The Innovators Dilemma is arguably one of – if not the – most important book in describing how technological innovation works and why almost always the incumbents and leading players in markets fail to capture the next wave of innovation in their market and have their lunch eaten by a newcomer. This book is so good I read it multiple times and every time I learn more. Below I share what I think is the most important excerpt from this book which captures its key essence (although I highly suggest anyone operating in the technology business to read the entire book)
“The reason [for why great companies failed] is that good management itself was the root cause. Managers played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technology change.
Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish those things also to do something like nurturing disruptive technologies – to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets– is akin to flapping one’s arms with wings strapped to them in an attempt to fly. Such expectations involve fighting some fundamental tendencies about the way successful organizations work and about how their performance is evaluated.”
A frequent misinterpretation of the innovators dilemma is that incumbents (described above as great companies which in many cases they were) fail to develop these disruptive technologies or to embrace them due to the inability of the organization to adapt operationally or technologically to these new innovations. In other words conventional theory zeros in on the inability of management to spot, develop or reorganize to bring these new technologies to market. That is plain wrong and the opposite is in fact shown to be true.
What the theory (and the extensive supportive evidence) in fact supports is that in the incumbents are most often the ones to spot and develop these technologies and reorganize themselves just fine to do so. The problem is t in fact they fail to value them properly because they apply them to their existing customers and product architectures (what the author calls ‘value networks’). Often these new technologies are still (at their early stages) weak for the more advanced and mature value networks that these incumbents operate in, so the ROI on the effort needed to advance them is seen as low. In other words, management acts sensibly in rejecting the continued investment in these new technologies acting in the company’s best interest to protect profits and avoiding cannibalization. Moving into new markets is rejected as they are seen as too small to make a dent for them and their cost structure prohibitive to enter at sensible margins.
Therefore what ends up happening is that new entrants (often founded by frustrated departing ex-employees of the incumbents) with little or nothing to lose do gown down-market (or upmarket for them from their ground zero starting point). Initially that doesn’t pose a threat – the new entrants just find new markets for these technologies largely by trial and error, at low margins but their nimble and low cost structure allows them to operate sustainably where the incumbents could not. However, the error in valuing these technologies comes from what happens next. By being intrinsically superior technologies that find new niche markets, they advance very rapidly and hit that steep part of the classic ‘S’ curve, eventually entering the more mature markets of the incumbents and disrupting them. In other words, the smaller markets (the classic Trojan horses) are the guinea-pigs that help the technologies advance enough to play in the big boys league. In many cases the entry-point markets become an insignificant share of the eventual total as the new technologies move into higher margin upmarket territory disrupting them due to their superior performance.
So technology leaders evaluating whether to invest in new and immature technologies must do so with a futuristic frame of reference. The key question being: if these technologies found new customers, new markets which may in themselves be small and insignificant (now and in the future), could they mature enough to make inroads into the big boys league and have our lunch? And if so, does investing in them today at the risk of cannibalizing ourselves make sense in the longer term? Hence, the innovators dilemma.