The Innovator's Dilemma

# Introduction

Why is success so difficult to sustain? Is successful innovation as unpredictable as the data suggests?

Companies that are successful at maintaining their position in established markets have a terrible track record with emerging technology.
The things they do that to sustain performance - like benchmarking the competition, listening to their customers and investment strategy in new technologies – can be the biggest impediments to success with disruptive technologies.

# Take-Aways

Disruptive technology is usually built on known technology that is uneconomical or non-performant, combined with novel product positioning and unknown applications parallel to current customer needs.
A technology has the potential to be disruptive if its trajectory of improvement is steep enough to intersect the demand of the mainstream market.
Disruptive technology is not attractive to the mainstream customer because it is not an incremental improvement. It will only begin to be successful with a niche market that values the new technology.
Big companies fail to adapt, not because of a lack of resources, but because they are focused on prioritizing current value networks over emerging ones.

# Principles

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

# Defining and Build a Framework

# How Can Great Firms Fail?

Disruptive innovations tend to be technically straightforward.
They generally package known technologies in a unique architecture and enable use in applications that were previously not technically or economically feasible.
Established firms focused their technology development on sustaining current trajectories of performance improvement: higher performance and higher margin domains to the upper right of the trajectory map.
Sustaining technology can be radically new and difficult, but it is not disruptive.
Current customers lead you towards sustainment, not disruption.
Historically disruptive technology is almost exclusively led by new entrants, not established organizations.
Established firms are not looking down market which is where the disruption emerges: lower margin, non-performant and limited markets which all fail to meet their evaluation criteria.

# Value Networks and the Impetus to Innovate

# Weak Factors Impacting Innovation

Organizational structure can dictate how it develops new products
Established firms have technical capabilities targeting incremental improvements not radical technology changes

# Value Networks

A value network defines the context within which a firm identifies and responds to customer need, solves problems, procures inputs, reacts to competitors and strives for profit.

Factors:

Influenced by competitive strategy and historical choices of markets.
Mirrors product architecture
Dictate how value is measured and defines the boundaries
Defines cost structures and acceptable margins
Technology S-Curve: the magnitude of a product's performance improvement with a given time/effort differs as the technology matures.
Early progress is slow.
Rate of progress accelerates as the technology is refined and better understood.
Asymptotically approaches a natural limit of resource inputs.
Disruptive technologies are subsequent S-curves that start below the established technology, then intercept and pass it.

Sustaining and Disruptive Technologies S-Curves

# Managerial Decision Making

Step 1: disruptive technologies are developed within established firms with experiments, unofficial resources and off-the-shelf components.

Step 2: Marketing looks for reactions from current customers, which is typically negative as the technology doesn't meet or extend core needs.

Step 3: Established firms double-down on sustaining technologies

Step 4: New companies form, often from disillusioned staff at established companies, and markets for disruptive technologies are found by trial and error

Step 5: New entrants move upmarket as disruptive technology starts to surpass established technology in one or more dimensions

Step 6: Established firms belatedly jump in to defend customer base

Value networks strongly define and limit what companies within them can and cannot do:

Influence where resources are directed and which technological hurdles are attacked.
Define what measures are important and therefore need to be prioritized.
Encourage established firms to ignore or discount technology that does not address their customers' needs.
Mask changing definitions of the level, rate and direction of progress in technology trajectories.
Hinder an established company from identifying, quantifying and pursuing emerging markets.

# What Goes Up, Can't Go Down

Cost structures dictate required margins and attractiveness of new markets.
Once established, it is difficult for a company to compete with a new entrant that has a lower cost/margin structure.
Companies move upmarket, pursuing segments that are ever more attractive given their cost structure.
Companies follow their customers as they move upmarket as well.
New entrants attack from below as their technology starts to compete with established solutions.
The costs required to become competitive in higher-end markets restrict downward mobility and create further incentive to move upmarket.

# Managing Disruptive Technological Change

When new technology is required to address the needs of existing customers, established firms can adapt successfully.
Good management uses the decision-making and resource-allocation processes that are key to the success of established companies, which also reject disruptive technologies.

Resource dependence: Customers effectively control the patterns of resource allocation in well-run companies.
Small markets don’t solve the growth needs of large companies.
The ultimate uses or applications for disruptive technologies are unknown in advance. Failure is an intrinsic step toward success.
Organizations have capabilities that exist independently of the capabilities of the people who work within them. An organization's capabilities reside in processes and values - which also define disabilities when confronted with disruption.
Technology supply may 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.

# Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them

Resource allocation processes weed out proposals that customers don't want, which includes disruptive technologies.
Non-executives make resource allocation decisions by deciding which proposals they will present to senior management.
Create an independent organization and embed the disruptive product among emerging customers that do need the technology.

# Match the Size of the Organization to the Size of the Market

Early entry by first movers in emerging markets provide significant advantages when disruptive technologies are involved.
Creating new markets is significantly less risky than entering established markets against entrenched competition.
Emerging markets are small by definition, so competing organizations must be able to become profitable at a small scale.
Established companies wait until an emerging market becomes "large enough to be interesting", which is too late.

# Discovering New and Emerging Markets

Your forecasts will use the context of your value system, so they won't assess disruptive technology accurately.
The majority of successful new business ventures abandoned their original business strategies when they pursued disruptive technologies.
The businesses that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.

# How to Appraise Your Organization's Capabilities and Disabilities

Organizations have capabilities that are independent of the people who work there.
The people in an organization are far more adaptable than the organization itself.
Innovation requires more than assigning the right resources to the problem. The organization in which these resources land needs processes and values that fit the problem.
Functional and lightweight teams are appropriate vehicles for exploiting established capabilities, whereas heavyweight teams are tools for creating new ones.
Spin-out organizations are a viable tool for forging new values.

# Performance Provided, Market Demand and the Product Life Cycle

Performance oversupply creates an opportunity for a disruptive technology to emerge and to invade an established market from below.
Performance oversupply triggers a change in the basis of competition, where other product attributes become the dimension driving differentiation.
A product becomes a commodity when the market need of each attribute or dimension is fully satisfied by more than one available product.
Differentiation loses its meaning when the features and functionality have exceeded what the market demands.
Disruptive technology changes the basis of competition.
The attributes that make disruptive products worthless in mainstream markets typically become their strongest selling points in emerging markets.
Disruptive products tend to be simpler, cheaper, more reliable and more convenient than established products.

# Summary

A technology has the potential to be disruptive if the trajectory of improvement is steep enough to intersect the demand of the mainstream market.
Historically, disruptive technologies involve no new technologies but consist of components built around proven technologies and put together in a novel product architecture that offers the customer a set of attributes never before available.
The focus, processes and values of an established company are the capabilities that make it successful in sustaining technologies. They are also the disabilities that hinder leading in disruptive technologies.
Disruptive technologies are a marketing problem, not a technological problem. Fit the market to the product, not the product to the established market.