The Innovator’s Dilemma contemplates the difficulties of maintaining a firm’s position when faced with innovative technologies.
Summary
Large companies that spend millions on research and development often fail to effectively confront challenges posed by innovation. Traditional business practices such as conducting strategic planning and paying close attention to customer needs are insufficient for negotiating disruptive innovations in the market. This is the innovator’s dilemma. Business managers must be prepared to confront this paradox. Rather than specific suggestions, they require a theoretical framework to manage the impact of disruptive innovation on established firms.The history of the disk drive industry from the 1970s into the mid-1990s suggests that business innovations can come in two forms: innovations that help established firms maintain their advantages, and disruptive innovations that can rapidly transform an industry. Disruptive innovation is likely to come in the guise of a low-cost product that initially appeals only to a few consumers. The disruptive innovation gains customers in its market by providing a cheaper and more convenient alternative. Disruptive innovation is a relentless process, so established firms must be prepared to confront disruption when it occurs in their markets.
Key Takeaway
Improvements to a new technology are easy at first but become more difficult to achieve over time.
Technological innovations can be divided into two types: sustaining innovations and disruptive innovations: Although all innovations cause some disruption, not all innovations are categorically disruptive. Some technological innovations sustain the role of incumbents in the market by helping established firms maintain their mainstream customers. Disruptive innovations weaken the hold of established firms; they are more likely to focus on developing fringe features that appeal to only a few customers.
A new innovation can be sustaining to one industry but disruptive to others: Electric cars are a potentially disruptive innovation for traditional automobile manufacturers and gas stations. They are also a sustaining innovation for the highway construction industry or the automobile insurance industry. When determining whether an innovation is sustaining or disruptive, it is better to judge its impact, rather than its design. No matter how revolutionary in design, a new product is not a disruptive innovation unless it potentially threatens the role of established players in a market.
Listening to customers and responding to their wishes can actually be counterproductive. Disruptive innovations create their own markets: successful business managers must realize that their customers often don’t know what they want in the long term. Sometimes companies develop technologies before they are ready to be embraced by consumers. Thus, while market research is a key part of product development in large firms, it is impossible to do market research with customers and clients of new technologies. Customers cannot be surveyed about products that do not exist. New disruptive products create markets where there was no previous demand. For example, few customers in the early 1990s displayed much interest in digital music files, which emerged at a time when the sale of CD recordings remained profitable. Today, laptop computers often do not even come with a standard CD drive, because it’s taken for granted that users will prefer digital music files instead.
Market dynamics can favor new entrants into a business’s sector at the expense of well-established firms: Entrenched firms tend to focus on their current market at the expense of developing customers in new sectors. Often, niche markets are too small for big firms to make a profit. In practice, this can mean that firms focused on new products can see very rapid rates of growth in markets that established firms cannot enter without diluting their brand. Instead of refocusing on lower-end consumers or customers with niche needs, large luxury firms can contend with new innovations by purchasing promising rivals. An example of this strategy in practice is Facebook’s purchase of WhatsApp in 2014. At the time of the purchase, Facebook had more users and its social network offered a number of ways for users to contact each other and share data. WhatsApp offered only a fraction the modes of communication Facebook offered, but it was increasingly used by mobile phone users as a communications platform. In this way, WhatsApp’s popularity posed a threat to Facebook’s efforts to be the dominant communication platform. Recognizing the threat posed by WhatsApp, Facebook moved quickly to purchase it.
Large companies are bureaucratic; innovation within them is often difficult as a result: the reasons why companies lose their competitive advantages revolve around arrogance, complacency and the tendency for companies to engage in activities for its own sake and to copy their peers instead of staying ahead of them. Some companies didn’t bring in young people with fresh ideas. Sometimes managements weren’t attuned to the tectonic shifts in their industry.
Defectors who leave successful companies to start rival firms can be a serious challenge to the position of established firms in the market.
Ways to Avoid the Dilemma
Berkshire Hathaway achieved its success not by conquering change, but by avoiding it. For example, you can hardly think of a more old fashioned business than a railroad business, but it’s unlikely that anyone is ever going to create another trunk railroad. At the same time, Burlington Northern has been quite clever at adapting technology to its railroad by double decking all the trains, raising the heights of the tunnels, etc. In this way, Berkshire Hathaway has become what it is today.
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