The Innovator’s Dilemma

After reading Disrupting Class and several articles about disruptive technology on the asymco blog, I decided I should go to the source and read The Innovator’s Dilemma by Clayton M. Christensen, published in 2000. It’s one of those books that seems fairly obvious in retrospect — now that ten years have passed and its lessons have largely been absorbed into business practice and culture.

The book is based on Christensen’s PhD thesis, which originally looked at technology and business trends in the hard disk drive industry. He found that some technologies (such as improved read-write heads) served to “sustain” existing product lines and cement the dominance of existing companies, while other technologies (such as smaller form factors) ended up “disrupting” existing products to the extent that once-dominant companies sometimes went out of business in just a few years.

The reason these companies failed was not that they were poorly managed, but because the disruptive products were in completely separate markets (and accompanying “value networks”). The existing companies were simply not designed to compete in those new markets. For example, 5-inch drives were sold to minicomputer makers, while 3.5-inch drives were sold to personal computer makers (with shorter design cycles, higher volumes, and lower profit margins). The existing minicomputer customers had no need for 3.5-inch drives, so the 5-inch manufacturers saw no market and no need to produce them until it was too late and other startup companies were already dominating the emerging market for personal computer hard drives (3.5-inch).

In other words, the businesses of making and selling 5-inch versus 3.5-inch drives were so different that being the dominant expert in hard drive technology was not actually much of an advantage. In fact, it was a disadvantage because the whole organization was designed to compete in the old business and naturally fought attempts to undercut that business.

But how do you know if a given product idea is going to be disruptive?

One clue: disruptive products are usually simpler, less powerful, and have smaller profit margins than existing products. So they need to find markets that value product attributes like convenience, reliability, and ease of use over sheer power. For example, business accounting software in the nineties was driven by the needs of large enterprise customers and so was quite complex and powerful. Quicken disrupted this market by creating a simpler, cheaper product based on its personal finance software. This was so much easier to use that it quickly gained an 80% market share among small business owners who did not need all those extra features.

What makes technologies “disruptive” rather than just “niche” is when they progress far enough to compete up-market with existing product lines. For example, Quicken continued to add features so that larger and larger businesses were able to use its software, pushing out the old software companies to only serve the largest enterprise customers. Potential disruptive technologies should have a plausible development plan that will eventually displace existing products up-market.

The big take-aways are:

1. If you want to start a new company, do it with a product idea that is likely to be disruptive. Otherwise, you have very little chance of making any headway against existing players.

2. Generally the only way to manage disruptive technologies from within an existing company is to create a totally separate organization with the sole purpose of going after that disruptive technology. If you don’t keep it separate enough, resources will inevitably be borrowed to take care of existing business and the new products will languish.

Apple has a better record than most for its ability to disrupt its own products before competitors get the chance. Horace Dediu makes a good argument that the iPhone should be seen not as “a better phone” but as a disruptive technology for personal computers: a simpler and more convenient way to accomplish computing tasks such as email and web surfing. The inclusion of a phone capability just makes it all the more convenient. I know at least one person who decided to get an iPhone instead of a new laptop; and Apple’s iPad is even more competitive with laptop computers. iPhones and iPads will continue to “move up-market” by adding the ability to conveniently handle ever more computing tasks. As this happens, Macs and other desktop PCs will increasingly be seen as high-end tools for power users.

Leave a Comment