 1: Excavators (1950s-1970s) In the 1950s, the majority of the excavator market was controlled by companies that made cable excavators. Now, in the age of hydraulic excavators, very few of those companies exist. Only 4 of the 30 cable excavator companies managed to transform themselves into hydraulic excavator companies, even though they had 20 years to do it and the engineering know-how to make hydraulic excavators. Why? Cable Excavators Hydraulic Excavators

Integrated Steel Mills Example 2: Steel (1960s-1990s) Integrated Steel Mills – operated by companies like US steel, etc. have been on the decline (steel belt became the rust belt). Mini-mills are small mills that use scrap metal and little power to operate. Compared to large, capital-intensive integrated steel mills, they are much cheaper. However, the quality of their steel was much worse, with visible defects in the steel. Mini-mills went from introduction in 1960 to controlling the majority of the market. Yet, none of the major integrated steel companies operated a mini-mill as late as 1999 (when mini-mills had already captured 50% of the market). Why? Integrated Steel Mills Mini-mills

Value Propositions and Networks Products offer specific qualities that make them valuable to customers. These qualities are value propositions. Customers, customers of customers, etc. build a value network around these qualities. Value networks demand continual improvement along those qualities, because those are the ones that are important. Example: Intel continues to make faster (more instructions per sec) and smaller processors. This is because its’ customers (value network) demand this.

Sustaining Innovation Innovation along the qualities important to the value network.

Disruptive Innovation Innovation along qualities not seen as valuable by the value network. Radically change the value proposition offered to the market. Disruptive products usually offer worse performance than existing products along qualities demanded by current value network. But they are better for other qualities, which may not be valuable right now...

Disruptive or Sustaining? Innovation Type of Innovation The development of the diesel-powered excavator, replacing the steam-powered excavator. The invention of the digital camera, replacing the film camera. The invention of a new engine that allows Boeing to make planes that can carry 10% more passengers than its competitors. SUSTAINING DISRUPTIVE SUSTAINING Not easy to do. Clayton Christensen initially thought the iPhone was sustaining, but later conceded disruptive.

Markets for Disruptive Technologies Due to the nature of Disruptive Technology, they can’t be sold to mainstream customers. Initial markets of disruptive technologies are small and remote from mainstream customers. Often, it’s not even clear who the customers will be when disruptive innovations are being made.

Ex: Hydraulic Excavators Hydraulic excavators, when introduced: Carried fewer cubic feet per bucket. Could not extend as far as cable excavators. However, they were: More maneuverable. Had smaller buckets. Could be attached to the back of a small tractor. Hydraulic excavators were initially used for small sewage projects and residential foundations. Previously done by hand. Cable excavators were too expensive, too big, and too imprecise for them. Qualities in the excavator market were bucket size, extension distance. Hydraulic Excavator’s initial bucket capacity was smaller, and couldn’t extend as far. The initial markets for the Hydraulic excavator didn’t exist before – these small projects used to be done by hand. They measured performance by shovel width, maneuverability, etc.

Moving Up-Market How do disruptive technologies go from serving a small, unimportant market to completely taking over the larger markets of the incumbents? Higher Rate of Innovation Technology Supply vs Market Demand

Moving Up-Market Higher Rate of Innovation Technology Supply VS Market Demand Because technology often improves much faster than the expectations of users, there may be a mismatch between what is being supplied by the technology and what the demand from the market is. As a result, a product that merely meets the users demands (a new entrant) may displace existing products that go way beyond what the user needs, even though the existing product has “more features”. This is because the disruptive technology satisfies the needs of the market, but also has its own set of valuable characteristics. Source: http://dltj.org/article/disruptive-innovation-card/

Why Successful Companies Fail When dealing with disruptive technologies, the things that make companies so successful are also those that lead to their downfall. Listening to Customers Investing in Technologies that Customers Want Focusing on Large Markets, not Small Ones Seeking Higher Margins

Why Successful Companies Fail Listen to Customers Steve Ballmer isn’t an idiot – he was actually doing what all good managers do: listening to his customers. His client base (enterprise) was telling him the iPhone didn’t make any sense. However, listening to customers is a mistake when dealing with disruptive strategy.

Why Successful Companies Fail Invest in technologies their customers want, rather than the disruptive ones. Ex: IBM continued investing in mainframes, even well after the invention of the minicomputer and the personal computer. This is something very hard to change from within an organization. Executives cannot simply dictate resource allocation, much of it is subconscious by middle managers (and Program Managers!) Hard to motivate employees about a technology that their customers do not want. IBM’s customers were primarily mainframe customers, and they wanted more powerful mainframes. As a result of listening to its customers, IBM invested more in mainframes and very little in personal computers (until much later). Hard To Change: - Middle managers often weed out many ideas because they don’t want to risk failure by taking on ideas their customers don’t want. These managers are interested in their career advancement, and suggesting/promoting a product for which there may be no market is committing career suicide. - Even if all managers are on-board, it’s hard to motivate people to work on something if they hear from customers everyday that they don’t even want it.

Why Successful Companies Fail Focus on large markets, not small ones Ex: $10 million market for new, disruptive technology To Microsoft: Less than 0.0002% of revenue – boring! To Start-up: Great business opportunity! Again, it’s hard to motivate employees (sales & engineering) to work on things that are so inconsequential to the organization’s bottom line.

Why Successful Companies Fail Seek higher margins Source: http://theinnovationandstrategyblog.com/wp-content/uploads/2013/04/130415-minimills-and-integrated-mills1.jpg Incumbents are happy to get out of markets with low margins and move up. No one ever wants to move back down to lower margin markets. Disrupters see higher markets as an opportunity – “if only we could reach that market, we could make so much more money” They slowly drive incumbents from EVERY market as they move in a northeast direction on this chart. Note: Investors and journalists LOVED the US steel companies as they moved upstream. Each of these companies had higher margins and profitability as a result, and their stock prices took off. This is another example of how doing the right thing will lead to failure.

Technical Competency Are incumbents incapable of fighting entrants? “Too slow”, “Too big”, “Bureaucratic”, etc. Most often, incumbents have the ability and technology to create disruptive products. Disruptive Innovation is a marketing problem, not an engineering problem.

Technical Competency Should incumbents wait for the market/technology to develop? By the time incumbents decide to enter, they will be at a disadvantage to the entrants, who now have: Technical Know-How Economies of Scale Distribution and Business Channels Customer Loyalty The incumbent sacrifices all of its inherent advantages by waiting. However, this is not necessarily true for sustaining technologies. The authors research found companies who were “followers” in sustaining technology had no long term disadvantage to those that were leaders in sustaining technology. However, followers in disruptive technology almost always lost to leaders in disruptive technology.

How To Fight Back The history of how companies have fought back is analogous to human flight. First, we tried to adapt ourselves for flight. Eventually, we learned to use the laws of nature to our advantage. Most companies will try to combat disruptive technologies by trying to adapt themselves. However, the successful companies will harness the principles of disruptive technologies to their advantage.

How to Fight Back Set up or buy a small, independent organization to combat the disruptive technology. Its’ customers will need the disruptive technology, ensuring resource flow as managers make the right decisions. Can get excited about small markets and small wins.

How to Fight Back Ex: HP Kittyhawk Disk Drive Plan for failure. Don’t bet all your resources at the start. It’s impossible to know about markets that haven’t yet been created. Must be found through “trial and error”. Ex: HP Kittyhawk Disk Drive HP Kittyhawk – a very disruptive drive (was small & rugged) that was poised to be a game changer for HP. However, HP spent a lot of money in R&D and marketing thinking that the drive would be used by PDA makers. Since PDA sales didn’t take off as planned (Apple Newton, Palm, Microsoft), that didn’t work. However, game companies contacted HP if they could make such a drive at a lower price point and in large volumes. However, at this point HP executives felt they had already dumped too much money into the product and thus they shut it down. Eventually HP left the hard drive business entirely.

How to Fight Back Don’t wait for breakthroughs. Move early and find markets based on current technology. What makes the product unattractive to mainstream customers will make it attractive to new markets. Ex: iPhone Waiting will give others advantage, as mentioned earlier. Ex: iPhone’s lack of keyboard made it unattractive to business power users, but the increased screen space and touch sensors made it very attractive to consumers.

Thank You The Innovator’s Dilemma by Clayton M. Christensen Collin’s Business Essentials (2006) Available at the MS Library. Other interesting books: The Innovator’s Solution: Creating and Sustaining Successful Growth The Innovator’s Prescription: A Disruptive Solution for Health Care