Intelligence at the Edge #4

The Innovator's Dilemma

How disruptive technologies can destroy established markets.

David's smiling face

By David S. Isenberg                                                               amnetlogo

From America's Network, October 1, 1998

Incumbent companies, even superbly managed ones, hardly ever bring new, discontinuous technologies to market. That's because, paradoxically, they're good at listening to their customers.

This the gist and grist of the most important book I've read in several years: The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail by Harvard Business School professor Clayton Christensen (1997, Harvard Business School Press).

Christensen's main idea is that sustaining and disruptive technologies are very different: Sustaining technologies give us better/faster/cheaper in established markets, while disruptive technologies open new markets, and deflate or destroy old ones. The author develops strong evidence that incumbent companies always lead sustaining technology to market but virtually never lead in markets opened by disruptive technologies.

It works like this: Suppose you owned a desktop PC 10 years ago. Then, suppose somebody told you, "I have this fantastic new disk drive. It holds half as much data, costs twice as much and it's six ounces lighter!" Desktop PC users don't carry their machines around; they don't need a PC that's six ounces lighter — and they certainly won't pay more for it. They have a different set of needs. They want more storage, even if it makes their machines heavier.

However, the six-ounce advantage provides value in another, discontinuous market space: laptops.

Discontinuous markets start small. At first, they aren't cash cows. More importantly, their initial customers don't share key values of established market customers. The first laptop users expected less storage at higher cost in exchange for portability.

How disruptive technologies become dangerous

At every budget cycle, companies must decide where to allocate resources. If an incumbent compares its mainstream, established business to a new, marginal, often money-losing long shot, it's usually a no-brainer. New, disruptive technologies become dangerous when their performance expands into the value matrix occupied by the old market.

Christensen maps disruptive technologies, the markets they created and served, and the companies they built and destroyed. The disk drive market is the author's forté. He lays out how incumbent companies like Seagate and Miniscribe were overcome by upstarts like Conner and Rodime as the 3.5-inch disk helped create the PC market.

Then, to generalize, Christensen digs into the transition of mechanical excavators from cable controls to hydraulic. He shows how big steelmakers were smelted by mini-mills — and how Bethlehem Steel and U.S. Steel died. Then, he shops for evidence at the once-mighty Sears Roebuck to explain how the emergence of discount retailers exposed its softer side. It's hard to tell what will be valued in the next market discontinuity. In 1992, the year before Mosaic appeared, the demand for Web browsers was undetectable. Now, six years later, Web browsers are indispensable to millions of users and have created billions of dollars of new, totally unanticipated value.

Christensen takes a few swags at what might be next — electric cars to replace internal combustion vehicles, flash memory to replace disks — but every book has limits. Not every new technology defines a new market (e.g. video telephony). It's not possible to predict what a non-existent marketplace will value. You can't ask its customers, because they don't yet exist.

Incumbency and the Internet

For disruptive technologies that have established footholds, the book provides powerful analysis. Take the Internet; the typical phone customer wants very different things from a communications network than a typical Internet user does. The Internet is disrupting all kinds of established value spaces, including news, banking, advertising, radio, retail, travel and gambling.

Initially, incumbents in these markets will do two things. First, they will listen to their mainstream customers. Second, they will treat the new technology as if it were sustaining. (Notice how the telcos emphasize the better/faster/cheaper aspects of Internet telephony.) They will be surprised.

If Christensen is right, incumbents will miss the value of the Internet, and new companies will rise to dominate the Internet's new markets. For example, Internet voice could morph into an element of a seamless communications mix that does not remotely resemble telephony as we know it today.

The Innovator's Dilemma threw a few last straws on the back of my 12-year career at AT&T. It remains useful as I think about strategy with clients. The book's most provocative point — that there are structural reasons why incumbent companies don't lead technology revolutions — is likely to stand the test of time.

Copyright 1998 Advanstar Communications.