The Innovator’s Dilemma

A Reflection

There is this theory in management called resource dependency. It essentially says that the decisions made by a company are dictated by the resources it is dependent upon: customers, investors, etc. The goal of a company is to gain profits and increase revenue. This is done by giving customers exactly what they want in order for them to keep buying your product.

Disruptive technologies exist in small/emerging markets or those markets that haven’t even formed yet. When the market for a disruptive technology has reached a large size, it is too late for a company to enter that market because it is already dominated by key players and that first-mover advantage is crucial.

The role of the management within a company is to properly allocate scarce resources in order to achieve profit maximization. If a company has $100 million annual revenues, and their goal is to hit 10-20% in profits, that means that they must make anywhere from $10-20 million. Disruptive technologies exist in small markets. Small markets produce a few million at best in revenue. It would be a misallocation of resources if management were to decide to invest in those markets.

Conflicts will arise for a company if they try to simultaneously manage the resource allocation to meet their objectives while at the same time investing in disruptive technologies. New innovative ideas usually come from the bottom up. The engineers who are doing the work are usually the ones who think of new ideas. They present those ideas to their managers, and then the managers sift through ideas to see which ones they will present to the senior management. This sifting through ideas is where things go wrong. The managers are not altruistic. They know what it takes for the company to succeed, and will bank on the ideas that will do so; and in the process, gain some recognition so they can move up the chain and further their career ambitions. The ideas that make the company succeed are not ones that invest in disruptive technologies because those moves do not provide enough returns in investment to meet the yearly objectives.

Disruptive technologies must be managed very differently than traditional management in profit seeking companies. You cannot go in with a lot of planning because you are entering new territory. The objective is to learn. The principals in dealing with disruptive technologies are very similar to the principals of The Lean Startup. They require fast market launches and quick iterations. Sometimes it requires you to listen to customers and sometimes it requires to ignore them. With disruptive technologies, sometimes the customers don’t know what they want.

This is the reason why so many small startups succeed with disruptive technologies while large corporations don’t. Startups have the ability to launch fast and iterate. They do not have profit maximizing objectives. They are figuring it out as they go. Their efforts can be fully focused on developing the technology, and not on what the yearly goals are.

So how can companies innovate when it comes to disruptive technologies? Create offshoots. IBM had spun off many small companies in order for them to solely focus on disruptive technologies. Google created Google X. Dayton Hudson was successful with the Target Chain. Berkshire Hathaway is in the same boat. J&J compromises of 160 autonomously operating companies. Smallness and independence has many advantages in innovation. Companies ought to spin off a small organization to focus on the disruptive technology, with only the CEO watching how the progress is like.

The Innovator’s Dilemma is certainly an amazing read. I had many “aha” moments during this book and it all made sense. I highly suggest reading this book if you are interested in innovation. Tweet at me or send me an email; I would like to hear some thoughts.