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

Published in 1997 by American author Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail is a business management book that views market dynamics from the perspective of technological innovation. It is considered a seminal text on innovation management and received the Global Business Book Award for the Best Business Book of 1997.

Christensen proposes that well-managed firms fail when good management practices rub against complex market conditions, hindering them from leveraging innovations that redefine the standards of performance. Based on research that Christensen conducted as a doctoral student at Harvard Business School, as well as continued research that he performed as a full professor at Harvard University, the book offers strategies for overcoming these obstacles, contextualizing them for new firms and market leaders alike. Underlying these discussions are critical ideas on underserved markets, agile capabilities, and the dynamics of opportunity and risk.

This study guide refers to the 2016 paperback edition published by Harvard Business Review Press.

Summary

The Innovator’s Dilemma is anchored around two research topics: explaining the reasons for corporate failure and predicting innovation success. In the Introduction, Christensen observes that conventional business practices actually contributed to corporate failure because the managers implementing them could not contextualize innovations in the wider business landscape. He distinguishes between two types of innovations—sustaining innovations and disruptive innovations—and describes how market dynamics shape the perception of the latter type to make them seem unattractive to industry leaders at the most critical window of investment opportunity. This, essentially, is the innovator’s dilemma.

The insight is elaborated further in the first part of the book, where Christensen concretizes it in the context of the disk drive. In Chapter 1, he describes how the established firms that drove the disk drive revolution assumed a passive approach to innovation once they occupied lead positions in the market. The established firms’ loyalty to their customer base, who described the small disk drive as having no value, prevented them from anticipating the eventual dominance of newer entrant firms who leveraged the same technology to their advantage.

In Chapter 2, Christensen ties the pattern of innovation rejection and market shift to a concept he calls the value network. In a value network, companies operate within the boundaries of customer relationships that have historically provided them with the resources necessary to gain market leadership. Companies address market requirements with an overwhelming bias to profitability, which is why they value sustaining innovations that directly address customer needs more than disruptive innovations. However, by definition, disruptive innovations shift the standard for product performance. Entrant firms that seize the opportunity are able to create new value networks wherein the disruptive technology finds value. This approach gives them a steady market platform to introduce sustainable innovations to their product and attack the established firms’ markets.

In Chapter 3, the author traces this pattern again in the mechanical excavator industry, which abandoned cable-actuated shovels for the disruptive backhoe technology. While this suggests that established firms are doomed to fail, Christensen tries to diagnose the root causes that prevent them from building new value networks in Chapter 4. He explains that an established firm’s inflexible cost structure can only be met by the pursuit of upmarket profit projections. Hence, the typical response to the threat of entrant firms is to move upmarket, rather than down into the entrants’ home value network.

Christensen devotes the second part of the book to solutions that resolve these obstacles to innovation management. The first five chapters of this section zero in on a different aspect of the value network, from resource allocation to market analysis.

Chapter 5 examines the ways in which companies depend on customers to meet their resource needs. Some companies either fail to justify engaging in newer, lower-margin value networks, or else they try to engage with the new network alongside their original customer base. Christensen recommends embedding independent organizations in the new value networks, since their resource priorities will align with the new network offerings.

In Chapter 6, Christensen observes that companies will always tend toward growth, which makes the pursuit of smaller markets untenable. Large firms cannot accelerate a small market’s growth without sacrificing an impractical number of resources, nor can they wait for the market to fit their growth requirements. Thus, Christensen reiterates the strategy of embedding an independent organization in the new value network, since its size will match that of the market.

Chapter 7 discusses the inevitability of failure in the pursuit of disruptive products. Christensen argues that no one can analyze or predict the market where the innovation will find value, since it is still being created alongside the innovation’s market applications. Managers should accept that ideas are likely to fail in a trial-and-error approach, forcing them to minimize organizational impact by ensuring that each market investment is small enough to reduce losses.

Chapter 8 dissects the notion of organizational capability by dividing it into three factors: resources, processes, and values. Christensen argues that processes and values are significant barriers to disruptive innovation since they are usually developed with the company’s initial market in mind. A company would have to undergo a radical reorganization to shift their capabilities away from an established market. Once again, Christensen proposes creating an autonomous organization wherein the processes and values are still flexible, alternately suggesting that acquiring a smaller company can leverage its capabilities toward success.

Finally, Chapter 9 probes the tendency of innovations to surpass the rate of improvement demanded by mainstream markets, enabling entrant firms to meet the demand once they have acquired a firm position in their initial value network. Christensen provides three possible strategies that leverage the knowledge of a company’s technology supply trajectory against the trajectory of their customers’ demands.

The last two chapters of the book consolidate these insights by applying them to a case study on the electric vehicle. Because this innovation is viewed as a disruptive technology, Christensen shows how the market leaders who dominate the market with gasoline-powered vehicles will take the innovation for granted. He considers possible markets and sets guiding principles for engineers to follow in order to engage them. He also establishes an autonomous organization to commercialize the product so that its capabilities can be focused toward addressing the unique needs of its value network. He ultimately concludes that intensifying good management practices will not necessarily result in better market performance. Instead, he cautions companies to become more aware of the context in which they operate and act responsively to either seize or defend their position.