January 10, 2009

The Innovator’s Dilemma – Clayton M. Christensen.

The Innovator’s Dilemma – Clayton M. Christensen.

This is a management book and also well thought out book from a Harvard research on why successful companies fail.

PS - This book provides abstraction that helps much.

For most of the explanation the author used Disk drive industry and I like the reason for selecting this industry, provided by his friend.

“Those who study genetics avoid studying humans, because new generations come along only every thirty years or so. It takes long time to understand the cause and effect of any change. Instead they study fruit flies because they are conceived, born, mature, and die all within a single day. If you want to understand why something happens in business, study the disk drive industry. Those companies are closest things to fruit flies that the business world will ever see”.

The thesis is based on the factor that companies who don’t see & act on disruptive innovations, would fail miserably.

Harness the principle of disruptive innovation.

1. Companies depend on customers and investors for resources.
2. Small markets don’t solve the growth needs of large companies .
3. Markets that don’t exist can’t be analyzed .
4. An organization’s capabilities define its disabilities.
5. Technology supply may not equal market demand .

Some examples of disruptive technologies:

Author accentuate the importance of triple factor in any corporation . RPV – Resources, process and value.

Well-managed companies are excellent at developing the sustaining technologies that improve the performance of their products in the ways that matter to their customers. This is because management practices are biased toward:

1. Listening to customers
2. Investing aggressively in technologies that give those customers what they say they want.
3. Seeking higher margins
4. Targeting larger markets rather than smaller ones.

Disruptive technologies however are distinctively different from sustaining technologies. Disruptive technologies change the value proposition in a market. When they first appear they almost always offer lower performance in terms of the attributes that mainstreams customers care about. But disruptive technologies have other attributes that a few fringe (generally new) customers value. They are typically cheaper, smaller, simpler and frequently more convenient to use. Therefore they open new markets. Further because with experience and sufficient investment, the developers of disruptive technologies will always improve their product’s performance, they eventually are able to take over the older markets. This is because they are able to deliver sufficient performance on the old attributes, and they add some new ones.

The ‘Innovator’s Dilemma’ describes both the process through which disruptive technologies supplant older technologies and the powerful forces within well-managed companies that make them unlikely to develop those technologies themselves.

Author offers a framework of 4 principles (listed at the beginning of this page) to explain why existing technologies are anti-productive when it comes for exploiting disruptive ones. And finally, he suggests ways that managers can harness these principles so that their companies can become more effective at developing for themselves the new technologies that are going to capture their markets in the future.

1. Companies depend on customers and investors for resources.

In order to survive, companies must provide customers and investors with the products, services and profits they they require. The highest performing companies, therefore, have well-developed systems for killing ideas that their customers don’t want. As a result, these companies find it very difficult to invest adequate resources n disruptive technologies – lower margin opportunities that their customers don’t want – until their customers want them. And by then, it is too late.

2. Small markets don’t solve growth needs of large companies.

To maintain their share price and create internal opportunities for their employees, successful companies need to grow. It isn’t necessary that they increase their growth rates, but increasing amounts of new revenue just to maintain the same growth rate. Therefore it becomes progressively more difficult for them to enter the newer, smaller markets that are destines to become the large markets of the future. To maintain their growth rates. They must focus on large markets.

3. Markets that don’t exist can’t be analyzed

Sound market research and good planning followed by execution according to plan are the hallmarks of good management. But companies whose investment process demand quantification of market size and financial returns before they can enter a market get paralyzed when faced with disruptive technologies because they demand data on markets that don’t yet exist.

4. Technology supply may not equal market demand

Although disruptive technologies can initially be used only in small markets, they eventually become competitive in mainstream markets. This is because the pace of technological progress often exceeds the rate of improvement that mainstream customers want or can absorb. As a result the products that are currently in the mainstream eventually will overshoot the performance that mainstream, markets demand while the disruptive technologies that underperform relative to customer expectations in the mainstream market today may become directly completive tomorrow. Once two or more products are offering adequate performance, customers will find other criteria for choosing. These criteria tend to more toward reliability, convenience and price, all of which are areas in which the newer technologies often have advantages.

A big mistake that managers make in dealing with new technologies is that they try to fight or overcome the principle of disruptive technology. Applying the traditional management practices that led to success with sustaining technologies always leads to failure with disruptive technologies. The productive route that often leads to success is to understand the natural always that apply to disruptive technologies and to use them to create new markets and new products. Only by recognizing the dynamics of how disruptive technologies develop can managers respond effectively to the opportunities that they present.

Following are his recommendations

1. Give responsibility for disruptive technologies to organization whose customers need them so that resources will flow to them.

2. Set up a separate org. small enough to get excited by small gains

3. Plan for failure. Don’t bet all your resources on being right the first time. Think of your initial efforts at commercializing the first time. Think of your initial efforts at commercializing a disruptive technology as learning opportunities. Make revisions as you gather data.

4. Don’t count on breakthrough. Move ahead early and find the market for the current attributes of the technology. You will find it outside the current mainstream market. You will also find that the attributes that make disruptive technologies unattractive to mainstream markets are the attributes on which the new markets will be built.

Tx n Rd

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