The Innovator's Dilemma

Disruptive technologies typically enable new markets to emerge.

Small beginnings, big impacts. Disruptive technologies often emerge in small, low-end markets that established firms overlook or consider unprofitable. These technologies initially underperform in mainstream markets but excel in new applications. Examples include:

• Personal computers: Initially seen as toys, they disrupted minicomputers and mainframes

• Hydraulic excavators: Started in small construction projects, eventually overtook cable-actuated machines

• Disk drives: Smaller drives began in emerging markets (e.g., portables) before invading established ones

As these technologies improve, they eventually meet mainstream market needs, often at a lower cost or with added convenience, leading to industry upheaval.

Managers played the game the way it was supposed to be played. The very decision-making and resource-allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies.

Resource allocation shapes innovation. Established companies struggle with disruptive technologies not due to technological incompetence, but because of their resource allocation processes. These processes are designed to support:

• High-margin products

• Large markets

• Existing customers' needs

Disruptive innovations often:

• Offer lower margins

• Target smaller, undefined markets

• Don't meet current customers' needs

Consequently, disruptive projects consistently lose out in the competition for resources within established firms, even when senior management supports them.

The innovator's dilemma: Good management can lead to failure

Success breeds failure. The innovator's dilemma arises because the very management practices that lead to success in established markets can cause failure when facing disruptive technologies. These practices include:

• Listening closely to customers

• Investing in higher-performance, higher-margin products

• Focusing on large, growing markets

While these approaches work well for sustaining innovations, they systematically cause companies to miss disruptive opportunities. Managers face a dilemma: practices that ensure success in the present can sow the seeds of failure in the future.

What this means, however, is that much of what the best executives in successful companies have learned about managing innovation is not relevant to disruptive technologies.

Trajectories reveal opportunities. Understanding the trajectories of market demand and technological improvement is crucial for predicting disruptive potential. Key concepts:

1. Performance oversupply: When technology improvement outpaces market demands

2. Intersecting trajectories: Point where disruptive tech meets mainstream needs

Analyzing these trajectories helps managers:

• Identify potential disruptive threats

• Recognize opportunities for innovation

• Time market entry for new technologies

Companies that align their strategies with these trajectories are better positioned to either defend against or capitalize on disruptive innovations.

Only the CEO can ensure that the new organization gets the required resources and is free to create processes and values that are appropriate to the new challenge.

Autonomy enables disruption. To successfully pursue disruptive innovations, established companies should create separate organizations. This approach:

• Allows for different cost structures and profit expectations

• Enables focus on small, emerging markets

• Permits development of new processes and values

Key considerations:

• The separate organization should be small enough to get excited about small wins

• It needs independence in resource allocation

• CEO-level support and attention is crucial

Examples of successful spin-outs include IBM's PC division and Johnson & Johnson's approach to medical devices.

Amid all the uncertainty surrounding disruptive technologies, managers can always count on one anchor: Experts' forecasts will always be wrong.

Action trumps analysis. Traditional market research is ineffective for disruptive technologies because the markets don't yet exist. Instead, companies should:

• Adopt a discovery-driven planning approach

• Plan to be wrong and learn quickly

• Use low-cost probes and experiments to test markets

Successful strategies:

• Watch what customers do, not just what they say

• Create products and see how customers use them

• Be prepared to iterate and pivot based on market feedback

Honda's success in the U.S. motorcycle market and Intel's journey into microprocessors exemplify this experimental approach to market discovery.

Once the demand for capacity was satiated, other attributes, whose performance had not yet satisfied market demands, came to be more highly valued and to constitute the dimensions along which drive makers sought to differentiate their products.

Oversupply reshapes markets. When the performance of products exceeds market demands, the basis of competition shifts. This process typically follows a pattern:

1. Functionality

2. Reliability

3. Convenience

4. Price

As one attribute becomes "good enough," customers start valuing other features. This shift creates opportunities for disruptive technologies that may be inferior on traditional metrics but superior on emerging ones.

Examples:

• Disk drives: Shift from capacity to size and power consumption

• Accounting software: From functionality to ease of use (Intuit's success)

• Insulin: From purity to convenience of delivery

Organizations have capabilities that exist independently of the capabilities of the people who work within them. Organizations' capabilities reside in their processes and their values.

Process and values define capabilities. A company's ability to innovate depends not just on its resources (people, technology, capital) but also on its:

Processes:

• How work gets done

• Communication patterns

• Decision-making procedures

Values:

• Criteria for setting priorities

• What defines "good" projects

These elements often become so ingrained that they define what an organization can and cannot do, regardless of the individuals involved. This explains why:

• Established companies excel at sustaining innovations

• They struggle with disruptive technologies that don't fit existing processes and values

Ensuring that capable people are ensconced in capable organizations is a major management responsibility in an age such as ours, when the ability to cope with accelerating change has become so critical.

Match the challenge to the organization. Successful innovation management requires aligning the type of innovation with the right organizational structure. Key considerations:

1. Assess whether existing processes fit the innovation challenge

2. Determine if current values support the initiative

3. Choose the appropriate organizational structure:

   • Functional teams for leveraging current capabilities

   • Heavyweight teams for creating new processes

   • Autonomous organizations for developing new values

By matching the innovation challenge to the right organizational capabilities, managers can increase the chances of success for both sustaining and disruptive innovations.