Week 1: Innovator’s Dilemma
Disruptive innovation challenges a firm’s core competences and is the main
reason why corporate firms might lose their competitive advantage
- E.g. think of Nokia losing their market leader position due to the
introduction of smart phones – so disruptive innovation destroys the
incumbents
Large firms missing the boat
Typologies of technological change:
• Old vs. new (Cooper and Schendel, 1976)
• Competence-enhancing vs. competence-destroying (Tushman and
Anderson, 1986)
• Incremental (change with small steps) vs. radical (change with big
steps) (Utterback, 1994)
• Sustaining (duurzaam) vs. disruptive (ontwrichtend) (Christensen and
Bower, 1996) !
Sustaining innovations improve existing products along dimensions that
mainstream customers already value.
Disruptive innovations initially perform worse on mainstream criteria, but
offer a different value proposition. (often cheaper, smaller, more convenient)
- disruptive technologies often underperform established products in
mainstream markets at first, but they have features that fringe or new
customers value
Sustaining innovation can be incremental and radical (same for disruptive)
Disruptive innovation is about market impact, while radical innovation is about
degree of technological change.
It is especially the latter (laatste) types of change that large established firms
have difficulties coping with.
Why? The Success Syndrome
(Large established firms especially struggle with the more radical/disruptive
forms of change. So why firms “miss the boat” → success syndrome)
Good fit with the market leads to success.
Success leads to growth (size, and age).
As firms become larger and older, it becomes harder to changes →this creates
inertia (structural and cultural).
That inertia helps them perform well in stable markets, but it makes them
struggle when the market changes, especially with radical or disruptive
innovation.
• Structural inertia resistance from change that comes from formal
systems and routines that make change difficult. (less incentive to be
innovative)
, - systems, routines, reporting lines, budgets, incentives
• Cultural inertia: resistaince to change that comes from shared beliefs
and mindsets about what made the company succesful in past. (company
doensn’t want to change)
So the firm becomes very good at running the old business, but bad at adapting
to a new one.
Is inertia always bad?
• No, it is also what keeps a company going and focused instead of
changing all the time with every small trend which is coming and going,
which results in more efficiency.
• Inertia may result from accountability and reliability in order to keep
everything in control. This might be a good thing, but also makes for less
innovativeness and more vulnerability in times of `disruptive innovation.
Thus, slow innovation.
• How to protect the traditional successful business and to engage in radical
innovation at the same time? → protect the business which made you
what you are (past) but also think about the future
The innovator’s Dillema
Why do large successful companies sometimes fail when confronted with
disruptive changes in their environment?
• According to Clayton Christensen, failure to adapt to disruptive innovation
is not the result of bad management, but a result of good
management
• Large companies depend on their existing customers and investors for
resources
• They listen closely to these customers and investors and kill ideas for
which there is little need
It shows product performance over time, with two demand lines:
• performance demanded at the high end of the market
• performance demanded at the low end of the market
The figure shows product performance over time. Established firms follow a
sustaining innovation path, improving their existing product from the
incumbent starting point (A) to better satisfy current and high-end customers
(B). If they continue improving beyond what customers actually need, this leads
to overshooting (after B).
,Point B is the most premium product you can offer for which high-end customers
still want to pay, if you develop your product even further, you are
overshooting
In contrast, disruptive innovation starts at a lower performance level (C), so
incumbents initially ignore it. Over time, it improves, becoming good enough for
low-end customers (D) and eventually for the mainstream market (E). This
explains why established firms, despite good management, may fail when
disruptive innovation catches up.
• sustaining innovation = improves existing product
• disruptive innovation = starts lower, improves later
• overshooting = more performance than customers need
• incumbents miss disruption because they follow current customers too
closely
Innovator’s Dilemma
! Disruptive technologies typically have (at least initially)
• Lower profit margins
• Small markets
• No reliable market statistics
These are exactly the reasons established firms reject them.
Problem is: by the time the disruptive technology becomes good enough for the
mainstream market, entrants may already have learned faster, built capabilities,
and captured the new market.
Article 1: The Innovator’s Dilemma (Christensen) – Introduction only
Christensen’s introduction argues that the book is about a paradox: great, well-
managed companies can still fail when markets and technologies
change.
According to Clayton Christensen, failure to adapt to disruptive innovation is not
the result of bad management, but a result of good management. Yet those
practices can make them ignore new disruptive technologies that initially look
unattractive. Key question in this article: “Why do well managed companies
often fail in spite of doing the right thing – i.e., meet their customer needs?
Good management was the most powerful reason why they failed to stay atop
their industries. Precisely because
• these firms listened to their customers
• invested heavily in new technologies that provide their customers more
and better products of the sort they wanted, and
• because they carefully studied market trends and systematically allocated
invested capital to innovations that promised the best returns, they lost
their position of leadership.
What this implies at a deeper level is that many of what are now widely accepted
principles of good management are, in fact, only situationally appropriate. There
are times at which it is right not to listen to customers, right to invest in
developing lower-performance product with lower margins, and right to
aggressively pursue small, rather than substantial, markets.
, The innovator’s dilemma: the logical, competent (skilled) decisions of
management that are critical to the success of their companies are also the
reason why they lose their position of leadership.
Sustaining vs disruptive technologies
Sustaining technologies improve product performance along the dimensions
mainstream customers already value. These can be incremental or radical, but
they still help firms serve their existing market better. Christensen argues that
leading firms are usually very good at sustaining innovation.
Disruptive technologies initially perform worse on the attributes mainstream
customers care about, but they offer a different value proposition. They are
often cheaper, simpler, smaller, and more convenient, so they appeal first to
fringe, low-end, or new customers. Over time, they improve enough to compete
in the mainstream market.
The pace of technological progress can, and often does progress faster than
market demand.
A central point in the introduction is that technological progress often moves
faster than market demand. Firms keep improving products for their best
customers, sometimes beyond what many customers actually need.
When that happens, the basis of competition changes. Customers stop choosing
mainly on maximum performance and start caring more about reliability,
convenience, and price. This is where disruptive entrants gain strength.
→ This means that in effort of providing better products than a competitor and
earn higher prices and margins, firms often ‘overshoot’ the market; they give
customers more than they need, or ultimately are willing to pay fo
Disruptive Technologies vs Rational Investments
Large firms don’t invest heavily in disruptive technologies for to three main
reasons (reasons why investing in disruptive innovation often seems irrational to
established firms):
1. Disruptive products are simpler and cheaper; they generally promise
lower margins, not greater profits;
2. Disruptive technologies typically are first commercialized in emerging or
insignificant, small markets;
3. Leadings firms’ most profitable customers generally don’t want them or
cannot use them well
The overall message is that good management is only situationally
appropriate: practices that are excellent for sustaining innovation can become
harmful when disruption appears.
Principles of Disruptive Innovation (why not to invest?)
1. Companies Depend on Customers and Investors for Resources
This principle, based on resource dependence theory, argues that managers
do not fully control resource allocation inside the firm. In practice, customers
and investors strongly influence where resources go, because companies survive
only by satisfying them. High-performing firms become especially good at
funding projects their best customers want and rejecting those they do not. This
Disruptive innovation challenges a firm’s core competences and is the main
reason why corporate firms might lose their competitive advantage
- E.g. think of Nokia losing their market leader position due to the
introduction of smart phones – so disruptive innovation destroys the
incumbents
Large firms missing the boat
Typologies of technological change:
• Old vs. new (Cooper and Schendel, 1976)
• Competence-enhancing vs. competence-destroying (Tushman and
Anderson, 1986)
• Incremental (change with small steps) vs. radical (change with big
steps) (Utterback, 1994)
• Sustaining (duurzaam) vs. disruptive (ontwrichtend) (Christensen and
Bower, 1996) !
Sustaining innovations improve existing products along dimensions that
mainstream customers already value.
Disruptive innovations initially perform worse on mainstream criteria, but
offer a different value proposition. (often cheaper, smaller, more convenient)
- disruptive technologies often underperform established products in
mainstream markets at first, but they have features that fringe or new
customers value
Sustaining innovation can be incremental and radical (same for disruptive)
Disruptive innovation is about market impact, while radical innovation is about
degree of technological change.
It is especially the latter (laatste) types of change that large established firms
have difficulties coping with.
Why? The Success Syndrome
(Large established firms especially struggle with the more radical/disruptive
forms of change. So why firms “miss the boat” → success syndrome)
Good fit with the market leads to success.
Success leads to growth (size, and age).
As firms become larger and older, it becomes harder to changes →this creates
inertia (structural and cultural).
That inertia helps them perform well in stable markets, but it makes them
struggle when the market changes, especially with radical or disruptive
innovation.
• Structural inertia resistance from change that comes from formal
systems and routines that make change difficult. (less incentive to be
innovative)
, - systems, routines, reporting lines, budgets, incentives
• Cultural inertia: resistaince to change that comes from shared beliefs
and mindsets about what made the company succesful in past. (company
doensn’t want to change)
So the firm becomes very good at running the old business, but bad at adapting
to a new one.
Is inertia always bad?
• No, it is also what keeps a company going and focused instead of
changing all the time with every small trend which is coming and going,
which results in more efficiency.
• Inertia may result from accountability and reliability in order to keep
everything in control. This might be a good thing, but also makes for less
innovativeness and more vulnerability in times of `disruptive innovation.
Thus, slow innovation.
• How to protect the traditional successful business and to engage in radical
innovation at the same time? → protect the business which made you
what you are (past) but also think about the future
The innovator’s Dillema
Why do large successful companies sometimes fail when confronted with
disruptive changes in their environment?
• According to Clayton Christensen, failure to adapt to disruptive innovation
is not the result of bad management, but a result of good
management
• Large companies depend on their existing customers and investors for
resources
• They listen closely to these customers and investors and kill ideas for
which there is little need
It shows product performance over time, with two demand lines:
• performance demanded at the high end of the market
• performance demanded at the low end of the market
The figure shows product performance over time. Established firms follow a
sustaining innovation path, improving their existing product from the
incumbent starting point (A) to better satisfy current and high-end customers
(B). If they continue improving beyond what customers actually need, this leads
to overshooting (after B).
,Point B is the most premium product you can offer for which high-end customers
still want to pay, if you develop your product even further, you are
overshooting
In contrast, disruptive innovation starts at a lower performance level (C), so
incumbents initially ignore it. Over time, it improves, becoming good enough for
low-end customers (D) and eventually for the mainstream market (E). This
explains why established firms, despite good management, may fail when
disruptive innovation catches up.
• sustaining innovation = improves existing product
• disruptive innovation = starts lower, improves later
• overshooting = more performance than customers need
• incumbents miss disruption because they follow current customers too
closely
Innovator’s Dilemma
! Disruptive technologies typically have (at least initially)
• Lower profit margins
• Small markets
• No reliable market statistics
These are exactly the reasons established firms reject them.
Problem is: by the time the disruptive technology becomes good enough for the
mainstream market, entrants may already have learned faster, built capabilities,
and captured the new market.
Article 1: The Innovator’s Dilemma (Christensen) – Introduction only
Christensen’s introduction argues that the book is about a paradox: great, well-
managed companies can still fail when markets and technologies
change.
According to Clayton Christensen, failure to adapt to disruptive innovation is not
the result of bad management, but a result of good management. Yet those
practices can make them ignore new disruptive technologies that initially look
unattractive. Key question in this article: “Why do well managed companies
often fail in spite of doing the right thing – i.e., meet their customer needs?
Good management was the most powerful reason why they failed to stay atop
their industries. Precisely because
• these firms listened to their customers
• invested heavily in new technologies that provide their customers more
and better products of the sort they wanted, and
• because they carefully studied market trends and systematically allocated
invested capital to innovations that promised the best returns, they lost
their position of leadership.
What this implies at a deeper level is that many of what are now widely accepted
principles of good management are, in fact, only situationally appropriate. There
are times at which it is right not to listen to customers, right to invest in
developing lower-performance product with lower margins, and right to
aggressively pursue small, rather than substantial, markets.
, The innovator’s dilemma: the logical, competent (skilled) decisions of
management that are critical to the success of their companies are also the
reason why they lose their position of leadership.
Sustaining vs disruptive technologies
Sustaining technologies improve product performance along the dimensions
mainstream customers already value. These can be incremental or radical, but
they still help firms serve their existing market better. Christensen argues that
leading firms are usually very good at sustaining innovation.
Disruptive technologies initially perform worse on the attributes mainstream
customers care about, but they offer a different value proposition. They are
often cheaper, simpler, smaller, and more convenient, so they appeal first to
fringe, low-end, or new customers. Over time, they improve enough to compete
in the mainstream market.
The pace of technological progress can, and often does progress faster than
market demand.
A central point in the introduction is that technological progress often moves
faster than market demand. Firms keep improving products for their best
customers, sometimes beyond what many customers actually need.
When that happens, the basis of competition changes. Customers stop choosing
mainly on maximum performance and start caring more about reliability,
convenience, and price. This is where disruptive entrants gain strength.
→ This means that in effort of providing better products than a competitor and
earn higher prices and margins, firms often ‘overshoot’ the market; they give
customers more than they need, or ultimately are willing to pay fo
Disruptive Technologies vs Rational Investments
Large firms don’t invest heavily in disruptive technologies for to three main
reasons (reasons why investing in disruptive innovation often seems irrational to
established firms):
1. Disruptive products are simpler and cheaper; they generally promise
lower margins, not greater profits;
2. Disruptive technologies typically are first commercialized in emerging or
insignificant, small markets;
3. Leadings firms’ most profitable customers generally don’t want them or
cannot use them well
The overall message is that good management is only situationally
appropriate: practices that are excellent for sustaining innovation can become
harmful when disruption appears.
Principles of Disruptive Innovation (why not to invest?)
1. Companies Depend on Customers and Investors for Resources
This principle, based on resource dependence theory, argues that managers
do not fully control resource allocation inside the firm. In practice, customers
and investors strongly influence where resources go, because companies survive
only by satisfying them. High-performing firms become especially good at
funding projects their best customers want and rejecting those they do not. This
