The Innovator’s Dilemma
I have recently come across a book from Clayton M. Christensen: The innovator’s dilemma (Christensen, 2013). This book is not new, the first version came out in 1997 and most of the analysis is about disruptive technological changes in the disk and the mechanical excavator industries.
This was long before e-commerce, cloud, and not to mention digital twins, Internet of Things (IoT), Edge-computing, AI commercial services and similar. The book shows its age when it claims that “in the near future, “internet appliances” may become disruptive technologies” (p. xix).
Nonetheless, I found many useful insights in Christensen’s book and his conclusions are still relevant in the 3rd decade of the 21st century. Keep reading to find out why…
Disruptive innovations
I never thought about the origin of the word “disruptive” before. When I speak to Version 1 customers I have equally used the terms “cutting-edge” and “disruptive” technologies to describe the areas we operate, mostly Machine Learning (ML), Artificial Intelligence (AI) and Robotic Process Automation (RPA). But why are cutting-edge technologies disruptive? According to Christensen, that is because, compared to sustaining technologies, they “change the value proposition in a market”.
This is sensible, and it still applies to the technologies mentioned before. It is in this sense that I will refer to disruptive and interchangeably cutting-edge technologies in this post.
Sustainable vs disruptive technologies
Christensen’s analysis frames the comparison of sustainable vs disruptive technologies in a perspective where the former, listening to the needs of their current market base, keep pushing improvements up to a point whereby the performances outstrips the clients’ needs (“northeastern pull”). At the same time, disruptive technologies which started with lower performances than those required by the established product markets, has improved and become competitive in those market too.
It is this performance oversupply in the existing market that gives disruptive innovations a reason to emerge. The concept is shown in the graph below: established companies move according to the “northeastern pull”, while entrant firms look for “upward mobility”.
The author’s thesis is that many major organisations, often focusing on their current customers’ needs, do not have the time to explore lower markets which are risky and even if succeeding, do not match with the growing rate the stakeholders are expecting from the main markets.
General organisational impediments
Some organisations are fitter than others when it comes to innovation.
Common limitations, such as too much red tape and a risk-averse culture are obvious. But the bottom line is the fact that innovation implies radical change: well-practiced organisations often work better in improving what they have always been doing. In Christensen’s words: “sustainable projects addressing the needs of the firms’ most powerful customers […] almost always preempted resources from disruptive technologies with small markets and poorly defined customers” (p. 43, cursive not mine).
And this links to the next issue.
The value network
The value network is the context the organisation operates for answering its customers’ needs. Since so much of this depends on past choices, the value of the technology is measured in terms of past and current clients and markets. Disruptive innovations are uncertain according to the usual criteria the organisations apply. In result of this, resources are very often allocated to sustaining innovation rather than radical ones.
The value network also defines the cost structure for prioritizing product and services delivered by a company. The S-curve of technological changes for sustainable innovations relates to one value network only (Figure 2), with a single and consistent measure of product performance.
Conversely, disruptive innovation is measured by multiple attributes in different value networks (Figure 3).
It follows that the technology S-curve, while a valuable predictor for sustainable technology, cannot be used with disruptive technology because as Christensen puts it, they ask “the wrong question”. Instead, the important question here would be if and when the disruptive technology will improve so much to intersect the from below the trajectory of the market’s needs (Figure 1).
The role of middle management in the resource allocation process
The author correctly points out that most of the proposal to innovate comes from deep within the organisation, rather than from the top. Hence, middle management plays a vital role in selecting the projects.
The criteria is sensible:
- minimise the risk of project failure.
- maximise the organisation short term profit.
The manager’s careers and the benefits package depends on how well the middle management fulfills both of the criteria. Project failures are bad, even more if they are failing because the projects did not meet the current customers’ needs, or worse if the market for the project did not exist at all.
In result of this, top managers prefer to have control over the resource allocations but very often these are already determined by all the day-to-day choices middle-management makes.
Christensen makes the point very clear when he shows an imaginary dialogue between an innovator and his manager for allocating the resources for disruptive technology. The innovator’s drive to implement the idea quickly and before the competitors surrender when faced with questions on who could have been the potential buyers: “well, I am not sure, but there’s got to be a market out there somewhere for it” (p. 83).
In the resources allocation race, project proposals for new markets do not stand a chance: projects targeted to the current customers’ needs will always win. Even when the top management is committed to investing in disruptive technology, most people in the organisation will be skeptical and unlikely to cooperate if it doesn't fit their model (p.84).
The theory of resource dependence
If we accept Christensen’s assumption that the current customers’ needs drive the business, it follows that it is the customers of an organisation that actually control the firm’s resources. This is called resource dependence and it states that a firm operates within the limits of those entities outside the organisation which provide it with the resources necessary for its survival.
Unfortunately, this can hardly work with disruptive technologies which usually look at future customers’ needs, needs they very often do not know about (yet!). The author’s strategy would be to “create an independent organisation and embed it among emerging customers that do need the technology” (p. 102). Christensen provides a few examples but the one most interesting is probably Hewlett-Packard. In the mid-80s they were among the leaders in laserjet printing technologies. Once ink-jet technology became available, instead of ignoring this disruptive technology, HP created a totally autonomous unit and let two businesses compete against each other.
But without the need to be so extreme, autonomous business units with different reporting lines and limited objectives (compared to the mainstream organisation) could make the “resource dependence work for us rather than against us” (p. 218). Because of their smaller scope, separate business units also provide an attitude towards failure more appropriate to disruptive innovation.
The size of the organisation vs the size of the market
Creating a new market is less risky than entering an established market. It is also more rewarding. Nonetheless, small new markets can barely satisfy the required growth requirement of bigger companies.
Most projects are funded based on their profit and growth impact. It is very hard for managers to justify investment which cannot clearly relate to such growth as disruptive innovations promise lower profit margins. This is so true that sometimes the best people in the organisation do not even want to be associated with the project at all. On the one hand, skilled people “want to work on mainstream programs, not peripheral ones” (p. 218). On the other hand, managers “don’t want to spend [their] precious managerial energy constantly defending our existence”.
As the authors point out “Every innovation is difficult. The difficulty is compounded immeasurably […especially in those organisations where] most people are constantly questioning why the project is being done at all” (p. 134). This is why the top and C-level management’s support is key for innovative ideas to succeed.
Conclusions
In this post I shared some reflections on The innovator’s dilemma (Christensen, 2013) in the light of my experience in Version 1's Innovation Labs whose focus is on disruptive technologies to address our customers’ business problems.
By definition, if the market is new then it cannot be analysed. Hence why, instead of plans for execution, managers should focus on learning and discovery when cutting-edge technology is concerned. Instead of plans to execute, plans for learning works better with innovation.
When supported by the top management, as is the case in Version 1, initiatives like the Innovation Labs will have the experiences, the focus and the scope to apply disruptive technology to real business problems the client organisations are facing, paving the way for possibilities these organisations did not even know about. This could create new commercial opportunities in existing or new markets, driving innovation and addressing all the challenges highlighted before.
References
Christensen, C.M., 2013. The innovator’s dilemma: when new technologies cause great firms to fail. Harvard Business Review Press.
