The Innovator's Dilemma

The Innovator’s Dilemma is a business classic that explains the power of disruption, why market leaders are often set up to fail as technologies and industries change and what incumbents can do to secure their market leadership for a long time.

I’m not sure if Peter Thiel referenced this book in his business manifesto, Zero to One, but it wouldn’t surprise me to learn this is where he got the idea from. Clayton Christensen published The Innovator’s Dilemma in 1997 and with it, disrupted the way leaders talk about technological progress.

He distinguishes between two kinds of technologies:

Sustaining technologies. These focus on growing existing technologies by enhancing their performance, mostly through extended functionality or increased capacity. Disrupting technologies. These change the landscape of an entire industry, or spark a new one altogether, because they solve a problem in an entirely new way or for an entirely new group of people.

As you can imagine, established businesses and market leaders shine when it comes to the first kind. They have built up enormous efficiencies and vast amounts of resources, which make it easy to provide incremental progress at scale. Where incumbents often lack imagination and swiftness is in disruption.

For example, while it was a piece of cake for IBM to make hard disks thinner and add storage capacity in the 80s, adopting the new 1.5-inch format didn’t come so naturally, as long as the 14-inch disks were still selling the best.

The reason startups have a chance to overtake industry titans when it comes to disruption is that it starts in low-margin niche markets, because the target customer is often an entirely different one than before. Big companies are slow in serving these, because two of the three defining factors of a business’s culture and capability to act are rigid for them:

Resources. Anything you can buy, sell, hire or fire. Processes. Patterns of action and communication, both formal and informal. Values. The criteria by which managers and employees make all organizational decisions.

Market champions are loaded with resources, but have very hardened processes and a fixed set of values, which rarely matches the new target market of a disruptive innovation. The three factors are increasingly hard to change, especially short-term, so it’s no wonder a company like Kodak has a tough time giving a new technology like digital cameras the real attention it deserves.

When you’re processes and values don’t match the market disruption forces you to break into, even the greatest management won’t be able to salvage that dilemma.