Innovators Dilemma by Clayton Christensen

BOOK SUMMARY
1
Clayton M. Christensen

1.How can great firms fail?
2. Value network and impetus to innovate
3.Distruptive technological change in the
mechanical excavator industry
4. What goes up, Cant come down
5. Give responsibility for disruptive technologies
to organizations whose customers need them
Contents
2

6. Match the size of the organization to the size of
the market
7. Discovering New and Emerging Markets
8. How to Appraise Your Organization’s
Capabilities and Disabilities.
9. Technology Supply May Not Equal Market
Demand
Contents
3

10. Managing Disruptive Technological
Change: A Case Study
11. The Dilemmas of Innovation: A
Summary
Contents
4

THE PREMISE
“This book is about the failure of
companies to stay atop their industries
when they confront certain types of
market and technological change. It’s not
about the failure of simply any company,
but of good companies – the kinds that
many managers have admired and tried
to emulate, the companies known for
their abilities to innovate and execute.”
5

THE DILEMMA
“…the logical, competent
decisions of management that are
critical to the success of their
companies are also the reasons
why they lose their positions of
leadership.”
6

Chapter 1
How can great firms fail? Insights
from hard disk drive industry
7

8
Two Types of Innovations
Two Types of Innovations
Sustaining
• Improve
performance of
established
products
• Meet demands of
mainstream
customers in
major markets
• Vary in difficulty,
cost, time, etc.
• Established firms
Disruptive
• Generally
underperform
established products
in mainstream
markets
• Have new features
that fringe / new
customers value
• Cheaper, simpler,
smaller, more
convenient to use
• Entrant firms

9
Disruptive Innovations
Incumbents beat newcomers at sustaining
innovations, but lose with disruptive
innovations.
Disruptive innovations are often technically
simpler than the previous generation.
Example: PCs vs. mainframes.

Disk Drive Industry
10
In the Disk Drive industry, successful firms have
listened responsively to customer needs and
invested heavily in research, manufacturing and
technology to satisfy next generation customer
needs

Disk storage capacity increased.
The cost per MB of storage decreased.
11
Disk Drive Industry

Yet..
1980-1995: 109 out of 129 firms that entered the
industry, failed !
12
High Level of Failure

Disk Drive Industry
13
• Disruptive innovations happened
• Firms developed unique architecture for
existing technology and applied them to new
markets.
Example: 14 inch drive for mainframe
computers
8-inch drive for mini computers
5.25 inch drive desktop market
2.5 inch Portable systems

Disk Drive Industry
14
• New entrants led in developing and
adopting disruptive technologies.
• Leading firms were held captive by their
customers.
• Sustaining technologies did not precipitate
failure

Impact of Technology Change
Technology mudslide hypothesis: With the
relentless onslaught of technology change, firms
should scramble with whatever resources they
have to stay on top of the competition.
15
Technology Mudslide

Proved wrong by study that revealed neither pace
nor difficulty of technological change lay at root
of leading firm’s failures
Industry’s leading firms led in developing and
adopting sustained technologies
Disruptive innovation resulted in failure of
industry’s leading firms
16
Technology Mudslide hypothesis

Firms that are well-managed and do the right
thing (like listening to customers, investing
resources to build higher-performance products
that yield higher profits) often can't handle
disruptive innovations, and lose. If anything, the
"right" thing may be counter-productive.
This is why it's an Innovator's Dilemma.
17
Big Picture

Chapter 2
Value network and impetus to
innovate
18

Value networks & the Impetus to
Innovate
Value Networks
19
The context within which a firm identifies and
responds to customers’ needs, solves
problems, procures input, reacts to competitors
& strives for profits

Value network & impetus to
innovate
20
Value network: Nested commercial
system

Innovate
21
As a firm gains experience within a given
network, it is likely to develop capability,
organizational structure & cultures tailored to its
value network’s specific requirements
Competitive
Strategy
Perception
of
economic
value of
technology
Expected
rewards
from
pursuing
sustaining &
disruptive
innovation

Innovate
22
Cost Structure characteristics of each value
network can have a powerful effect on the firm’s
decision on pursuing innovations
Example: Disk Drive mfg. firms competing
within mainframe computer network entail a
particular cost structure with gross margin of
~50%. Within portable computer value network,
a different cost structure may result in gross
margins of ~ 15%-20%

Innovate
23
Technology S-curves
Conventional S curve
Disruptive innovation S
curve

innovate
24
Metrics of value: Markets value individual
attributes differently and value varies over time
Cost structures: Different value networks entail
different cost structures
Technology S curve: Magnitude of product’s
performance improvement in a given time period
or effort is likely to differ as technologies mature

innovate
25
Conventional
technology S curve
Disruptive technology
S curve

innovate
26
Disruptive technologies first developed in
established firms
Managerial decision making
Marketing personnel sought reactions from
current customers
Marketing managers threw impetus behind
alternative sustaining projects

innovate
27
Organizational and managerial explanation: When
architectural technology change is required,
organizations that facilitate component level innovations
fail
Capabilities and radical technology: Magnitude of
technological change relative to company’s capabilities
Value network and new perspective: Pattern of
resource allocation leads to established firms consistent
leadership in sustained innovation and dismal in
disruptive
Reasons for failure

The Mechanical Excavator industry has
traditionally used steam-powered earthmoving
equipment. This was then displaced by
gasoline-powered engines. This was part of
“radical technological transition”. Hydraulic
powered mechanical excavators came as a
“Disruptive change” in technology leaving the
major players in the field unprepared and
opening up the field for new, younger players.
Disruptive Technological Change in
the Mechanical Excavator Industry
Chapter 3
28

LEADERSHIP IN SUSTAINING TECHNOLOGICAL
CHANGE
From William Smith Otis’ invention of the steam
shovel in 1837 through the early 1920s,
mechanical earthmoving equipment was steam-
powered
In 1920 with a much needed innovation
gasoline-powered engines were substituted for
steam power
Disruptive technology change
29

They moved faster , were more efficient,
reliable and at a lower cost as the process
was through internal combustion rather than
the steam based approach. Hence this was
considered sustainable
23 out of 25 negotiated and transferred to
gasoline powered shovels.
30

Slowly by 1928, the diesel and electric motors
were catching up for shovel technology. after
World War II, introduced the arched boom
design, which allowed longer reach, bigger
buckets, and better down-reaching flexibility
further helping the established firms to
innovate their machines
31

THE IMPACT OF DISRUPTIVE HYDRAULICS
TECHNOLOGY
After world war 2 although the main source of
power was diesel engines, a new mechanism
emerged for extending and lifting the bucket:
hydraulically actuated systems replaced the
cable-actuated systems
Only 4 out of 30 had transformed into this
technology
32

33
Players in the market for Steam Shovels

The excavation industry has seen a major
change
4 players upgrades
Many players failed
34

The players who remained diverged into
equipment as huge, cable-actuated draglines
for strip mining and dredging
The new entrants of Hydraulic mechanism
gained market share
35

Performance demanded in the Mechanical
Excavator Market
First and largest, the general excavation market,
composed of contractors who dig holes for
basements or civil engineering projects such as
canal construction;
36

Second, sewer and piping contractors, who
generally dig long trenches;
Third, open pit or strip mining
37

Highest volume of bucket capacity was with
mining, followed by excavation and followed by
sewer and piping contracts
The capacity of easily moving out form a trench
or mine was a important factor in deciding the
mechanism of the equipment used.
38

The Emergence and Trajectory of
Improvement of Hydraulic Excavation
Hydraulic backholes as they had less basket
capacity was restricted to only sewer mining
where it did wok exceedingly efficiently in
less than an hour and also were very mobile
39

The digger was mounted and attached with a
tracker for faster mobility. These
specifications limited the value of the
hydraulic machines
By 1974 the bucket capacity increased to 10
cubic tons making it capable to venture into
the mining market
40

THE RESPONSE TO HYDRAULICS
The leading cable shover acquired a hydraulic
company and established good products but
the market was not ready for it at that time. The
technology was a combination of cable and
hydraulics
41

Bucyrus kept its Hydrohoe on
the market for over a decade,
attempting periodically to
upgrade its performance to
make it acceptable to its
customers
but the machine was never
commercially successful.
42

Ultimately, the
company returned
to the cable
shovels that its
customers
needed.
43

44
• Till 1966 profits were high
on cable shoven
• In 1960’s when the hybrids
were introduced they caught
on to market.
• The new entrants took the
opportunity and improved
sales whereas the existing
believed they are still
dominant and the market
will not change
• Only a few ventured that
stayed later along with the
new players

CONCLUSION
Contractors found, however, that hydraulic
machines were much less prone to breakdowns
than cable actuated excavators.
In particular, those who had experienced the life-
threatening snap of a cable while hefting a
heavy bucket embraced reliable hydraulics
quickly, as soon as it was capable of doing the
job.
45

The basis of product choice in the market
shifted to reliability.
Sewer and piping contractors began adopting
hydraulic equipment rapidly beginning in the
early 1960s, and general excavation
contractors followed later in the decade.
46

KEY POINTS
Early uses of hydraulic excavators were very
different in size, use and distribution channels
Use of previous technology combined with
the “disruptive technological change” :
shovels and backhoes powered hydraulically
New players accepted hydraulics as a given
and cultivated new applications of the
technology
47

KEY POINTS
Established players tried to adapt the
technology as ways to meet the current market
demands
The big companies failed because to them
“hydraulics” didn’t make sense until it was too
late
Listening to customers, being smarter, good
management may all fail when confronted with
disruptive technology
48

CHAPTER 4
What Goes Up, Can’t Come Down
Leading companies of a certain sector can
move easily and steadily to high-end markets.
However, moving down to lower-end markets
is difficult because of the image created by
the company and improved financial
performance makes it hard for down-market
development for these companies.
49

KEY POINTS
With new product development, companies
look for higher margins
For catering to higher-market, all resources
within the company are aligned towards a
very specific model of improving profitability
Sensible resource allocation is at the root of
companies’ upward mobility and immobility
to lower markets
50

THREE FACTORS
Three important factors which create
immobility to lower-markets :
Promise of upmarket margin,
simultaneous upmarket movement of its
customers and
difficulty of cutting costs to move down
market
This causes vacuum in lower-market which
attracts companies with better cost structures
and technologies
51

In the tug-of-war for development resources,
projects targeted at the explicit needs of
current customers or at the needs of existing
users that a supplier has not yet been able to
reach will always win over proposals to
develop products for markets that do not
exist
52
What Goes Up, Can’t Go Down

VALUE NETWORKS AND MARKET VISIBILITY
The impetus to drift upmarket can be
particularly powerful when a firm’s
customers themselves are migrating
upmarket. In this case the intermediate
manufacturers will take a hit and the firms
that have gone towards the trajectory of
north east
53

In the internal debates about resource
allocation for new product development,
therefore, proposals to pursue disruptive
technologies generally lose out to proposals
to move upmarket.
54

THE NORTHEASTERLY MIGRATION OF
INTEGRATED STEEL
Minimill manufacturing steel was famous in
1960’s. For the same cost and efficient
process of steel manufacturing Minimills took
one tenth of the investment for setup
compared to the Integrated steel mills.
55

56
In 1995, the most efficient Minimill required 0.6
labor-hours per ton of steel produced; the
best integrated mill required 2.3 labor-hours.
It cost about $400 million to build a cost-
competitive steel Minimill and about $6 billion
to build a cost-competitive integrated mill
Minimills virtually dominate the North American
markets for rods, bars, and structural beams.

At the same time, management teams at
integrated mills have taken aggressive steps
to increase mill efficiency.
USX, for example, improved the efficiency of
its steel making operations from more than
nine labor-hours per ton of steel produced in
1980 to just under three hours per ton in
1991. It reduced the workforce and invested
more than $2 Bn for the modernizing of parts
57

The minimills could sell virtually over
telephone all the steel they produced. By
1980, they captured 90 percent of the
rebar market and held about 30 percent of
the markets for bars, rods, and angle
irons.
1992-95 the major players closed down
their integrated minimills.
58

Conclusion
The integrated mills did not let the minimills
tamper with the mainstream work of profitable
business of the large auto, appliance, and can
companies.
59

The integrated steel companies’ march to the
profitable northeast corner of the steel
industry is a story of aggressive investment,
rational decision making, close attention to
the needs of mainstream customers, and
record profits
60

Chapter 5
Give responsibility for disruptive
technologies to organizations
whose customers need them
61

RESOURCE DEPENDENCE
THEORY
Give responsibility for disruptive
technologies to organizations whose
customers need them
Resource dependence theory: Customers
allocate an organization’s resources, not
management
62

AN INDEPENDENT
ORGANIZATION
Create an independent organization and
embed it among emerging customers that
do need disruptive technology
Same organization cannot support
mainstream customer and pursuing
disruptive innovation
63

RESOURCE ALLOCATION
64
Good resource allocation processes are
designed to weed out proposals that
customers don't want
Good resource-allocation processes will weed
out disruptive innovations
Resource allocation takes place at all levels of
the organization. It is not a "top-down"
process

HOW TO HARNESS THIS PRINCIPLE?
65
Or
Technology is placed within a
different value network
Try to convince the company
Or
Spin out an independent organisation
Emphasis is on alignment of
manager’s intentions and customer
requirements

CHAPTER 6
66
" Small Markets Don't Solve the Growth Needs
of Large Companies"
Managers must be leaders, not followers, in
commercializing disruptive change.
Being a follower in sustaining technologies is a
viable and possibly desirable strategy but
leadership in disruptive technologies creates
enormous value
Dilemma: To be a leader or a follower?

CHAPTER 6: HOW TO HARNESS THIS
PRINCIPLE?
67
Or
Johnson comprises 160 autonomous
companies, each of which can introduce
small disruptive products such as
disposable contact lenses.
Match the size of the organization to the size of
the market
Implant projects aimed at commercializing
disruptive innovations in organizations small
enough to get excited about small market
opportunities.

Chapter 6
Match the size of the
organization to the size of the
market
68

Match the size of the organization to the
size of the market
Leadership is not essential in sustaining
technologies – you can be a follower company
But leadership is essential in disruptive
innovations
Big companies are searching for big markets
to sustain growth rates
69

“Disruptive technologies for small markets” is
not interesting option
Best strategy is to acquire a small company
and launch products through it
70

71
" Small Markets Don't Solve the Growth Needs
of Large Companies"
Managers must be leaders, not followers, in
commercializing disruptive change.
Being a follower in sustaining technologies is a
viable and possibly desirable strategy but
leadership in disruptive technologies creates
enormous value
Dilemma: To be a leader or a follower?

HOW TO HARNESS THIS
PRINCIPLE?
72
Or
Johnson comprises 160 autonomous
companies, each of which can introduce
small disruptive products such as
disposable contact lenses.
Match the size of the organization to the size of
the market
Implant projects aimed at commercializing
disruptive innovations in organizations small
enough to get excited about small market
opportunities.

Chapter 7
Discovering New and
Emerging Markets
73

DISCOVERING NEW AND EMERGING
MARKETS
For disruptive technologies, markets are
unknowable.
Then, how can we discover and target
those markets that do not yet exist ?
74

Sustaining vs. disruptive technologies:
Sustaining technologies are improvements
that sustain an organization's focus, goals,
and customers. They allow an organization to
do their job better, to improve their products
and to increase customer satisfaction.
75
Discovering new and emerging markets

MARKETS
In contrast, Disruptive technologies
are usually those innovations that
initially do not improve the focus of the
company.
A market must be developed and new
customers are to be found.
76

MARKETS
Methods to forecast those two different
markets can’t be the same.
Example: Honda’s inaccuracy in estimating
the size and the potential use of its products
for the North American market, despite the
firm’s manufacturing prowess
77

MARKETS
“Agnostic marketing”
No one, not the firm or the customers
know how a disruptive technology can
be used
78

Discovering New and Emerging Markets.
Because markets for disruptive technology are
unknowable, managers should plan to learn and
discover, NOT plan and execute. Many
management skills are inappropriate, and can
paralyze a firm.
79

MARKETS
Plans to learn vs. plan to execute :
For sustaining technologies, plans are
established in order to take action.
On the contrary, for disruptive innovations, first
analyse and learn from what did not work,
possibly resolve uncertainties.
Only then elaborate a plan of implementation.
80

CHAPTER 8
Organizations have distinct capabilities that
differentiate them. Christensen argues the RPV
framework is the best way to view such
capabilities. To take on a disruptive challenge,
therefore, Christensen discusses 3 options
facing a company: acquiring a different
organization where processes and values match
the new task, changing the processes and
values of the current organization, and
separating out an independent organization with
new processes and values.
81
How to appraise your organization's
capabilities and disabilities.

HOW TO APPRAISE YOUR ORGANIZATION’S
CAPABILITIES AND DISABILITIES
Not only must a manager well choose, train
and motivate the right people for the right job,
he also has to prepare the right
“organization” for the job.
82

The organizational capabilities framework :
Resources : people, equipment, technology,
relationships with suppliers, distributors, or
customers, brand, information
Processes : the methods of transforming the
resources into products, including interaction,
coordination, communication, and decision-
making
83

Values : the criteria to help organizations
prioritize their decisions
Values can evolve in two dimensions : the first
relates to the acceptable gross margins,
the second dimension relates to how big
a business has to be in order to be interesting
84

The relationship between processes
and values, and success in addressing
sustaining vs. disruptive technologies
85

Resources can easily fit in a new and
disruptive business, whereas
processes and values are very hard,
even impossible to adapt
86

The advantage of start-ups : they create
the processes and the values in
accordance with the disruptive
innovation, even if they don’t have the
resources required yet
87

Creating capabilities to cope with
change :
Acquire a different organization whose
processes and values could easily
match with the new project
88

Try to change the processes and values
of the current organization
Separate out an independent
organization and develop within it the
new required processes and values
89

90
Fitting an innovation’s requirements with the
organization’s capabilities

Chapter 9
Technology Supply May Not Equal
Market Demand
91

Market Demand
92
When performance oversupply occurs, it creates
an opportunity for a disruptive technology to
emerge and subsequently invade established
markets from below.
Performance oversupply triggers a fundamental
change in the basis of competition in the
product's market along four dimensions:
functionality, reliability, convenience, and price

The attributes that make disruptive products
worthless in the mainstream markets often
become strong selling points in emerging
markets.
Disruptive products tend to be simpler, cheaper,
and more reliable and convenient than
established products
93
Market Demand
Two characteristics of disruptive
technologies consistently affect product life
cycles and competitive dynamics:

When confronted with a disruptive technology,
established firms typically view them as a
technical challenge and therefore seek to
improve the disruptive technology enough so
that it is suitable for known markets.
However, firms that are most successful at
commercializing a disruption are those who
frame it as a marketing challenge and attempt to
find a market that embraces the attributes of the
disruptive technology as they currently stand.
94
Market Demand

Chapter 10
Managing Disruptive Technological Change:
A Case Study
95

How can managers succeed when faced
with disruptive technological change?
A case study on the electric automobile
show that major automakers do not see a
market
Innovators need to find a customer need, a
niche, develop the marketing, and create a
new distribution model.
96
Managing Disruptive
Technological Change: A Case Study

Managing Disruptive
97
Electric Vehicle Example
Identify whether technology is disruptive
•Look at market behavior, not the interviews. Plot market
performance demanded over time. If it exceeds new
technology capacity, then it might be disruptive.
•Look at performance improvement of new technology
over time. If it is growing faster than market performance
demanded, then it can be disruptive. (It will intersect
market need curve)

Managing Disruptive
98
Identify where is the market for the new tech
•Ignore mainstream market. Find a market that values the
disadvantages of the disruptive technology
•No one can learn from market research where the right
market is for an emerging market. Only way to learn is
through expeditions of trial and error, prototyping,
selling real products to real people paying real money

Managing Disruptive
99
Business plan must be one for learning, not executing
strategy
Product: simple, reliable, convenient. Designed for quick
and cheap iteration. Low price point.
Product plan cannot rely on achieving breakthrough tech
innovations. Disruptive tech usually combines existing
technology in new way.

Managing Disruptive
100
Product plan cannot rely on achieving breakthrough
technology innovations. Disruptive technology usually
combines existing stuff in new way.
Distribution strategy: Usually a new value network and
channel is needed because existing one has clear formula
that doesn't fit the need of the new product
Create independent organization or spin-off so as not to
compete against current needs & resources
Bigger organizations are best for sustainable innovation

Chapter 11
101
The Dilemmas of Innovation:
A Summary

The pace of progress that markets demand or
absorb can be different than the progress that
technological advances offer
Managing innovation is the mirror image of
managing the resource allocation process. Those
proposals to innovate that get the funding and
manpower they require might succeed. Those
that formally or de facto are accorded lower
priority get starved of resources and have little
chance.
102
A Summary

Just as there is a resource allocation side to
every innovation problem, matching the market to
the technology is another.
The capabilities of most organizations are far
more specialized and context-specific than most
managers are inclined to believe
In many instances, the information required to
take decisive action in the face of disruptive
technologies simply does not exist.
103
A Summary

It is not wise to adopt a blanket technology
strategy to always be a leader or to always be a
follower
Perhaps the most powerful protection to entry
that small entrant firms enjoy as they build the
emerging markets for disruptive technologies is
that what they are doing simply does not make
sense for the established leaders to do.
104
A Summary

105
References
1. http://www.maxmednik.com/1/post/2012/04/notes-on-the-innovators-
dilemma.html
2. http://www.slideshare.net/NoorulhadiQureshi/the-innovators-dilemma-
22447261
3. https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved
=0CEsQFjAE&url=https%3A%2F%2Fnet.educause.edu%2Fir%2Flibrary%2Fpo
werpoint%2FELIWEB0810.ppt&ei=EfHPUrW3Dq2TiAeOsYGABw&usg=AFQjC
NGjywy6JUNIbS2MibS1eB_T2JSkRQ
4. https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved
=0CCoQFjAA&url=http%3A%2F%2Fwww.ischool.utexas.edu%2F~i385q%2Far
chive%2Fbuchanan_innovators_dilemma.ppt&ei=EfHPUrW3Dq2TiAeOsYGAB
w&usg=AFQjCNEdax2Gg5bIjRaXq5txTelyPaHt2g
5. http://www.barelkarsan.com/2012/08/the-innovators-dilemma-chapter-2.html
6. http://en.wikipedia.org/wiki/The_Innovator's_Dilemma
7. http://www.businessweek.com/chapter/christensen.htm
8. http://timkastelle.org/blog/2012/02/better-business-models-lead-to-better-
businesses/

10
6
Prepared By: Prof. Sameer Mathur, Ph.D.
Sameer Mathur
Indian Institute of Management,
Lucknow
Marketing Professor 2013 –
Marketing Professor 2009 – 2013
Ph.D. and M.S. (Marketing) 2003 – 2009

Innovators Dilemma by Clayton Christensen

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