The Innovator’s Dilemma

CLAYTON M. CHRISTENSEN

Reviewed by Todd

Many in book publishing have a romanticized view of the industry’s origin, beginning with Johannes Gutenberg and the movable-type printing press he invented in 1453. While that treasured form has changed little in the past five and a half centuries, the way the book is sold and distributed has changed dramatically in the last thirty years. Independent bookstores first struggled against the mall chains of Waldenbooks and B. Dalton, then the big-box retailers such as Barnes & Noble and Borders, and now the online superstore, Amazon. And these retail redistributions pale in comparison to the tectonic shifts that lie ahead in the form of print-on-demand and electronic distribution of books. In The Innovator’s Dilemma, Clayton Christensen shows how management practices that typically serve executives well fail in the face of just such disruptive innovations.

Christensen begins by drawing a distinction between two types of innovation. In the first, everything from new products to customer service is designed to meet customers’ demands. In the normal course of business, customers pay the bills, and writing those checks gives them significant influence over an organization’s decision making. New ideas and opportunities, evaluated on the ability to serve existing customers and earn the necessary margins to support the company, are called sustaining innovations and are always successful ventures for existing (and dominant) firms.

But sometimes, innovation creates a new technology or reveals a new way to organize a firm’s resources. This disruptive innovation does not offer the performance needed in the existing market, and entrant companies are forced to find a new set of customers who value innovation on a different set of metrics than those of the traditional market. Existing companies disregard the disruptive innovation because of its lower margins, and the newcomers find a small beachhead outside the existing market, using that market space to develop further. As the performance of disruptive innovations outpaces the sustaining innovations, entrants move into established markets and their lower cost structure forces incumbents further up-market, forfeiting existing profitable markets.

Clayton Christensen provides an array of case studies in The Innovator’s Dilemma, including how the steel industry is still at the mercy of the disruptive innovation of minimills. Using scrap steel over iron ore, minimills require one-tenth the scale and can produce steel at 15 percent lower cost than traditional integrated steel mills. When minimills first emerged in the 1960s, they were able to produce only low-quality steel whose only market was construction rebar. The integrated mills were happy to cede this low-end, price-sensitive market. What the incumbents missed was the minimills’ desire to move further into their markets. With a completely different cost structure and technology that was improving faster than existing methods, minimills began producing structural steel and sheet steel. Minimills now account for 50 percent of the steel made in the United States, and here is the amazing part: at no point did an existing steel company using integrated mills construct a minimill to take advantage of the disruptive innovation.

“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.”

To suggest that the integrated steel mills simply hid their heads in the sand would be too easy. Christensen says most markets that serve as the launch point for disruptive innovation are too small for large organizations to concentrate on. These emerging markets lack clear evidence that they will turn out profitable. When disruptive technologies are being developed, the applications for them are unpredictable, and worse, companies are misled when they attempt to use the same tools from their mature markets. In nearly every case of disruptive innovation, a new set of companies rises to dominate the industry.

For disruptive innovation to flourish, says Christensen, companies need to create the right organizational structure. Companies often start by promoting successful managers to lead new efforts, but without addressing the processes and values of the new group, the leadership will start to make decisions the same way it always has. Disruptive innovation requires an autonomous organization with the appropriate cost structure to address the emerging markets. In the 1970s, the motor controls industry was disrupted by programmable logic controllers (PLCs), and the only company to successfully traverse the disruption was Rockwell Automation (then Allen-Bradley). The Milwaukee-based company did so by investing in two smaller companies shortly after commercial introduction of PLCs and combining them into a separate division, which it pitted against its existing electromechanical division. Rockwell showed that it is possible to establish dominance during a period of disruptive innovation while maintaining market leadership in the traditional product.

While the innovator’s dilemma stems from uncontrollable external pressures, dealing with it is an internal dilemma. Managers lack the information and experience needed to make confident investments in disruptive technology. The tried and true resource allocation process favors current customers and their needs, starving incubatory projects of needed love and attention. And to survive the innovation pipeline, the disruptive technology needs the marketing leader to find new clients who appreciate its current capabilities. As performance improves, the customers who showed no interest in the initial idea are exactly the ones who will be clamoring for it. TS

The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business, Collins Business Essentials edition, Paperback 2006, ISBN 9780060521998

WHERE TO NEXT? Here for the disruptive story of steel Here for the story of global disruption Here for a story of team dysfunction | EVEN MORE: The Innovator’s Solution by Clayton M. Christensen and Michael E. Raynor; Competitive Strategy by Michael E. Porter; Innovation and Entrepreneurship by Peter F. Drucker