"A classic is something everybody wants to have read, but nobody wants to read." —Mark Twain.
I suspect Clayton Christensen’s book The Innovator’s Dilemma could be described this way. Evidence enough is the way most people misuse the term “disruptive innovation.”
And yet, it’s a book with incredible value to anyone running or starting a business. It’s apparently the one business book Steve Jobs read, and Andy Grove credits Christensen’s ideas for Intel’s launch of Celeron.
Christensen has a deep respect for people, and in trying to explain why, so often, successful companies ran into trouble, he wasn’t satisfied with an explanation that said managers simply did stupid things. This respect is key to his outlook on life and among the reasons he was able to keep pushing until he came up with the disruptive innovation framework.
The timelessness of the principles of disruptive innovation lies in the fundamental behavior of humans and organizations. The key findings of Christensen’s research are as follows.
1. Disruptive innovations are not interesting to the currently attractive customers
This is where the key distinction comes in between classifying innovations as sustaining/disruptive or radical/incremental. Most people misuse the term disruptive innovation when they mean to say radical innovation (i.e., significant, difficult, etc.).
Christensen describes a sustaining innovation, which can be radical or incremental, as follows:
A sustaining innovation is an innovation that improves the performance of established products along the dimensions of performance that mainstream customers in major markets have historically valued.
A key finding from Christensen’s exhaustive research is that most innovations are sustaining in nature and “rarely have even the most radically difficult sustaining technologies precipitated the failure of leading firms.”
In contrast, a disruptive innovation is one that “brings to a market a radically different value proposition than had been available previously.” The products underperform along key dimensions that matter to the most important, largest, most profitable customers, but they appeal to fringe (and generally new) customers. They’re typically cheaper, simpler, and more convenient to use.
This is the key dynamic: a disruptive innovation is not one that gets existing, large, profitable, mainstream customers excited because it allows them to do something they already to better, faster, or cheaper, offering some absolute benefit. The characteristics of the product and the market to whom they appeal are the key factors.
2. Technology improves faster than market needs
Companies engage in predictable behavior in trying to charge higher prices, outmaneuver competition, and earn higher margins: they add more and more features. In doing so, they “overshoot” their market. Customer needs advance relatively slowly compared to the pace of innovation.
The dramatic implication of these two behaviors is that companies end up offering bloated, high-priced, complicated products to even their highest end customers (think Microsoft Office) and certainly to their low end customers that care for very basic features. These low end customers are the ones that are most vulnerable. It’s to them that a disruptive innovation that underperforms on many characteristics important to the high end customer may be just perfect.
But here’s the most mind-blowing part: even the disruptive innovation, once it finds a foothold with those low end customers, will start improving in functionality, likely at a similar (if not faster) pace than the existing offerings. It will soon overserve the low end customers and meet the needs of the high end customers. But by then, it will also be simpler, cheaper, and more convenient than the existing offering. And then it’s game over for the incumbent because it’s too late to respond with their own offering.
3. Incumbents can’t create disruptive products even if they wanted to
The third element in Christensen’s framework essentially says that you could send a letter to the CEO of an incumbent firm letting him know what was coming—that a disruptive technology had emerged that would, in a few years, make his company’s offering extinct—and he still wouldn’t be able to do anything about it.
Firms that meet with great success end up creating processes and cultures that lead to an institutionalized process of creating and improving products for their largest, most profitable customers. Yet, disruptive technologies are simpler and cheaper, offering lower margins, not greater profits. They’re a fit for comparatively less attractive customers in emerging or insignificant markets. The mainstream, largest, most profitable customers of a company don’t want the products, and in many cases, can’t even use them if they wanted to.
Meaning: “companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late.”
Translated: you can do everything right and drive right off a cliff.
That’s the bang-your-head-on-a-desk dilemma that CEOs of successful companies face. It’s why Christensen’s book is so incredible. It’s why there will always be opportunities for smart startups. And it’s why it blows my mind more people don’t read and re-read this book until they’ve absorbed the ideas and can convince others to make significant decisions based on it.
So…create (or be early to) new markets no one else cares about
The most powerful part of the book for me was when Christensen summarized his research on the disk drive industry in a table.
(A lot of Christensen’s initial research was based on the disk drive industry in the years between 1976 and 1993, though Christensen went on to confirm the findings in markets ranging from excavators to steel to motorcycles.)
Between 1976 and 1993, eighty-three firms entered the disk drive industry. He categorizes them by technology strategy (vertical axis), with firms at the bottom using only proven technology strategies and firms at the top using one or more new components. He also categorizes them by market strategy, with firms on the left having entered existing disk drive markets (what he calls existing “value networks”) and those on the right having entered new markets, defined as those less than two years old.
He defined a successful company as one that generated $100 million or more in revenue in at least one year, even if it subsequently failed. (His table, Table 6.1, shows more detail, including type of firm and more detail on types of outcomes. I’ve included here only the percent he qualified as successful, which gets to his same point.)
He goes on to show the total revenue dollars logged by the firm in each category as well as that total divided by the number of firms in that category (whether successful or not).
Bottom line: firms that entered new markets had a dramatically higher rate of success, 38 percent versus 7 percent, and had dramatically bigger success, $1.9 billion in cumulative revenue per firm versus $78 million.
Please read this book. Christensen writes largely from the perspective of large companies that are facing this dilemma. If you’re an entrepreneur, those dilemmas are your opportunity. This is your playbook of how to create companies that have a dramatically higher likelihood of success.