The Innovator's Dilemma: When New Technologies Cause Great Firms to Fall

The Innovator's Dilemma: When New Technologies Cause Great Firms to Fall

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by Clayton M. Christensen, Don Leslie
     
 

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Great companies can fail-not because they do anything wrong, but because they do everything right. Meeting customers' current needs leads firms to reject breakthrough innovations-"disruptive technologies" that create the products and opportunities of the future.Radical thinking . . . and a wake-up call. Citing examples from many industries (computers,

Overview

Great companies can fail-not because they do anything wrong, but because they do everything right. Meeting customers' current needs leads firms to reject breakthrough innovations-"disruptive technologies" that create the products and opportunities of the future.Radical thinking . . . and a wake-up call. Citing examples from many industries (computers, retailing, pharmaceuticals, automobiles, steel), Clayton M. Christensen explains how to avoid a similar fate. He presents strategies for determining when not to listen to customers, when to pursue small markets at the expense of larger ones, and other ways to ensure long-term growth and profit. This award-winning book shows managers the changes that may be coming-and how to respond for success.

Product Details

ISBN-13:
9781565114159
Publisher:
HighBridge Company
Publication date:
06/13/2001
Edition description:
Abridged, 2 CDs
Pages:
140
Product dimensions:
4.94(w) x 5.63(h) x 0.44(d)

Read an Excerpt

Chapter 1: How Can Great Firms Fail? Insights from the Hard Disk Drive Industry

When I began my search for an answer to the puzzle of why the best firms can fail, a friend offered some sage advice. "Those who study genetics avoid studying humans," he noted. "Because new generations come along only every thirty years or so, it takes a long time to understand the cause and effect of any changes. Instead, they study fruit flies, because they are conceived, born, mature, and die all within a single day. If you want to understand why something happens in business, study the disk drive industry. Those companies are the closest things to fruit flies that the business world will ever see."

Indeed, nowhere in the history of business has there been an industry like disk drives, where changes in technology, market structure, global scope, and vertical integration have been so pervasive, rapid, and unrelenting. While this pace and complexity might be a nightmare for managers, my friend was right about its being fertile ground for research. Few industries offer researchers the same opportunities for developing theories about how different types of change cause certain types of firms to succeed or fail or for testing those theories as the industry repeats its cycles of change.

This chapter summarizes the history of the disk drive industry in all its complexity. Some readers will be interested in it for the sake of history itself. But the value of understanding this history is that out of its complexity emerge a few stunningly simple and consistent factors that have repeatedly determined the success and failure of the industry's best firms. Simply put, when the best firmssucceeded, they did so because they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers' next-generation needs. But, paradoxically, when the best firms subsequently failed, it was for the same reasons—they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers' next-generation needs. This is one of the innovator's dilemmas: Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake.

The history of the disk drive industry provides a framework for understanding when "keeping close to your customers" is good advice—and when it is not. The robustness of this framework could only be explored by researching the industry's history in careful detail. Some of that detail is recounted here, and elsewhere in this book, in the hope that readers who are immersed in the detail of their own industries will be better able to recognize how similar patterns have affected their own fortunes and those of their competitors.

How Disk Drives Work

Disk drives write and read information that computers use. They comprise read-write heads mounted at the end of an arm that swings over the surface of a rotating disk in much the same way that a phonograph needle and arm reach over a record; aluminum or glass disks coated with magnetic material; at least two electric motors, a spin motor that drives the rotation of the disks and an actuator motor that moves the head to the desired position over the disk; and a variety of electronic circuits that control the drive's operation and its interface with the computer. See Figure 1.1 for an illustration of a typical disk drive.

The read-write head is a tiny electromagnet whose polarity changes whenever the direction of the electrical current running through it changes. Because opposite magnetic poles attract, when the polarity of the head becomes positive, the polarity of the area on the disk beneath the head switches to negative, and vice versa. By rapidly changing the direction of current flowing through the head's electromagnet as the disk spins beneath the head, a sequence of positively and negatively oriented magnetic domains are created in concentric tracks on the disk's surface. Disk drives can use the positive and negative domains on the disk as a binary numeric system—1 and 0—to "write" information onto disks. Drives read information from disks in essentially the opposite process: Changes in the magnetic flux fields on the disk surface induce changes in the micro current flowing through the head.

A team of researchers at IBM's San Jose research laboratories developed the first disk drive between 1952 and 1956. Named RAMAC (for Random Access Method for Accounting and Control), this drive was the size of a large refrigerator, incorporated fifty twenty-four-inch disks, and could store 5 megabytes (MB) of information (see Figure 1.2). Most of the fundamental architectural concepts and component technologies that defined today's dominant disk drive design were also developed at IBM. These include its removable packs of rigid disks (introduced in 1961); the floppy disk drive (1971); and the Winchester architecture (1973). All had a powerful, defining influence on the way engineers in the rest of the industry defined what disk drives were and what they could do.

As IBM produced drives to meet its own needs, an independent disk drive industry emerged serving two distinct markets. A few firms developed the plug-compatible market (PCM) in the 1960s, selling souped-up copies of IBM drives directly to IBM customers at discount prices. Although most of IBM's competitors in computers (for example, Control Data, Burroughs, and Univac) were integrated vertically into the manufacture of their own disk drives, the emergence in the 1970s of smaller, nonintegrated computer makers such as Nixdorf, Wang, and Prime spawned an original equipment market (OEM) for disk drives as well. By 1976 about $1 billion worth of disk drives were produced, of which captive production accounted for 50 percent and PCM and OEM for about 25 percent each.

The next dozen years unfolded a remarkable story of rapid growth, market turbulence, and technology-driven performance improvements. The value of drives produced rose to about $18 billion by 1995. By the mid-1980s the PCM market had become insignificant, while OEM output grew to represent about three-fourths of world production. Of the seventeen firms populating the industry in 1976—all of which were relatively large, diversified corporations such as Diablo, Ampex, Memorex, EMM, and Control Data—all except IBM's disk drive operation had failed or had been acquired by 1995. During this period an additional 129 firms entered the industry, and 109 of those also failed. Aside from IBM, Fujitsu, Hitachi, and NEC, all of the producers remaining by 1996 had entered the industry as start-ups after 1976.

Some have attributed the high mortality rate among the integrated firms that created the industry to its nearly unfathomable pace of technological change. Indeed, the pace of change has been breathtaking. The number of megabits (Mb) of information that the industry's engineers have been able to pack into a square inch of disk surface has increased by 35 percent per year, on average, from 50 Kb in 1967 to 1.7 Mb in 1973, 12 Mb in 1981, and 1100 Mb by 1995. The physical size of the drives was reduced at a similar pace: The smallest available 20 MB drive shrank from 800 cubic inches ([in..sup.3]) in 1978 to 1.4 [in..sup.3] by 1993—a 35 percent annual rate of reduction.

Figure 1.3 shows that the slope of the industry's experience curve (which correlates the cumulative number of terabytes (one thousand gigabytes) of disk storage capacity shipped in the industry's history to the constant-dollar price per megabyte of memory) was 53 percent—meaning that with each doubling of cumulative terabytes shipped, cost per megabyte fell to 53 percent of its former level. This is a much steeper rate of price decline than the 70 percent slope observed in the markets for most other microelectronics products. The price per megabyte has declined at about 5 percent per quarter for more than twenty years.

The Impact of Technology Change

My investigation into why leading firms found it so difficult to stay atop the disk drive industry led me to develop the "technology mudslide hypothesis": Coping with the relentless onslaught of technology change was akin to trying to climb a mudslide raging down a hill. You have to scramble with everything you've got to stay on top of it, and if you ever once stop to catch your breath, you get buried.

To test this hypothesis, I assembled and analyzed a database consisting of the technical and performance specifications of every model of disk drive introduced by every company in the world disk drive industry for each of the years between 1975 and 1994. This database enabled me to identify the firms that led in introducing each new technology; to trace how new technologies were diffused through the industry over time; to see which firms led and which lagged; and to measure the impact each technological innovation had on capacity, speed, and other parameters of disk drive performance. By carefully reconstructing the history of each technological change in the industry, the changes that catapulted entrants to success or that precipitated the failure of established leaders could be identified.

This study led me to a very different view of technology change than the work of prior scholars on this question had led me to expect. Essentially, it revealed that neither the pace nor the difficulty of technological change lay at the root of the leading firms' failures. The technology mudslide hypothesis was wrong.

The manufacturers of most products have established a trajectory of performance improvement over time. Intel, for example, pushed the speed of its microprocessors ahead by about 20 percent per year, from its 8 megahertz (MHz) 8088 processor in 1979 to its 133 MHz Pentium chip in 1994. Eli Lilly and Company improved the purity of its insulin from 50,000 impure parts per million (ppm) in 1925 to 10 ppm in 1980, a 14 percent annual rate of improvement. When a measurable trajectory of improvement has been established, determining whether a new technology is likely to improve a product's performance relative to earlier products is an unambiguous question.

But in other cases, the impact of technological change is quite different. For instance, is a notebook computer better than a mainframe? This is an ambiguous question because the notebook computer established a completely new performance trajectory, with a definition of performance that differs substantially from the way mainframe performance is measured. Notebooks, as a consequence, are generally sold for very different uses.

This study of technological change over the history of the disk drive industry revealed two types of technology change, each with very different effects on the industry's leaders. Technologies of the first sort sustained the industry's rate of improvement in product performance (total capacity and recording density were the two most common measures) and ranged in difficulty from incremental to radical. The industry's dominant firms always led in developing and adopting these technologies. By contrast, innovations of the second sort disrupted or redefined performance trajectories—and consistently resulted in the failure of the industry's leading firms.

The remainder of this chapter illustrates the distinction between sustaining and disruptive technologies by describing prominent examples of each and summarizing the role these played in the industry's development. This discussion focuses on differences in how established firms came to lead or lag in developing and adopting new technologies, compared with entrant firms. To arrive at these examples, each new technology in the industry was examined. In analyzing which firms led and lagged at each of these points of change, I defined established firms to be those that had been established in the industry prior to the advent of the technology in question, practicing the prior technology. I defined entrant firms as those that were new to the industry at that point of technology change. Hence, a given firm would be considered an entrant at one specific point in the industry's history, for example, at the emergence of the 8-inch drive. Yet the same firm would be considered an established firm when technologies that emerged subsequent to the firm's entry were studied.

In the history of the disk drive industry, most technology changes have sustained or reinforced established trajectories of product performance improvement. Figure 1.4, which compares the average recording density of drives that employed successive generations of head and disk technologies, maps an example of this. The first curve plots the density of drives that used conventional particulate oxide disk technology and ferrite head technology; the second charts the average density of drives that used new-technology thin-film heads and disks; the third marks the improvements in density achievable with the latest head technology, magneto-resistive heads...

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Innovator's Dilemma 4.3 out of 5 based on 0 ratings. 32 reviews.
Just_Another_Engineer More than 1 year ago
What it does: Provides insight for business managers that need to deliver continually improved products to their markets. Provides good information about how business have grown and fallen in the face of technical advancement. It does provide case-study backed recommendations on how to manage innovative business ventures. What it does not do: This is not about 'how to innovate,' how to make a better mouse trap, nor even how to find out what your customer wants. Christensen assumes that you have that much together already. The book's emphasis is on business management. Comments: Before reading "The Innovator's Delimma," I thought that I knew what a 'disruptive innovation' was. (After all, I am an experienced engineering manager working in new product development.) But Christensen succeeded in changing my paradigm here and gave me significant insight into the evolution and demise of corporations. Christensen's book takes an academic study of business innovation, drawing extensively on the computer hard drive industry, to divide innovation into two classes: 'sustaining' and 'disruptive.' What many people would be inclined to call 'disruptive innovation' are, in Christensen's view, radical 'sustaining innovations.' The 'disruptive innovations' are initially generally not especially technically innovative, but they fill a market niche and grow to the point of challenging the established. He then digs into details, and pulls out similar supporting case studies of the excavator industry (steam shovels to back hoes), computers and electronics, and lesser detail in discussing changes in retailing. He shares some good insights into why big companies have fallen to upstarts. This is rooted in the natural tendencies of companies to progress from lower-end, lower-margin products to higher-end, higher-margin products. He also shows how companies succeed by innovating and managing to provide what customers' want, and how that focus can cause a company to miss the disruptive technology. His case-study supported recommendations on how companies can address the dilemma seem convincing. A few complaints about the book: 1) the texts and graphs do not agree or match in several cases - this was very annoying, 2) the case studies are largely from manufacturing, so applications to the services industry may not be as straightforward as one would hope, 3) the advice is geared more towards keeping a large corporation alive rather than in assisting small companies grow. He ends with a discussion of how he would manage commercializing an electric car, based on his research findings. (I don't think that GM has been listening.) In my opinion, he didn't follow his own advice well enough in his plan - it relies too much on mainstream market.
Anonymous More than 1 year ago
Clayton M. Christensen’s work in his book The Innovators Dilemma is both equal parts frightening and entertaining. To the professional world of high-ranking executives and aspiring business owners this book is like a dangerous warning. The book outlines the problems successful companies have in adapting to new emerging markets that utilize disrupting technologies. He backs up his claims by using in depth analysis of real world examples to help frame his perspective and opinion. Christensen creates what he calls the ”failure framework”(Christensen 7), and using the frantic changing of the guard in the disk drive industry elaborates on three main reasons why leading firms tend to stumble repeatedly with stagnation and disruptive technology. Upon finding comparisons in industries unlike the ones previously mentioned, Christensen goes onto promote what he has dubbed the, “principles of disruptive innovation”(Christensen 14). The Innovators Dilemma culminates with an explanation of how to spot threats and opportunities of disruptive technology and their markets as well as where in today’s world disruptions are currently happening. I enjoyed reading The Innovators Dilemma because I believe what he writes about is seen constantly in society. Technology is continually advancing and changing. The same advances in technology have a massive impact on various industries across the world, from hotel enterprises to various outlets of social media. Examining recent technological advances such as Airbnb, Uber and other recent startups we see how disruptive advances in technology can truly be. As Christensen argues, traditional powerhouse companies in their respective markets were unable to capitalize on the evolving technology because they had a responsibility to their customers and their investors to provide great quality and create growth. He provides tremendous examples such as Sears and IBM as leading firms that fell victim to what is described as the “Failure of Success Bias”(Silk 52)in What Is Marketing by Alvin J. Silk. Failure of success bias is a term used to describe firms that lose touch with customers and markets because they fail to understand evolving culture, emerging technologies and repeat past strategies. The book uses Sears as a prime example, a company that once accounted for over 2% of all retail sales in the United States was considered to be in the upper echelon of successful firms in the late twentieth century. As Christensen points out in his failure framework, Sears like other successful firms don’t have the luxury of spending valuable resources on possible disruptive technologies because improving their sustained technologies is more profitable in the short run. Firms can’t spend cash on long-term investments because shareholders voice their opinions for what Christensen calls ‘‘Rational Investments’’(Christensen 71). By using companies like Sears and IBM, Chistensen is able to solidify his argument and delicate elaboration of the failure of success bias. Ultimately showcasing to aspiring business owners and the professional world the importance of recognizing disruptive technologies and the dangers of being successful. What struck me the most was how Christensen’s principles remain relevant in today’s market. It has been almost two decades since the book was first published and yet Christensen’s principles remain at the forefront of emerging technologies. He highlights five fundamental principals that harness the princ
Anonymous More than 1 year ago
Clayton’s Christensen’s book, “The Innovator’s Dilemma”, is a well-known read amongst business experts, offering a unique look at the constant and repeating reason that businesses fail. Originally published in 1997, Professor Christensen of Harvard Business School writes about what he finds is the key factor is business failure: disruptive technology. Typically technologies seek to improve existing products or markets, which Christensen calls “sustaining technologies”. Sustaining technologies are what businesses handle best, since they address the current needs and wants of customers. However, disruptive technologies quickly change the market, leaving businesses that did not see the change coming in the dust. Sometimes the changes are easy to see, while some are nearly impossibly to spot. Throughout the book, Christensen meticulously breaks down his findings and what led him to his theories, offering countless examples that although now dated, still prove his point as technology evolves exponentially today. By the end, he seeks to provide successful solutions and tips for businesses that face the “innovators dilemma”: making a decision to embrace a disruptive technology, regardless of whether or not it is counter-productive to current business operations.  For a large section of the read Christensen describes his theories, using the hard disk industry as a primary example. Seagate was a large manufacturer of 5.25 inch hard drives, and in 1985 developed the first 3.5 inch design. After testing with customers, the initial response was that 3.5 inch drives were not growing in popularity, and were more expensive, causing their development to be shelved. As a result, Seagate continued to develop the 5.25 inch drives, making them perform better and more efficiently, until new and competing companies developed the 3.5 inch drive. Quickly the 3.5 inch drives grew in performance and reliability, becoming more popular as the main components of personal computers and laptops. As a result, Seagate quickly lost its 5.25 inch drive market, not anticipating the rise of the 3.5 inch drives. This example explains Christensen’s theories rather well, demonstrating the need to embrace technologies still in their infancy. Although 5.25 inch drives were the sustaining technology, which drove Seagate’s success for quite some time, the disruptive technology was the smaller and higher performance 3.5 drives, which have made 5.25 drives obsolete.  Of course, identifying disruptive technologies is not an easy task, and it is especially more difficult to invest money and resources into a product that will not succeed for an indefinite period of time. In the second half of the book, Christensen offers many ideas for combating this, such as creating strategies to embrace disruptive technologies with research and development plans as opposed to immediately jumping to serving the current market. Another strategy he offers his for a company to take a stake in a disruptive company, typically a startup, to provide necessary resources and share the benefits of the emerging innovation. For example, Johnson & Johnson in the past has acquired small startup companies focused on disruptive technologies at the time, such as disposable contact lenses and blood glucose meters, and provided them research for further development, which today have evolved into billion dollar markets. This seems to be a highly valued solution offered by Christensen, since there are numerous instances in which he dismisses the idea of creating a division within a large company for research on a disruptive technology. Christensen says that typically these divisions are given minimal resources and support, due to the present day sustaining operations that hold back advancement on emerging technology.  Overall I felt that Professor Christensen’s theories are very valid in a world where technology continues to grow faster than businesses can keep up. He supports his claims with real examples from the industry, which demonstrate how well managed businesses constantly fail due to their myopic look at the market. The book itself, although slightly dry, provides indispensible information to semi-mature audiences, especially business owners looking towards the future in our techno-centric world. Despite examples that are now semi-dated, Christensen’s findings can still be applied to today’s biggest market changes, as companies such as how Uber, Skype, Amazon, and Google continue to replace traditional markets that were once wildly successful. I recommend this book to any rising entrepreneur, as it offers insight to how startup companies can use disruptive innovation to their advantage, and also to veteran business owners that seek to stay ahead of the technological revolution. 
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Even if it does get a bit clunky at times, the ideas are important considerations for managers today.
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HIGHLY recomended do read this book it is amazing!!!!!!!!!
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D_Kemp More than 1 year ago
For those interested in what makes company's succeed or fail when faced with technological change, this book should satisfy. Using the disk drive industry as his main focus, but delving into many other examples, Christensen shows how companies react to disruptive technological change, and why most often they fail to adapt. However, Christensen is not just descriptive, but includes advice on how a business can successfully adapt to disruptive technological change. Highly recommended, but technical at times.
David_Marquet-Practicum More than 1 year ago
We are all familiar with the story of the innovative and nimble startup surpassing the corporate leader with a disruptive technology that the larger corporation was blind to. Why this happens is the subject of Clayton Christensen's thoughtful Innovator's Dilemma. Although originally published in 1997, it's a highly relevant and useful read today. Christensen was interested in how the market leaders missed the disruptive innovations. At the time, most thought the corporate leaders were just too arrogant or too bureaucratic to see the disruption coming. Could there be more structural forces at play? Turns out, there are. The first half of the book follows the development of the disk drive and the hydraulic excavator to understand and make clear these forces. First, the author distinguishes between sustaining technologies and disruptive technologies. Market leaders, it turns out, are capable of innovation but those innovations typically occur as incremental evolutionary changes to existing products - sustaining innovations. Where they get tripped up is the development of disruptive technologies which fundamentally transform the existing product. In many cases the market leader also developed early forms of the disruptive technology or were at least aware of the development of the technology. Christensen, a professor at the Harvard Business School, makes the case that in ignoring the disruptive technology, the market leader was acting quite rationally. They were following their customers' and corporation's best interests. Christensen discovered that the disruptive technology yields a product that is inferior as measured by the traditional metrics for product quality. In the case of the disk drive it was price/unit storage. For the excavators, it was reach. For the disk drives, the disruption was the introduction of smaller and smaller drives. At each step of the way, these products were costlier than the existing larger drives in terms of price/unit storage. However, their advantages, in terms of other characteristics such as size, weight, and power consumption outweighed nominal improvement in the price/unit storage ratio provided by sustaining technologies. Eventually, price catches up and the disruptive products are better in both sets of characteristics. For the excavator (a big digger), the existing machines used cables to extend and control the basket. The overriding measure of performance was reach and capacity - how far out could the basket reach and grab a bucket of dirt. When hydraulic excavators appeared, their reach was very limited because of the physics of the hydraulic cylinders needed to control the baskets. Even today, a cable excavator will give you a longer reach. However, the hydraulic excavators had advantages of safety (no cable breaks) and had significantly lower maintenance costs. Eventually, as manufacturing of hydraulic excavators grew in practice, reach extended and for many uses such as building foundation excavation and utility pipe laying, as soon as the reach was sufficient for the task, the improvement in safety and the reduced maintenance costs made the hydraulic excavators superior. This book will change the way you think about innovation and the structures needed not only to spark the ideas, but get them built into new product lines. My name is David Marquet, from Practicum, Inc and we help our customers get everyone be a leader and avoid casting employees into follower roles. To co
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