The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail

“But theories are statements of cause and effect—which actions yield results, and why. As such, a good theory is consummately practical.”

Christensen makes an argument for the value of business theory, which he asserts is often shrugged off by managers who view theory as impractical. While this rings true given that management is a field that is rooted in executive actions, Christensen refutes the assumption that theory cannot help managers. To support his argument, he stresses that by studying past patterns, managers can more wisely chart a course in their present and future.

“What this implies at a deeper level is that many of what are now widely accepted principles of good management are, in fact, only situationally appropriate. There are times when it is right not to listen to customers, right to invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small, rather than substantial, markets.”

With this bold statement, Christensen suggests working counterintuitively to conventional business wisdom. The provocative nature of his suggestion is designed to invite engagement and criticism, for the author implicitly challenges his readers to engage their critical faculties and test his theories at every stage. Moreover, his observation that certain principles are only appropriate in context hints at The Importance of Being Agile.

“Managers can be extraordinarily effective in managing even the most difficult innovations if they work to understand and harness the principles of disruptive innovation. As in many of life’s most challenging endeavors, there is great value in coming to grips with ‘the way the world works,’ and in managing innovative efforts in ways that accommodate such forces.”

When Christensen urges managers to engage with the natural forces of the world, he hints at the recurring metaphor of scientific innovation: an analogy that will be utilized throughout the book. This passage also references Christensen’s argument that theory is an essential business tool. Scientists are, at their core, theorists, and rather than seeing them as standing in direct conflict with managers, Christensen closes the gap by identifying that both parties share a common need to study the world.

“By analogy, the ancients who attempted to fly by strapping feathered wings to their arms and flapping with all their might as they leapt from high places invariably failed. Despite their dreams and hard work, they were fighting against some very powerful forces of nature. No one could be strong enough to win this fight. Flight became possible only after people came to understand the relevant natural laws and principles that defined how the world work: the law of gravity, Bernoulli’s principle, and the concepts of lift, drag, and resistance.”

In this passage, Christensen explains the manager’s comparison to scientists with special regard to the invention of manned flight. In his view, managers are akin to scientists—innovators—who must develop a new approach to business practice that is designed to exploit rather than to resist the natural forces of their field.

“I am particularly anxious that managers read these chapters for understanding, rather than for simple answers. I am very confident that the great managers about whom this book is written will be very capable on their own of finding the answers that best fit their circumstances.”

In this passage, Christensen cautions those who come to his book for easy answers, implying that such a mindset is antithetical to the theoretical approach that he wishes managers to adopt, especially since theory lends itself to understanding the principles of nature rather than a hard set of rules. His framework also gives managers the freedom to pioneer new approaches with his framework in mind.

“The innovator’s task is to ensure that this innovation—the disruptive technology that doesn’t make sense—is taken seriously within the company without putting at risk the needs of present customers who provide profit and growth.”

Christensen uses this passage to speak directly to managers who are faced with the opportunities presented by disruptive technology. The challenge that faces them involves ensuring that the integrity of their organization’s main business channels remains intact, while also convincing the same organization to pursue a project that stands at odds with their main business. The later chapters of the book address this challenge by emphasizing the value of Seeing Opportunity in Risk and realizing The Influence of Underserved Markets.

“But in other cases, the impact of technological change is quite different. For instance, is a notebook computer better than a mainframe? This is an ambiguous question because the notebook computer established a completely new performance trajectory, with a definition of performance that differs substantially from the way mainframe performance is measured.”

In this passage, Christensen elaborates on how disruptive technologies can be so distinct from sustaining technologies. Rather than defining disruptive technologies by their ability to unseat market leaders and trigger upheavals, Christensen underscores the need to grade them on a plane of performance that is distinct from that of sustaining technologies. It is also worth noting that Christensen uses the notebook computer and the mainframe as two examples of products that are distinguished by disruption, since the two are also described as separate markets for the disk drive industry.

“Essentially, innovations that are valued within a firm’s value network, or in a network where characteristic gross margins are higher, will be perceived as profitable. Those technologies whose attributes make them valuable only in networks with lower gross margins, on the other hand, will not be viewed as profitable, and are unlikely to attract resources or managerial interest.”

This passage contains the dominant organizational dynamics that prevent many established firms from pursuing disruptive innovation. On its surface, the low returns of the disruptive markets do not align with the risk-averse, profit-seeking culture that ensures corporate survival. However, Christensen already notes that these products will find value in other networks, which suggests that The Influence of Underserved Markets is underappreciated by established firms.

“Disruptive technologies emerge and progress on their own, uniquely defined trajectories, in a home value network. If and when they progress to the point that they can satisfy the level and nature of performance demanded in another value network, the disruptive technology can then invade it, knocking out the established technology and its established practitioners, with stunning speed.”

One of the unique characteristics of disruptive innovation is its ability to progressively overtake value networks from the low end of the market. This sets it apart from sustaining innovations, which can migrate between markets but can rarely ever engage the low end of the market in the way that disruptive innovations do. In this passage, Christensen outlines a general strategy for positioning disruptive products, following them all the way to a stage of market upheaval.

“My findings consistently showed that established firms confronted with disruptive technology change did not have trouble developing the requisite technology […] Rather, disruptive projects stalled when it came to allocating scarce resources among competing product and technology development proposals[.]”

One of Christensen’s most influential insights is that established firms usually pioneer the disruptive technology but fail to develop and commercialize it. This idea implies the inability of such firms to look past the technology’s superficial low-margin quality and recognize the long-term advantages that leveraging such innovations will provide. This pattern emphasizes the theme of Seeing Opportunity in Risk, since the inability to take key risks results in corporate failure.

“Customers in these established markets eventually embraced the new architectures they had rejected earlier, because once their needs for capacity and speed were met, the new drives’ smaller size and architectural simplicity made them cheaper, faster, and more reliable than the older architectures.”

One of the prevailing market forces that established firms usually fail to account for is customer preference. This is evidenced by customer behavior around homogenized products, which occurs when the disruptive product becomes performance-competitive with the established firms’ product. In the case of the small disk drive, customers valued the natural simplicity with which the disruptive product had been developed, which was more preferable to the complex, overdeveloped offerings of established firms.

“Value networks strongly define and delimit what companies within them can and cannot do.”

In this passage, Christensen places the burden of corporate rigidity on the value network, whose dynamics force established firms to follow a set of decisions that inevitably lead them to failure. By doing so, Christensen cements the value network as one of the prevailing market forces, whose natural characteristics should be observed in business management, rather than resisted.

“It is clear from the histories of the disk drive and excavator industries that the boundaries of the value networks do not completely imprison the companies within them: There is considerable upward mobility into other networks. It is in restraining downward mobility into the markets enabled by disruptive technologies that the value networks exercise such unusual power.”

This passage discusses the issue of asymmetric mobility, which allows certain firms to migrate into value networks of higher value but prevents others from entering networks of lower value. This is precisely the natural law of the value network in practice. This dynamic creates conditions that show how companies can operate in observance of market forces. However, asymmetric mobility shows how established firms are disadvantaged by their inability to move downmarket, where disruptive technologies find value.

“Indeed, disruptive technologies have such a devastating impact because the firms that first commercialized each generation of disruptive disk drives chose not to remain contained within their initial value network. Rather, they reached as far upmarket as they could in each new product generation, until their drives packed the capacity to appeal to the value networks above them.”

In contrast to established firms, entrant firms that leverage disruptive technology possess an exclusive advantage granted by asymmetric mobility. They begin at the low end of the market and grow until their business needs exceed what the value network is able to provide them. This creates the impetus for entrants to migrate upmarket, chasing the competition into their home territory.

“In other words, sensible resource allocation processes were at the root of companies’ upward mobility and downmarket immobility across the boundaries of the value networks in the disk drive industry.”

Christensen explains the root causes of asymmetric mobility, citing the need to allocate resources logically as the reason that established firms cannot chase entrants downmarket. Looking at the value network as a market force, it is important to consider how the laws that govern market forces affect the two types of firms in different ways.

“For an organization to accomplish a task as complex as launching a new product, logic, energy, and impetus must all coalesce behind the effort.”

Christensen advises organizations, whether established or not, to commit themselves to the effort of product development. This advice foreshadows a later discussion of established firms that split their commitment with their mainstream business, which prompts Christensen to suggest the need for spin-out organizations.

“So how do non-executive participants make their resource allocation decisions? They decide which projects they will propose to senior management and which they will give priority to, based upon their understanding of what types of customers and products are most profitable to the company. Tightly coupled with this is their view of how their sponsorship of different proposals will affect their own career trajectories within the company, a view that is formed heavily by their understanding of what customers want and what types of products the company needs to sell more of in order to be more profitable.”

Discussing the behaviors of middle managers, Christensen draws an important parallel between them and the larger organization. Both operate with the motivation to improve their status, and both are therefore forced to make decisions that they believe will benefit them in the long run. This explains why managers tend to disregard disruptive project proposals, just as it explains why organizations choose to ignore the low-margin markets where disruptive products create value.

“But it is precisely when emerging markets are small—when they are least attractive to large companies in search of big chunks of new revenue—that entry into them is so critical.”

In this passage, Christensen drives home a firm point about the prevailing forces that govern market dynamics: The Influence of Underserved Markets. This concept is underscored by the need to enter the emerging market while it is still small. Established firms cannot reconcile this imperative with their growth requirements, but this consequently hinders them from harnessing disruptive technology’s first-mover advantages.

“Expecting achievement-driven employees in a large organization to devote a critical mass of resources, attention, and energy to a disruptive project targeted at a small and poorly defined market is equivalent to flapping one’s arms in an effort to fly: It denies an important tendency in the way organizations work.”

Christensen once again employs the metaphor of flight innovation to describe the established firms’ inability to enter emerging markets. By mimicking the movement of birds’ wings, these firms effectively resist the laws of natural market forces. Established firms must then seek an alternative in order to enter a smaller market.

“Amid all the uncertainty surrounding disruptive technologies, managers can always count on one anchor: Experts’ forecasts will always be wrong.”

Christensen drives the unpredictability of innovation with a simple dictum. Although he previously advised managers not to take a passive approach in business, this merits an exception, since the assumption around emerging markets is that they have yet to exist. Without a clear phenomenon to study, there is nothing to suggest that any forecast of its performance will lend itself to accuracy.

“Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources (or having the relationships with trusting backers or investors) so that new business initiatives get a second or third stab at getting it right.”

In this passage, Christensen encourages managers to adjust their attitude to account for the possibility of failure. This mindset clashes with the conventional practice of avoiding failure and liability, though Christensen points out that the fear of failure is not as important as the fear of missing out on the first-mover advantages that disruptive technology brings. In this way, he acknowledges the humanity of managers, stressing that their capacity for error does not greatly deter their efforts to carve out a position in the emerging market.

“To succeed consistently, good managers need to be skilled not just in choosing, training, and motivating the right people for the right job, but in choosing, building, and preparing the right organization for the job as well.”

Another one of Christensen’s most important insights involves reviewing organizational capabilities and seeing how they affect market mobility. In this passage, Christensen charges managers with the responsibility of assessing their organization, harnessing the same skills they use to develop human resources to foster organizational capabilities.

“[D]ifferentiation loses its meaning when the features and functionality have exceeded what the market demands.”

Perhaps the most telling sign that disruptive technology eventually finds value in the market is its potential to homogenize the market. Its high rate of improvement triggers each stage of the product life cycle, eventually wiping out all the factors of differentiation, so that customers treat all products as commodities, regardless of the supplier’s market position.