Christensen’s classic book, probably the study of innovation most read and revered by the business community itself, seeks to answer a simple question: Why do big, well-managed firms at the tops of their games, with commanding market leadership positions, consistently fail to innovate the revolutionary products that ultimately reformulate industries and lead to their downfall? Before Christensen’s study, most people assumed that it was short sightedness, or process lock-in, or failure to properly gauge the market. Christensen’s answer, however, was a shocker at the time: none of these things accounts for innovation failure. The companies who have lost the most due to this failure were not short sighted, were not constrained by inflexible processes, and were actually quite adept at evaluating the market by maintaining strong communicative links with their customers. In fact, it was doing everything right that caused these companies to fail.
Much of the time, large firms devote a great deal of resources to research and development (though this has decreased since the 1990s, when Christensen was writing his book), and are often forerunners in the development of new technologies. The problem, according to Christensen, happens in the marketing departments. New prototype inventions are brought to marketing departments, who approach a sampling of the core customers of the firm to determine whether or not there is a market for these potential products. Most of the time, the answer comes back “yes” to products that offer incremental improvements over those already being used, and comes back “no” to products that are significantly different with regard to capabilities. This is because demand often progresses at a slower rate than supply. Current customers only need so much in the way of improvement. Thus many innovative ideas for significantly different (i.e., new) products end up getting killed by marketing departments based upon very sound reasons.
Accordingly, Christensen differentiates between “sustaining innovation” and “disruptive innovation.” Sustaining innovation, the kind that large firms do well, involves improving products along existing metrics. Hard drives yet larger in capacity and faster in access, for instance. Disruptive innovation, however, involves the introduction of entirely new product categories. For instance, the release of 3.5” hard disks. At a time when most computer manufacturers were selling large workstation computers that traditionally used 8” hard disks, the innovative 3.5” drive was disruptive. But the top manufacturers of 8” hard disks failed to introduce 3.5” drives until long after startup companies and gobbled up a huge chunk of the market. This is because the workstation manufacturers who were the customers of these hard disk companies didn’t have any need for the smaller 3.5” drives, which were significantly slower and smaller in capacity than the 8” drives that were the industry standard. As a result, the dominant hard disk manufacturers saw no market for the new technology and, though it was well within their technical means to produce, made the rational decision not to. The startup companies that did produce and market 3.5” drives helped create a new market: the desktop PC. Their drives were slower and had a smaller capacity, but their smaller physical size and lesser cost made them perfect for inexpensive and much smaller home machines. When this market took off, the companies that had bet on 3.5” drives grew exponentially. And, as their drives improved over time, becoming faster and denser, they eventually overtook the demand curve of the workstation computers. At that point, though 8” drives were still faster and more dense, they were much more so than their customers needed, and the cheaper 3.5” drives cannibalized their market.
The basic lessons, according to Christensen, are that (a) technical improvements on the supply side tend to outpace technical needs on the demand side, leading to all products moving consistently upmarket, and (b) that existing markets are always significantly larger than new markets, and thus it doesn’t make sense for an established firm to expend disproportionate resources on not-yet-existing markets. This only makes sense in small firms that can afford to think small and are looking to grow. For a small firm, an emerging market can lead to significant growth. To a huge, established firm, introducing new products for a new market is likely to add very insignificantly to their bottom line; far bigger returns can be had from moving upmarket with incrementally improved products, or sustaining technological change. Because this makes sound rational sense, most large firms continue to follow this strategy until they are bottomed out by their competitors from below.
Christensen’s revolutionary conclusion, then, is that innovation presents an intractable dilemma to established companies. Disruptive innovation is a structural problem, not a managerial failure.
What should we conclude from this? Christensen notes that disruptive innovation always favors entrants. We should not expect well entrenched players to innovate as radically or creatively as new players. If one is an established player, this is pretty bad news. Christen’s advice is to spin off separate divisions or units to concentrate on disruptive innovation; only groups small enough to pursue uncertain and currently negligible markets will have a good chance at creating disruptive change.
Get the book from Amazon here.
-ZHTagged with: Clayton Christensen • disruptive innovation • innovation