The Innovator's Dilemma
In his book, The Innovator's Dilemma , Professor Clayton Christensen of Harvard Business School describes a theory about how large, outstanding firms can fail "by doing everything right." The Innovator's Dilemma, according to Christensen, describes companies whose successes and capabilities can actually become obstacles in the face of changing markets and technologies.
Christensen describes two types of technologies: sustaining technologies and disruptive technologies. Sustaining technologies are technologies that improve product performance. These are technologies that most large companies are familiar with; technologies that involve improving a product that has an established role in the market. Most large companies are adept at turning sustaining technology challenges into achievements. Christensen claims that large companies have problems dealing with disruptive technologies. Disruptive technologies are "innovations that result in worse product performance, at least in the near term." They are generally "cheaper, simpler, smaller, and, frequently, more convenient to use." Disruptive technologies occur less frequently, but when they do, they can cause the failure of highly successful companies who are only prepared for sustaining technologies.
Disruptive vs. Sustaining Technologies
As the above graph shows, disruptive technologies cause problems because they
do not initially satisfy the demands of even the high end of the market.
Because of that, large companies choose to overlook disruptive
technologies until they become more attractive profit-wise.
Disruptive technologies, however, eventually surpass sustaining
technologies in satisfying market demand with lower costs.
When this happens, large companies who did not invest in the disruptive
technology sooner are left behind. This,
according to Christensen, is the "Innovator's Dilemma."
Large companies have certain barriers to innovation which make it difficult to invest in disruptive technologies early on. Being industry veterans means that they have set ways in approaching new technologies. Baggage from precedents (such as equipment, training, procedures) hinder a quick response to disruptive technologies. Large companies also have an established customer base whom they must be accountable to. These customers often ask for better versions of current products rather than completely new technologies. Customers are a substantial barrier to innovation. Finally, companies make decisions according to their place in the value network--or, to put it simply, companies make decisions according to where they are in the market. The chart below ties elements of the Innovator's Dilemma to Teradyne's Aurora Story.
Solving the Innovator's Dilemma
The next logical question in
light of the rather grim picture presented by the Innovator’s Dilemma is can a
firm hope to succeed? The answer
lies in firms being able to identify, develop and successfully market emerging,
potentially disruptive technologies before they overtake the traditional
sustaining technology. However, as
described by the Innovator’s Dilemma, the value networks and organization
structures of these firms make it an arduous process to complete.
Identification of these
disruptive technologies can be a daunting mission because, as Christensen
states, “markets that do not exist cannot be analyzed."
One cannot predict what the market or probability of success will be for
these emerging technologies. Therefore,
managers need to engage in discovery-driven
planning, in which they operate on the assumption that new markets can not
be analyzed and instead rely on learning by doing and real-time adjustment of
strategy and planning. The key
obstacle to success with this approach is the stigma of failure in many firms. In trying to solve the Innovator’s Dilemma, managers should
leave room for failure in their planning, and be willing to invest in what may
be a potentially disruptive technology. This
requires that the firm itself be willing to leave room from failure, and should
failure occur, wrap the lessons from the experience back into the firm as
preparation for the next opportunity.
Even after correctly identifying
potentially disruptive technologies, firms still must circumvent its hierarchy
and bureaucracy that can stifle the free pursuit of creative ideas.
Christensen suggests that firms need to provide experimental groups
within the company a freer rein. “With
a few exceptions, the only instances in which mainstream firms have successfully
established a timely position in a disruptive technology were those in which the
firms’ managers set up an autonomous organization charged with building a new
and independent business around the disruptive technology.”
This autonomous organization will then be able to choose the customers it
answers to, choose how much profit it needs to make, and how to run its
Furthermore, the firm must quickly develop the new technology to compete with smaller, more mobile firms while maintaining its core business. Finally, even if engineers successfully develop a working product, they must find an appropriate market to target, a difficult task given the unpredictable nature of markets. In short, there are many variables involved in solving the Innovator’s Dilemma with few lifelines along the way.
"Discovering markets for emerging technologies inherently involves failure, and most individual decision makers find it very difficult to risk backing a project that might fail because the market is not there."
-Clayton Christensen, The Innovator's Dilemma.