One big question motivates Clayton Christensen’s book The Innovator’s Dilemma: why do successful, innovative firms fail because of disruptive innovations? Through case studies of a handful of industries, Christensen shows that companies that fail to stay at the top aren’t necessarily poorly managed. In fact, the firms that fail are often among the ones that function best. Why? The resources, habits, and processes that make these firms successful also make them vulnerable to disruptive innovation.
Established firms innovate, but the products they develop are “sustaining” technologies. Sustaining technologies “improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued”.
Disruptive technologies, on the other hand, often have worse performance than sustaining technologies. A disruptive technology succeeds not because it meets the needs of an existing market, but rather because new markets find its features appealing. These disruptive products might not perform as well along traditional metrics of value, but they might be more convenient, reliable, or cheaper.
If disruptive innovations are so dangerous to established firms’ success, why aren’t they capable of coming up with the disruptive innovations themselves? In fact, they are capable of developing them. Established firms consistently create sustaining innovations that improve performance. But when they put together disruptive innovations, their processes and values prevent them from successfully marketing these innovations. Managers at established firms will not want to risk their reputations to explore new markets for small profits when they know they can continue playing in existing markets and make higher margins.
Established firms depend on their customers and investors, and small markets can’t provide the growth these firms need. Some markets where disruptive technology could succeed don’t even exist yet, so firms can’t analyze them. Firms will thus continue to move upmarket to more advanced technologies at higher margins, putting themselves at risk that the ways they are improving their product might outpace customers’ demands for improvement.
So what can managers at successful firms do to deal with disruptive innovation? Christensen’s solution is to spin off smaller organizations within the larger organization. These internal start-ups can explore markets through trial and error and find customers whose needs are matched by disruptive technology. They don’t simply look for a technological breakthrough to let the new organization compete in existing mainstream markets. Because these organizations are small, even low margins and a small volume of customers and revenue can be exciting.
Crucially, these small organizations do not simply import the processes and values from the larger organization. They might take resources—employees, funds, technology, etc.—from the larger organization, but they come up with their own processes for creating value and their own principles for what matters most to them. They can thus develop different, flexible cost structures that allow them to adapt to new markets.
I really enjoyed reading this book, which my current manager recommended to me when I first interviewed at Comcast. Since I read the book, I’ve been looking for emerging disruptive technologies and how established firms like Comcast are managing them. The analytical framework in the book is very useful, and it can be applied to thinking about sustaining and disruptive technologies outside of business as well. I’m sure I will be coming back to it frequently.