Innovator's Dilemma - Christiansen

The Innovator's Dilemma: The Revolutionary Book that Will Change the Way You Do Business by Clayton M. Christensen - 4/5

The Innovator's Dilemma is a unique approach to understanding corporate failure. Christiansen's thesis is that well managed companies with all the best processes in place do fail. The failure is not due to inefficiency, bad management or bad processes but due to companies being responsible in terms of listening to their customers, investing in technologies that their customers' demand and rationally allocating resources to high-margin products. Christiansen argues that these investments are made on sustaining technologies as opposed to disruptive technologies. He reason's established sector leaders do this because the initial market for disruptive technologies is too small to justify the investment and sustain corporate growth. This provides new entrants with time and space to establish themselves in the emerging market and that when the performance of the disruptive technology intersects the needs placed on the traditional technologies in an industry, these disruptive technologies will start to take over from the traditional sector leaders.

Christiansen's thesis is that disruptive technologies exist in value networks with lower cost structures and lower margins than the value networks occupied by market leaders that focus on sustaining technologies and incremental technological developments. Christiansen argues that there are obviously more tangible benefits for competitors in value networks with lower costs structures (and margins) to attack value networks with higher margins. On the contrary, there is very little incentive for companies embedded in high-margin value networks to target sectors in the parallel network. And this then is the dilemma: how do current market leaders grow and develop substitute products that will make their current catalog redundant when the substitutes offer very little margin and won't contribute to the overall growth of the company.

Christiansen does suggest a few ways in which managers can facilitate the development of disruptive technologies. He first says managers should not grow disruptive technologies in established companies. Rather he argues they should create separate business units or companies with organizational sizes that match the market size. He also suggests that no one can really forecast the potential of market for disruptive technologies since the market doesn't exist. He suggests that instead of acting that forecasts are accurate, companies should learn and grow together about needed features and applications for their new products.

Even though the book was first published in 1997 the ideas are still valid. We have recently seen the rise of netbook computers and while Taiwanese companies are leading the way in the development and innovation of these products, traditional notebook and PC heavyweights like Dell are arguing against entering this market. Responding to Acer's recent rise to the second largest PC company by volume (Q3 09) in the world, Dell suggested they are more concerned with revenue and margin as opposed to volume. Another example closely aligned to the rise of netbooks are ARM processors. ARM processors are low cost processors licensed by a UK company. While they do not have the performance parameters of any of Intel's PC processors and chipsets, ARM processors (low performance, cost, power etc.) have been growing in the mobile phone space and are now entering the computer space through netbook computers on a different business model to Intel's or AMD. Of course Intel crushed AMD through a brutal price war since they both had similar business models. Even though I won't bet against Intel, it will be harder for them to disrupt ARMs growth.

Christiansen's book is well argued, clear and concise. His extensive use of case studies from a variety of industries including the hard disk sector, steel mills, discount retailing, and the excavator industries are enlightening and educational. He does reemphasize his points time and time again using different examples but he is merely honing in on his ideas and supporting them from a wide array of industries. It's a good read and essential for managers and executives who have the power to influence investment strategies for firms and resource allocation. However, for most of us who work in the trenches it is interesting and educational and I do recommend it to managers and other's that hope to develop new technologies and applications.