Actionable Book Summary: The Innovator’s Dilemma by Clayton M. Christensen
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.
Lesson #3: Watch Out For Radical Technological Transitions
Here’s why the book is called The Innovator’s Dilemma:
The current business leaders are where they are because they listened to their customers, invested heavily in new products, machines, warehouses, etc. Paradoxically, these same things are the reason a lot of times big firms go bankrupt – they listen to customers, invest in technologies…
This is one of the innovator’s dilemmas: Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake.” Clayton M. Christensen
Why is this bad?
Mainly because a lot of times customers don’t really know what they want.
That’s why Henry Ford famously said, “If I had asked people what they wanted, they would have said faster horses.”
If you ask people, they’ll tell you that they want a faster, more secure, nicely designed car. But if you’re somehow able to massively produce flying vehicles people will immediately be careless of 4-wheel cars.
What you should be looking for is radical technological transitions and invest in them. Things like electric vehicles, cryptocurrency, and the most obvious example – online shopping.
Yes, even e-commerce is something I need to mention.
Though starting an online business might sound obvious to you today, not long ago people thought that Jeff Bezos was crazy for starting an online-only shop.
Yet, despite the obvious benefits of creating an online store over physical ones, there are still millions of people who believe that brick and mortar businesses are the way to make a living. People all over the world still invest all of their savings in small local stores which lasts a year or two instead of starting something online.
Lesson #4: Create an RPV Framework for Your Company
An RPV framework stands for resources, processes, values.
By being well aware of these three, you’ll know what your company is capable of doing. Therefore, you’ll know what you can do and what you can’t do, which will help you decide what to avoid because you don’t have the know-how, for example.
In simple terms, an RPV framework is a way to find out your strengths, weaknesses, and overall potential. It’s something like an audit of your business.
Let’s look at the three one by one so you can get a better idea:
Resources: Here you have the obvious: people, equipment, designs, brands, the information you have, the amount of cash in the bank, your relationships with other firms, customers, technology… In most cases, you’ll look at your resources when you’re making future decisions. However, that’s often the wrong approach because resources are also things that can be bought – you can hire an outside firm for X if your company doesn’t have the know-how of how to do something specific. Or in other words, don’t let the lack of resources (or knowledge) stop you from investing in something that seems attractive.
Processes: Put simply, the processes are a set of actions that help organizations transform resources (the above-mentioned) into products. This includes manufacturing processes, internal and external communication, market research, budgeting, etc. And while your current processes are great for the things you produce now, you need to adjust them if you decide to do something new.
Values: This third factor has a higher meaning sort to speak. It’s basically what the company stands for. The WHY of the company as Simon Sinek would say. Though this is something you can’t clearly see nor touch, this is what comes to people’s minds when they think about your brand. For example, if you’re a sustainability-focused company, you’ll surely won’t enter the gasoline-powered cars manufacturing business.
Take some time to create your own framework and outline the main things in your company. This will not only help you make future decisions but also remind you why you do what you do.
Lesson #5: Entering New Markets Inherently Involves Failure
Large companies often surrender emerging growth markets because smaller, disruptive companies are actually more capable of pursuing them.” Clayton M. Christensen
It’s better to know this right from the start before committing to anything: You’ll most probably fail. Like, at least a couple of times before creating something people will want to buy from you.
This applies to everyone. It’s not only for settled companies who want to enter a new market. It’s also for people who want to start a weekend side hustle.
So, yes, you’ll fail.
What you can do about it?
Plan for failure.
That’s probably the best advice mentioned in the book because your approach will change for the better when you expect to fail. You’ll not only better manage your resources, but you’ll also have the will power to continue since you won’t feel stupid when things don’t work out as planned.
So, don’t bet all of your resources on one product when starting. It’s unlikely to become the next big thing right off the bat. Anticipate failure, learn from your mistakes, iterate, and try again.
“Our initial stab into the market is not likely to be successful. We will, therefore, need the flexibility to fail, but to fail on a small scale, so that we can try again without having destroyed our credibility.” Clayton M. Christensen
Create new markets: Based on the research from the book, it turns out that creating a new market is less risky and more rewarding than trying to satisfy your target audience year after year. The only downside is that it takes time. And time is usually something big companies don’t have. As they need a lot of cash to operate, they focus only on big opportunities. That’s why we often see in history how new players seemingly out of nowhere enter the market and crush well-established firms.
Target your new product to new people: When you develop something new, make sure to market it to other people, not just your current customers. Disruptive technology is often seen as an outcast, thus, not many of your clients will want it. Actually, most of them will probably hate it. But that’s OK. After all, this new thing was build for a completely different set of clients.
Consider the buying hierarchy: People consider the following four things before making a purchase: functionality, reliability, convenience, and price. If two products have the same functions, are both from reliable firms and are convenient to use, users will look at the price. Keep these things in mind when marketing your product.
Plan to fail: You need to take action before carefully planning the final product. Give yourself enough room to make adjustments to the product as you go along. Don’t expect things to work out the way you wanted. When you plan to fail, you’ll have the right mindset and approach. How to do it? Simple, when you have an idea think of ways things can go wrong.
Create simpler solutions: If you’re reading this right now you’re probably wondering how to create this unicorn-like product referred to as disruptive tech? Simple. Look at current solutions and create new ones that are simpler, cheaper, more reliable and easier to use than what’s currently available. These four should be your guiding principles if you decide to start something new, something disruptive.
Commentary and My Personal Takeaway
In the majority of the text, the author explains in great detail how the disk drive industry changed throughout the years. And though no one uses floppy disks anymore (except for the Save icon) it’s a great way to understand how being stuck in the now prevents you from becoming great in the future.
To some, the research in The Innovator’s Dilemma might seem dated, but what professor Christensen was able to package in the book is more than just case studies of long-gone firms. He trains our minds to spot new opportunities and gives us a new perspective to have in mind for the future development of our business.
If you have an existing business this book will help you understand what you’re doing wrong and show you how you can adjust your future strategy.
If you’re still hesitant about starting something new because you think everything is already created, this book will surely motivate you. There are plenty of examples in the pages where start-ups were able to crush big corporations.
My key takeaway from the book is the following: Watch carefully what customers do. Don’t listen to what they say. Customers don’t really know what they want.
…while managers may think they control the flow of resources in their firms, in the end it is really customers and investors who dictate how money will be spent because companies with investment patterns that don’t satisfy their customers and investors don’t survive.” Clayton M. Christensen
This is how things must work in great companies. They must invest in things customers want—and the better they become at doing this, the more successful they will be.” Clayton M. Christensen
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.” Clayton M. Christensen