The Innovator's Dilemma
Why is success so difficult to sustain? Is successful innovation as unpredictable as the data suggests?
- Companies that are successful at maintaining their position in established markets have a terrible track record with emerging technology.
- The things they do that to sustain performance - like benchmarking the competition, listening to their customers and investment strategy in new technologies – can be the biggest impediments to success with disruptive technologies.
- Disruptive technology is usually built on known technology that is uneconomical or non-performant, combined with novel product positioning and unknown applications parallel to current customer needs.
- A technology has the potential to be disruptive if its trajectory of improvement is steep enough to intersect the demand of the mainstream market.
- Disruptive technology is not attractive to the mainstream customer because it is not an incremental improvement. It will only begin to be successful with a niche market that values the new technology.
- Big companies fail to adapt, not because of a lack of resources, but because they are focused on prioritizing current value networks over emerging ones.
- Companies depend on customers and investors for resources
- Small markets don't solve the growth needs of large companies
- Markets that don't exist can't be analyzed
- An organization's capabilities also define its disabilities
- Technology supply may not equal market demand
# Defining and Build a Framework
# How Can Great Firms Fail?
- Disruptive innovations tend to be technically straightforward.
- They generally package known technologies in a unique architecture and enable use in applications that were previously not technically or economically feasible.
- Established firms focused their technology development on sustaining current trajectories of performance improvement: higher performance and higher margin domains to the upper right of the trajectory map.
- Sustaining technology can be radically new and difficult, but it is not disruptive.
- Current customers lead you towards sustainment, not disruption.
- Historically disruptive technology is almost exclusively led by new entrants, not established organizations.
- Established firms are not looking down market which is where the disruption emerges: lower margin, non-performant and limited markets which all fail to meet their evaluation criteria.
# Value Networks and the Impetus to Innovate
# Weak Factors Impacting Innovation
- Organizational structure can dictate how it develops new products
- Established firms have technical capabilities targeting incremental improvements not radical technology changes
# Value Networks
A value network defines the context within which a firm identifies and responds to customer need, solves problems, procures inputs, reacts to competitors and strives for profit.
- Influenced by competitive strategy and historical choices of markets.
- Mirrors product architecture
- Dictate how value is measured and defines the boundaries
- Defines cost structures and acceptable margins
- Technology S-Curve: the magnitude of a product's performance improvement with a given time/effort differs as the technology matures.
- Early progress is slow.
- Rate of progress accelerates as the technology is refined and better understood.
- Asymptotically approaches a natural limit of resource inputs.
- Disruptive technologies are subsequent S-curves that start below the established technology, then intercept and pass it.
# Managerial Decision Making
Step 1: disruptive technologies are developed within established firms with experiments, unofficial resources and off-the-shelf components.
Step 2: Marketing looks for reactions from current customers, which is typically negative as the technology doesn't meet or extend core needs.
Step 3: Established firms double-down on sustaining technologies
Step 4: New companies form, often from disillusioned staff at established companies, and markets for disruptive technologies are found by trial and error
Step 5: New entrants move upmarket as disruptive technology starts to surpass established technology in one or more dimensions
Step 6: Established firms belatedly jump in to defend customer base
Value networks strongly define and limit what companies within them can and cannot do:
- Influence where resources are directed and which technological hurdles are attacked.
- Define what measures are important and therefore need to be prioritized.
- Encourage established firms to ignore or discount technology that does not address their customers' needs.
- Mask changing definitions of the level, rate and direction of progress in technology trajectories.
- Hinder an established company from identifying, quantifying and pursuing emerging markets.
# What Goes Up, Can't Go Down
- Cost structures dictate required margins and attractiveness of new markets.
- Once established, it is difficult for a company to compete with a new entrant that has a lower cost/margin structure.
- Companies move upmarket, pursuing segments that are ever more attractive given their cost structure.
- Companies follow their customers as they move upmarket as well.
- New entrants attack from below as their technology starts to compete with established solutions.
- The costs required to become competitive in higher-end markets restrict downward mobility and create further incentive to move upmarket.
# Managing Disruptive Technological Change
- When new technology is required to address the needs of existing customers, established firms can adapt successfully.
- Good management uses the decision-making and resource-allocation processes that are key to the success of established companies, which also reject disruptive technologies.
- Resource dependence: Customers effectively control the patterns of resource allocation in well-run companies.
- Small markets don’t solve the growth needs of large companies.
- The ultimate uses or applications for disruptive technologies are unknown in advance. Failure is an intrinsic step toward success.
- Organizations have capabilities that exist independently of the capabilities of the people who work within them. An organization's capabilities reside in processes and values - which also define disabilities when confronted with disruption.
- Technology supply may not equal market demand. The attributes that make disruptive technologies unattractive in established markets often are the very ones that constitute their greatest value in emerging markets.
# Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them
- Resource allocation processes weed out proposals that customers don't want, which includes disruptive technologies.
- Non-executives make resource allocation decisions by deciding which proposals they will present to senior management.
- Create an independent organization and embed the disruptive product among emerging customers that do need the technology.
# Match the Size of the Organization to the Size of the Market
- Early entry by first movers in emerging markets provide significant advantages when disruptive technologies are involved.
- Creating new markets is significantly less risky than entering established markets against entrenched competition.
- Emerging markets are small by definition, so competing organizations must be able to become profitable at a small scale.
- Established companies wait until an emerging market becomes "large enough to be interesting", which is too late.
# Discovering New and Emerging Markets
- Your forecasts will use the context of your value system, so they won't assess disruptive technology accurately.
- The majority of successful new business ventures abandoned their original business strategies when they pursued disruptive technologies.
- The businesses that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.
# How to Appraise Your Organization's Capabilities and Disabilities
- Organizations have capabilities that are independent of the people who work there.
- The people in an organization are far more adaptable than the organization itself.
- Innovation requires more than assigning the right resources to the problem. The organization in which these resources land needs processes and values that fit the problem.
- Functional and lightweight teams are appropriate vehicles for exploiting established capabilities, whereas heavyweight teams are tools for creating new ones.
- Spin-out organizations are a viable tool for forging new values.
# Performance Provided, Market Demand and the Product Life Cycle
- Performance oversupply creates an opportunity for a disruptive technology to emerge and to invade an established market from below.
- Performance oversupply triggers a change in the basis of competition, where other product attributes become the dimension driving differentiation.
- A product becomes a commodity when the market need of each attribute or dimension is fully satisfied by more than one available product.
- Differentiation loses its meaning when the features and functionality have exceeded what the market demands.
- Disruptive technology changes the basis of competition.
- The attributes that make disruptive products worthless in mainstream markets typically become their strongest selling points in emerging markets.
- Disruptive products tend to be simpler, cheaper, more reliable and more convenient than established products.
- A technology has the potential to be disruptive if the trajectory of improvement is steep enough to intersect the demand of the mainstream market.
- Historically, disruptive technologies involve no new technologies but consist of components built around proven technologies and put together in a novel product architecture that offers the customer a set of attributes never before available.
- The focus, processes and values of an established company are the capabilities that make it successful in sustaining technologies. They are also the disabilities that hinder leading in disruptive technologies.
- Disruptive technologies are a marketing problem, not a technological problem. Fit the market to the product, not the product to the established market.