Author: Clayton M. Christensen
My Rating: 5/5
Summary: A great book that analyzes how a company’s lack of innovate can lead to distrust-turn by smaller organizations.
My Takeaways
One common theme is that the decisions that lead to failure were made when the leaders in question were regarded as some of the best leaders at the time.
Good management was the most powerful reason they failed to stay atop their industries.
Principle 1: Companies depend on customers and investors for resources.
Blindly following the maxim that satisfies customers has helped companies grow, but also led successful companies to fail because they are not focused on disruptive technologies.
Principle 2: Small markets don’t solve the growth needs of larger companies.
Principle 3: Markets that don’t exist can’t be analyzed.
With emerging markets, the one thing we know for sure, is that expert forecasts about how large the market will become are always wrong. The planning tools we use to understand sustaining technologies don’t work when used on disruptive technologies, Christensen says this is an exercise in ‘flapping wings’.
Principle 4: An organization’s capabilities define its disabilities.
People are surprisingly flexible. You can take an individual out of a large company and put them in a small startup, and they can adapt and survive. But a company has processes and values – the way it produces output, and the way it makes decisions on resources and pursuing ideas. These processes and values are not flexible, they cannot easily change to support a different low-margin product, when they are organized effectively around producing a high-margin product. The new scenario causes a company’s strengths to now become its weakness.
Principle 5: Technology supply may not equal market demand.
The incumbent companies compete aggressively to obtain higher-margin profits, by creating better product performance for the existing customers. Without realizing it, they overshoot the needs of the general market, and create a vacuum for lower-end, lower-cost technologies to enter at the foot of the market, servicing the basic needs of customers.
Incumbents often don’t realize the speed at which they are moving up-market, seeking higher profits, because they are engaged in a competitive battle with other incumbents. Because new entrants can enter with lower price points, it creates a compelling reason for some customers to begin changing.
The fear of cannibalizing your own products is cited as a reason why established firms delay the introduction of new technologies.
Incumbent firms successfully entered 1 market, but missed new emerging markets.
Value networks are unique to each firm and factor into how a company innovates because each part of the value networks has different success metrics.
Poor management was not the cause of how large successful firms’ downfall when dealing with disruptive technologies, but was the root cause.
These good management processes that nurture customer feedback, allocate resources effectively and don’t offer inferior products at lower profits in insignificant markets are the practices that reject confronting disruptive technological change.
5 fundamental principles of organizational nature that managers in successful firms recognize and harnessed when dealing with disruptive technologies. Firms that failed ignored or fought them.
- Resource dependence. Customer control resource allocation
- Small markets don’t solve the growth needs of large firms.
- The uses or applications of technologies are un knowable in advance. Failure is an intrinsic step towards success
- Organizations have capabilities that exist independently of the capabilities of the people who work within them. Organizations’ capabilities reside in their processes and values. The process and values that constitute their core capabilities within the current business model also define their disabilities when confronted with disruption.
- Technology supply might not equal market demand. The attributes that make disruptive technologies unattractive in established markets often are the very ones that constitute their greatest value in emerging markets.
Successful managers harnessed these principals to their advantage by doing the following in their organization:
- Embedded projects to develop and commercialize disruptive technology within an organization whose customers needed them.
- Managers aligned the disruptive innovation with the right customers, customer demand increased the probability the innovation would get the resources it needed.
- Placed projects to develop disruptive technologies in organizations small enough to get excited about small opportunities and small wins.
- Planned to fail early and inexpensively in the search for the market for a disruptive technology. They found that their markets coalesced through an iterative process of trial, learning and trial again
- They utilized some of the resources of the mainstream organization to address the disruption, but were careful not to leverage its processes and values. They created different ways of working within an organization whose values and cost structure were turned to the disruptive task at hand.
- When commercializing disruptive technology, they found or developed new markets that valued the attributes of the disruptive products, rather then search for a technological breakthrough – so that the disruptive product could compete as a sustaining technology in mainstream markets.
Successful Managers embraced the fact that markets change.
Often times, companies set up separate business units or other companies to develop a disruptive technologies that had different cost structures, customers and value networks. These independent orgs were created to match the size of the opportunity.
There are significant first mover advantages for companies that pioneer and commercialize disruptive technologies.
Most managers know how to develops plans for forecasting markets in sustaining technologies. This approach to managing disruptive technologies in emerging markets can paralyze companies. {Honda dirt bike example.}
It is impossible to predict how large markets will be for disruptive technologies and therefore, impossible for companies to understand how the products will be used.
Research suggests that firms that were able to successfully develops distributive technologies conservatived enough resources to develope technologies 2 to 3 times to get it right.
Failed ideas vs failed managers vs failed companies.
Failure is intrinsic to finding success with disruptive technologies
Action must be taken before plans can be developed for managers to learn about what’s important for new markets with disruptive technologies
Agnostic marketing
Three factors affect what an org can and can’t do:
- Resources.
- Processes
- Values. Define cost structure and incapableities.
One of the main reasons new startups that IPO flame out is because the lack of processes developed because the resources never transitioned into process that sustain growth (Avid) vs Mickinsey who is more reliant on process and values.
The very processes that made it successful in innovating in one market, made it incapable of competing in another. (DEC example)
Values set by the company (I.e 50% profit margins for new business) made it also incapable of addressing the less profitable OC market because it didn’t meet the companies criteria of innovation. Rendered it incapable of a winning strategy.
Companies must consider the RPV model when acquiring companies and integrating them.
Managers confronting change must first determine the resources they need to succeed. Then ask does the organization have the processes and values to succeed.
The very capabilities that define their org define their incapableities.
A product becomes commoditized when the features and functionality exceed the market demand.
The weaknesses of disruptive technologies are their strengths
Crossing the cashism
Important to find new markets for disruptive technologies and move further up market.
Disruptive technologies are simpler, cheaper, more reliable and convenient.
Develop a business plan for learning a market, not executing a strategy when it comes to developing disruptive technologies. You must plan to be wrong and try to be as right as soon as possible.
Performance over supply opens the door for more convenient disruptive technologies.
Products over time shift from functionality to other attributes like reliability and convenience and price.
The early characteristics of a winning design for a product will be simplicity and convenience And will be incubated in an emerging value network in which these attributes will be an important measures of value.
Upwardly mobile downwardly immobile
Disruptive technologies re-define the main stream value networks because of dealer economics and how it shapes the main stream value networks
The pace of progress that markets demand is different than the pace of the development technology.
Managing innovation mirrors the resource allocation process.
Find a new market that values the current characteristics of a disruptive technology
The information to make large investments in disruptive technology simply does not exist. It needs to be created.
Disruptive technology rarely make sense to invest in the early years when making money is not important
The very practices that managers do to make their companies industry leaders are the reasons why a successful companies fail.
Understand the laws that apply to disruptive technologies and use them to create new products for new markets.
Plan for failure and set up a separate organization that relies on new customers
Don’t count on breakthroughs. Move ahead early and find the market for the current attributes of the technology. You will find it outside the current mainstream market.