Why Do Big Companies Fail? The Tale of Disruptive Innovation.
“If I had asked people what they wanted, they would have said faster horses.” — Henry Ford, Founder of Ford Motors
When existing businesses were busy looking for faster horses to fulfill the people’s increasing transportation demand, Henry Ford tried a different approach. And when he finally succeeded with his automobile design, Ford T-Series completely disrupted the whole horse riding business. And this is called the disruptive innovation.
Disruptive innovation is not a new concept and it has been in our ecology for a very long time. A few of the common examples of disruptive innovations are when democracy replaced monarchy, Internet replaced the traditional money making model to make money online alternatives or when Emails replaced posts & telegrams.
Two Kinds of Innovation:
In the book ‘The Innovator’s Dilemma’ (Originally published in 1997), the author Clayton Christensen, who is a Harvard Professor, described that there are two kinds of innovation in the business world- Sustaining Innovation and Disruptive innovation.
This book created a profound impact on how innovators think about innovation and technology. In his book- the author also discussed why big firms fail under conditions of the technological change. However, in order to understand that, let’s first discuss what is sustaining and disruptive innovation.
1. Sustaining Innovation
Sustaining innovation is an incremental innovation process to improve the operations on a predictable time frame. This kind of innovation typically follows the ways the company was incorporated into the business.
Sustaining innovators only focus on the demands of the mainstream customers. If the customers want better products, they’ll keep evolving the products.
2. Disruptive Innovation
Disruptive innovations are the new innovations whose applications can significantly affect a market or industry functions. They create a new market and value systems which eventually disrupts the existing market, displacing market-leading firms, products etc.
Nevertheless, a disruption is never welcomed initially. Here are the few traits of the disruptive innovations:
- These kinds of innovation have a high risk of failure compared to the incremental sustaining innovations.
- They initially offers a lower performance compared to what the mainstream market has historically demanded.
- However, once developed, these innovation achieve faster penetration and builds a higher degree of impact on the established markets.
- Other performance attributes (smaller, faster, simpler, portable etc) — that is not valued by the current customers — make it prosper in a new value network.
- As the innovations improve along the traditional performance parameters, they eventually displace the former technology.
Why do big companies fail?
“Companies are misguided when they continuously listen to their current customers.”
The problem with the big companies is that their business environment does not allow them to pursue disruptive innovation when they first arise because they are not-profitable initially.
Most big firms are not comfortable with disruptive innovations as these innovations do not satisfy their current customers. They only focus on the demands of the mainstream customers. If the customer wants better products, they’ll keep evolving the products.
Moreover, these kinds of in-house disruptive innovation can burn huge resources away from the sustaining innovation — which is required to compete against the current competitions. Therefore, these companies are ‘held captive’ by their most profitable customers, restricting them from pursuing disruptions.
Let’s understand this with the help of an example.
There was a time when disk drive was a billion dollar industry.
The disks were continuously evolving its storage and performance as per the demand of the people. They managed a sustaining transition from one generation of the disk drive to another (14-inch hard disk drive → 8-inch floppy disk drive → 5.25-inch floppy disk drive → 3.5-inch floppy disk drive) so that people can get better disk drives.
However, these disk drives were never able to completely satisfy the demands at any particular time as the customers always demanded better storage capacity.
Now, when the new generation of drives (CDs and USB flash drives) first arrived, they offered the worst performance in terms of what the customers demanded. However, with time, they improved their performance and offered a huge storage capacity to the people which the traditional disk drives (floppy disks) were never able to fulfill.
What went wrong here?
Although the companies were continuously innovating to improve their product. But most of them went bankrupt continuously listening to their customers and giving them what they demanded.
The new generation of drive emerged in a new value of the network. Eventually, their products became ‘good enough’ in terms of performance and storage capacity and later displaced the former generation.
“Clayton Christensen argues in his book that a business must look at whether their innovation satisfies a firm’s current customer base or not?”
A Few best examples of the Disruptive innovations:
Most of the disruptive innovations are not gladly welcomed by the market when they first present themselves.
For example, when the transistor radio was first launched in the market, they offered poor sound quality compared to the big analog traditional radios.
However, the fact that they were portable and consumed less battery, opened the door for the new value market. It became popular among the college students and working people who needed a portable device to listen to music at work or at the beach. And as the sound quality improved, it eventually displaced the traditional big furniture radios.
Here are the few examples of recent disruptors:
(Disruptive Innovation → Market disrupted by innovation)
- Wikipedia → Traditional Encyclopedias
- Ipad → Portable computers
- Google Maps → Navigation system & paper maps
- Skype → Telecommunication system
- Netflix → CD/DVD rentals
- Amazon → Book selling shops/chains.
- Uber/Ola → Taxi Cab, Ride-sharing
Potential disruptive innovations that may transform the world:
There’s always someone somewhere working to disrupt the current market system.
A few of the ongoing potential disruptive innovations that may transform the world tomorrow are Robotics, Autonomous vehicles, Internet of things, Artificial intelligence, Space Colonization, 3D Printing, High-speed travels, Blockchain technology, Advanced virtual reality, Cryptocurrency etc.
Disruptive innovation is a process where a smaller company with fewer resources are able to successfully challenge the big businesses. Most of these big companies ‘FAIL’ when they do not react to this new market disruptions.
Nevertheless, ‘NOT’ all disruptions are dangerous for the big firms. Some disruptive innovations succeed. Most don’t!!
By the way, 👏🏻 *clap* 👏🏻 your hands if you enjoyed this post. It encourages me to keep writing and help other people finding it :)
Take Care. And keep hustling.