28 October 2012
Disruptive Technology and the Innovator’s Dilemma
Spoiler alert: This post is an abstract of “The Innovator’s Dilemma” by Clayton M. Christensen. If you want to read it without knowing what it’s about, then you may wish to skip this post. On the other hand, if you want to have a quick summary of its main ideas then, by all means, read on.
What is the reason that organisations fade away and die? Is it possible to learn anything from their demise and avoid this fate ourselves? The horrors of extinction has always haunted top management. In the business culture of today, with high competition and low tolerance of failure, these thoughts must be even more pressing to a CEO. Nobody wants to be called the guy or gal that killed the company.
It is easy to have preconceived ideas on what kills companies. We’ve all experienced horrible bosses and seen high-risk business propositions go astray. Surely, bad management has to be the main reason? Apparently, it’s not that simple. The Innovator’s Dilemma by Clayton M. Christensen presents research that go beyond these common assumptions. In fact, it turns out, it may be good management, i.e. doing what is generally considered good management, that causes it.
In many cases, it seems, we are killed because we are overrun by competitors using some technological advancement we have ignored for too long. As customer’s slowly migrate over to the new technology, our market position gradually dissolves. But that can’t be the whole explanation. What lies behind that?
It has always been assumed that the reason companies miss out on the next wave of technology is that they are poorly managed or have poor technical leadership. The reasoning behind this is that these organisations must simply lack the capability of seeing what’s next in the industry and they pay dearly for that. This is a simplistic explanation and research, according to Christensen, does not support it.
It turns out most technological advancements are in fact made by the market leaders in a field, the very same people we sloppily accuse of not understanding the trends. These advances are typically incremental improvements in how a produce or service works that sustains the utility of them. Christensen calls them sustaining technologies because they sustain our utility of some technology.
Sustaining technology advances need not be particularly small but may be quite substantial, i.e. a complete change of technology. Often, the market leaders invest millions of dollars on research and are the first to use them as they become viable. One example mentioned in the book is automobile manufacturing. Manufacturers keep improving and innovating their car designs and listen closely to what the customer’s want. There is nothing wrong with this. It is simply good management and exactly what they must do. If they invented a revolutionary petrol engine that only needed half the amount of petrol, it would still qualify as a sustaining technology.
But then there is that other type of change.
Occasionally, a technology change appears that seem related to today’s technology, but poorly fit to the current market. Typically, this technology is cheaper, often built from standard components, perhaps smaller in size than today, but worse in most respects valued by customers today. One example of this is when 3.5-inch hard drive technology arrived when 5.25-inch ruled the PC market. The technology seems unsuitable and unnecessary. The market leaders often dabble with it but are unsure what to make of it. As the market leaders approach customers with these new ideas, customers typically reject them. This is clearly not what they asked for. So the market leaders correctly assume that this technology can’t earn them enough money right now and that their customers are uninterested. In fact, they are screaming for other stuff so lets do that! This is the crucial moment. This choice opens up a window for other companies to compete with the new technology.
This type of technological change is what Christensen calls the disruptive kind. It is disruptive because it will change a market completely. Initially, the market for the new technology may be very narrow. For exemple, the 3.5” disks were only useful in portable computers, a very small market niche at the time. However, the new technology will improve incrementally. As it gets better its market reach grows as well. After some time, perhaps decades, the technology may be useful even in markets where it was deemed inappropriate years ago. If that happens, most customers will, often quite quickly, move over to the new technology and the old market dominants, stuck with the old technology, have lost. Their market deflates and they are lucky even to survive the blow. According to Christensen, this pattern repeats in many markets, as different as excavation and hard disks.
One example of a disruptive technology that Christensen mentions is the electrically powered automobile. The final chapter of the book is a scathing critique of car manufacturers and a brilliant way to show the applicability of the book’s thesis. The major manufacturers have all experimented with electric cars, presenting study after study of “cars of the future”. Some have even tried to market electric cars, but they have all failed (hybrid cars not considered). Why? Because in most valued dimensions, the electric car is worse than today’s petrol or diesel driven engines. It is heavy (because of the batteries), accelerates poorly, has a low top speed, reloads slowly, and its range without reloading is too short. It can’t compete with the petrol or diesel cars. On the other hand, it is better for the planet, more energy efficient, and less noisy. These are its only redeeming features. But customers don’t value these features enough today.
From this description, electric cars certainly have the smell of disruptive technology. It is therefore unlikely that any major automobile manufacturer of today will ever be successful with electronic cars. Their structure, sales force, and company culture are perfectly shaped to sell petrol or diesel cars. The challenge of disruptive technologies is not mainly a technical one, but one of marketing. A completely new player will probably have to enter the market with an offer of an specific-purpose electric car that will turn out to be useful in special circumstances. Another alternative is that one of the big manufacturers spawns a new company, a startup completely separate from the mother company. It will be a niche product to start with. Perhaps, as Christensen suggests, a car for teenagers, where it’s slowness is actually an advantage. It could also be a superior transportation means for commuters. I think the book is worth reading for this chapter alone.
Hence, managers have a dilemma! They have to find, research, spend time and money on technologies that seem practically useless today at the same time as their customers are constantly demanding better products and services and their bosses are demanding an ever increasing revenue stream. Good management is more or less defined as listening to customers and staying ahead of development. In these cases, managers have to conciously disregard what is considered good managment. It is good management that gets them killed in the first place.