Innovator’s Dilemma: Part II

My last article on the Innovator’s Dilemma by Clayton Christensen discussed how successful companies manage to capture and sustain a strong market share in the face of dynamic changes to their business sector. Mr. Christensen demonstrated that companies in the computer hard disk drive industry developed effective processes for gathering information from customers and rapidly acting on that information to improve their products in directions that the customer wanted to go. Even in the face of dramatic technical changes — changes he called sustaining technologies - these market leaders were able to transition to a new process or employ new components to maintain their market dominance. The problem the author postulates comes when the market faces a “disruptive innovation”.

Disruptive innovations, as defined by Mr. Christensen, mark a change to the existing product offering in a direction that doesn’t fit the current customer need. In the case of computer hard drives, the change came in the form of a smaller form factor. The sustaining technologies that helped the leaders meet customer demand for speed and data density also allowed innovators to create smaller and smaller disk drives. This new architecture had some advantages. The new smaller drives obviously took up less space and weighed less. But they also were more rugged and did not require as much power to operate. Unfortunately, these qualities were not parameters that interested the established customer base.

The mainframe computer industry established a standard for the 14-inch disk drive. The market leaders were able to deliver over 130 MB of storage capacity and improve capacity at a rate of 20% each year (1 GB hard drives were introduced in the early 1980's). At about that time, new entrants to the disk drive market offered an 8-inch hard drive. Companies like Micropolis, Priam, and Quantuum had a difficult time selling these new drive into the mainframe computer market. And it’s easy to see why, the earliest models could only store between 10 MB and 40 MB of data. When measured in dollars per MB of storage capacity, these new 8-inch products were too expensive.

Fortunately there was a new computer market starting up now known as minicomputers. Wang, DEC and Hewlett-Packard (among others) were starting to offer smaller desk-side computers for office use. The use model for these computers was substantially different than the mainframe market, making the storage space less important than size. The 8-inch product had found an emerging market and these companies attacked it with zeal. Interestingly, it was the “emerging” nature of this market that caused the established 14-inch manufacturers to miss this opportunity.

The mainframe market had been around for a decade at this point. Established firms could predict, with confidence, the sales volumes and profit for new hard drive releases. Additionally, the margin on 14-inch drives was rather high (~40%).

By contrast, the minicomputer market was in its infancy. Margins promised to be low since the product was new and you were selling into organizations with smaller budgets. Finally, there was no reliable way to predict sales volumes. Is it any wonder a successful manager at IBM would pass on supporting the development of a new 8-inch hard drive?

The new innovative companies that offered the 8-inch drives saw the same “small” opportunity presented by minicomputers in a very different way. They saw the opportunity to develop their product, improve upon its performance and drive efficiency to gain the most profit possible.

The pattern repeated itself several years later when Seagate introduced the 5.25-inch disk drive. This time, it was Micropolis, Priam, and Quantuum who had established themselves in the minicomputer market. These companies had developed their products to the point where the 8-inch disk drives met or exceeded the desired performance requested by customers in the mainframe market. These companies now turned their eye to the higher margins that could be had selling into that lucrative market.

Seagate was now the hungry rival able to establish itself in the desktop computer market with a product that didn’t quite meet the requirements of the minicomputer market. But the size and absolute cost of the 5.25-inch drive finally allowed companies to offer a computer to small businesses at a price under $5,000. Again, Seagate saw this as a great opportunity while Quantuum and others saw uncertainty and low margins.

Clayton Christensen explained early in the book that he used the computer disk drive industry to develop his theory of disruptive innovation. But this theory doesn’t provide much if it does not apply outside that industry. In my next installment, I will describe some of the other test cases the author used to test his theory. And as it turns out, his theory seems to explain transitions in retail, heavy equipment manufacturing and steel production.