The Innovator’s Dilemma by Clayton M. Christensen [Summary]
The Book In Three Or More Sentences:
In The Innovator’s Dilemma, Clayton M. Christensen, explains in great length, how and why well-established firms, mostly in the IT sector, fail. How these close to god-like companies are unable to innovate when changes in the world happen and are therefore outrun by smaller companies who, thanks to their flexibility and fresh perspective, spot these so-called disruptive technologies (think: iPhone and Tesla) and win the big game.
The Core Idea:
The world is evolving and regardless of how cool your company is today. If you want to stay in business, you need to innovate. However, a lot of times the next big wave (i.e. potential big market) is still really small and unattractive. Hence, the innovator’s dilemma. Established firms ignore small markets because they can’t satisfy their need for capital. However, that’s exactly what they have to do – pursue markets that don’t exist – because that’s where the future big bucks lie.
Listening to your customers is not always the right approach. You should observe what they do.
To enter new markets you should act before making plans.
Planning for failure is by far the best approach when doing something.
Lesson #1: The Difference Between Sustaining and Disruptive Technologies
It’s a war out there.
Competition is fierce and every day there are new players entering the battlefield.
As a leader of an organization, or a person who’s interested in starting his own business, you should know the difference between sustaining and disruptive technologies if you want to get a boatload of cash for what you’re doing.
Here’s a quick summary of the two:
These are well-established, already accepted by society products. Imagine gasoline cars or the smartphones we use nowadays. People don’t need to watch a series of YouTube videos to know what to expect from a smartphone. It will surely have a camera, a display, and an option to call people (though now rarely used).
And while entering a market full of sustaining techs isn’t risky per se, it’s still quite difficult as there are already a lot of players. You can’t really make it big if you don’t offer something new and interesting. Something “disruptive.”
Sustaining Company Practices:
Listening to customers.
Improving what’s already working.
Trying to satisfy investors.
Targeting big markets.
If you’re not quite comfortable with the word disruptive (like me) you can simply read it as innovation.
These innovative markets usually emerge from existing, already established products but offer simpler, and a lot of times more effective proposition to the buyers.
However, initially, the disruptive tech is out of shape and the market is quite small or even nonexisting.
For example, a lot of times the first version of a tech product is bad. Some people can even call it a disaster (Remember how many times Tesla was close to bankruptcy?). The most recent example is the folding phone. Samsung launched its folding phone in 2019 and a lot of folks later reported that the screen broke after just a day. Still, who knows what will happen after a year or two. Maybe we’ll be all walking around with phones that unfold into laptops.
The main point here is that disruptive technology is the future. There’s great potential, close to zero competition, and the possibility to become Musk-like famous.
Naturally, though, people are afraid of pursuing new markets as it requires putting money upfront for something that has an unclear future.
Disruptive Company Practices:
Watching what customers do, not what they say.
Trying to find a new way to do old stuff.
Driven by their values.
Pursuing smaller, nonexistent markets.
Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.” Clayton M. Christensen
Lesson #2: Big Companies Fail Because of Their Massiveness
If you have a 3 story house, a spouse, kids, and you own a bunch of stuff, it will be quite hard for you to move to another country and work the job you always wanted. Not impossible, but surely hard.
The same happens when an organization grows. They become so big and sluggish, that they can’t adjust when changes in the world happen. Or at least can’t act fast enough to seize a potential opportunity.
That’s one of the main reason big, well-established corporations shockingly fail.
Fortunately, thanks to the findings of professor Christensen, you can study these reasons and make the correct adjustments.
Here are 4 principles that explain why big old firms can’t spot emerging investment-worthy trends:
Companies depend on customers and investors: A well-established firm can’t simply march into a new market before convincing the investors and making sure their current customers are OK with it. After all, the above-mentioned are the backbone of their existence – the main source of income. And the bigger the company, the harder it gets to explore something new because the process is designed to kill ideas – bureaucracy, meetings, spreadsheets, etc.
Small markets are not attractive to large companies: When a Fortune 500 company, for example, is ready to diversify and attempt to conquer a new market, they search for big-enough markets. If the opportunity is small, there’s no go. Why? Well, big businesses need a lot of cash to remain active. Small markets don’t make sense for them because they need capital – to pay employees, investors, etc. And since disruptive tech always initially seems like a small niche, they skip it.
Nonexistent markets can’t be measured: Before entering a market, the board wants data. They want to see a detailed analysis of the new market. However, the potential of disruptive technologies is always uncertain at first. Thus, the data is not appealing (or there simply isn’t data) to the board and they reject investing.
Technological innovation does not match market demand: At first, emerging tech can be viewed as a weird toy that only crazy people play with. But the pace of technological progress is so fast that soon the new thing starts to appeal to more people and it becomes the preferred choice. Exactly what’s happening now in the car industry. More and more people want electric cars over gasoline-powered ones.
Or in other words, big firms fail because they’re slow, data-driven, and are afraid of losing what they have. On the other hand, the only way they can stay in business is to take risks what they already have and invest in markets that seem “unworthy” at first.
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