Innovation in 'disruptive technologies' is the philosopher's stone of managers and entrepreneurs that turns base metal into gold. Successful businesses look for growth by entering small emerging markets while back-markers pursue growth in large markets.
Either group takes risks. The winners take the chance that an emerging market for the disruptive technology may not appear at all. The losers accept the competitive risk of battling against established companies in established markets - and the first lesson is that this is basically poor strategy.
Paradox in Management
That large companies are locked into this mode is the book's wholly convincing thesis.
They are forced by customer demands and competitive pressures to invest heavily to sustain their existing strengths and, if possible, to strengthen that prowess. This produces Christensen's Paradox, which states that large companies fail in face of disruptive technologies, not because they are poorly managed, but because their management is excellent.
They did precisely what any business school professor would be happy to recommend:
- Listen to the customers.
- Invest aggressively in new technologies that will meet the customers' rising demands for performance.
- Meticulously study and meet market trends.
- Allocate resources to investments that promise to yield the best returns.
The author, an assistant professor at Harvard Business School, gives one example after another to show how this good management can't cope with a disruptive technology. All the four rules of good management cited above are usually broken by the disruptive innovators.
- They fail to listen to customers, because they don't have any.
- They develop lower-performance products as opposed to higher.
- They fail to rely on market research, because it's useless in these circumstances.
- They head off into tiny markets, with sales ranging from zero to negligible.
The strategy of the 14-inch disk drive industry summarises Christensen's thesis. The manufacturers went to extreme lengths to satisfy the customers, who all made mainframe computers. The 8-inch drives introduced by newcomers like Shugart, Priam and Quantum were useless to these customers.
The disks found their market with mini-computers - then a tiny segment. As the segment grew, though, and as the 8-inch disks caught up with the performance of lower-end 14-inch models, so the latter's makers began to lose out. But an 8-inch model was never introduced by two-thirds of the 14-inchers. Those that did were roughly two years late, and ultimately every 14-inch drive maker was driven from the industry.
Firms and individuals naturally play to their strengths - what they are good at, which has worked well in the past and still works well. However, these strengths are threatened by obsolescence in time.
IBM derived its vast profits and massive market strength from serving large corporate customers. However, the phenomenal growth in PC sales lay outside the large corporates - and IBM's market share, once 80%, slumped to single figures.
IBM's move to absorb its phenomenally succesful PC operation into the mainstream organisation failed. But originally the PC operation was a model response to the innovator's dilemma.
The PC activity was sited well away from any other IBM centre under independent management with a clear mandate. Most of the book's key prescriptions were met:
- Match the size of the organisation to that of the market.
- Find out about the market and its customers as you go along.
- Get in early, while the market is still unproven.
- Accept mistakes will be made.
- Acknowledge the weaknesses of disruptive technologies and their strengths.
Disruption produced one of Britain's legendary entrepreneurial success stories, that of J. C. Bamford. In 1947 Joe Bamford produced the very first hydraulic excavator - a small machine, designed to go on the back of tractors, that was entirely unsuitable for the major construction jobs. They were dominated by cable-actuated systems.
Their makers examined the hydraulic newcomers, but, to quote Christensen, 'Hydraulics was a technology that their customers didn't need - indeed couldn't use.' The chance for the cable champions to react had gone by the time hydraulic machines could finally match cable. JCB and the other hydraulic manufacturers swallowed up most of the market. In the process, Joe and his son Sir Anthony's combined fortunes hit £800 million in 1996.
At the beginning, the main strength of challengers like the Bamfords lies in their flexible approach: to learn as you go along, and to make false starts and mistakes, but react swiftly until you find the better path.
This style involves eight principles. Start-up winners…
- Reward risk-taking and refuse to punish failure
- Give new ideas very top priority
- . Allow new ideas to develop freely
- Prioritise great performance over good order
- Compete hard with themselves
- Recruit professional managers in good time
- Share financial rewards widely and generously.
- Aim for market share first and foremost
A Quartet of Differences
The Opportunity Octet (derived from a Business Week study of Silicon Valley) are necessities tactically. But they should rest on four strategic principles which mark out winning strategies from the runners-up and non-starters. Winners concentrate on the winning hand; cover every bet; work with strong partners; and think very big.
You can also get partners, so independent start-ups don't represent the only answer. The Silicon Valley giants have formed the sound habit of investing in small start-ups that have promising ideas. Cisco Systems has bought or invested in 34 of them over three years: Intel has set aside $500 million for similar efforts. If the investment succeeds with a new technology, the investor is in on the ground floor; if the start-up succeeds financially, the investor cashes in; and the odds are, of course, that technological and financial breakthroughs will go together.