As someone who’s read many books on business and biographies on business leaders, never before has a book impacted my understanding of what makes a business successful that Clayton Christensen’s ‘The Innovator’s Dilemma’. This book came highly recommended as one of Jeff Bezos’ favorites according to ‘The Everything Store’ and it was a harder book to read because some concepts and industries were so foreign to me. When I struggled to explain the concepts to a very good friend, I was inspired to write down my thoughts hoping that it would clarify my understanding. The main points of the book were:
- Innovative vs. Sustaining Advancements: Innovative advancements in technology lead to disruption and creation of new markets while sustaining advancements usually improve quality of current markets.
- Large Companies Focus on their Largest/Most Profitable Customer Base: Large organizations prioritize the needs of their vast customer bases, at the expense of promising (nascent) markets.
- Origin of Groundbreaking Technology: Groundbreaking innovations rarely emerge from customers who simply want a product to be faster, more reliable, or cheaper (sustaining technologies).
- Upmarket Movement: Established companies often attempt to capture bigger clients and larger margins by focusing on more profitable customers (usually the higher/premium end of the market)
- Large Companies Hire The Most Competent Managers: Large companies hire the best managers by paying the most money and these managers become successful by maximizing shareholder value. In this cycle, they ignore opportunities for trailblazing innovations
- Corporate Structure and Innovation: It’s crucial for companies to dedicate a segment of their organization to explore disruptive technologies, ideally without the constraints of traditional performance metrics that favor immediate profitability over long-term potential.
Disk Drives
The book starts with an example of what happened in the disk drive industry. It’s obvious to a modern audience that people will want devices that are smaller and more powerful but in the early stages of computers what mattered most was storage capacity. It all began with large, 14-inch drives used in mainframe computers, then moved to smaller 8-inch drives for minicomputers, followed by even smaller 5.25-inch drives for desktop computers, and finally 3.5-inch drives for laptops. The 14 inch drives had to be powerful, reliable, and have the largest storage capacity available. Eight inch disk drives were cheaper, but lacked storage capacity and durability so were ignored by most consumers of the 14” disk drive market. Luckily the minicomputer market found use for the cheaper drives and the technology was allowed to flourish. As soon as the 8” drive technology caught up in terms of storage capacity and reliability, customers naturally switched to the cheaper 8” drive options that now addressed their main concerns. The big shift to 3.5 inch drives occurred because laptop companies cared most about durability and energy efficiency because now customers wanted the ability to move their laptop and they needed to conserve as much battery power as possible.
It’s important to note that during the leaps in technology for disk drives, there were also underlying technological innovations and advancements that gradually improved individual part performance. Some of these were: advancements in magnetic media, improvements in read/write head technology, microprocessor advances, precision manufacturing, and error correction and data encoding technologies. Each innovation not only contributed to the disk drives getting smaller but also to their increased reliability and efficiency, facilitating the disruptive changes observed in this industry.
Disruptive Technology In Dirt Moving
The book thankfully explores different industries and the excavation sector exemplifies the concept of disruptive innovation in something more tangible than computer parts. Over two decades, this industry underwent a significant transformation due to the adoption of hydraulic excavation technology, which replaced traditional cable excavators. The largest companies dismissed hydraulic technology because it was inferior in power and shovel width—the primary metrics customers cared about. What was most important to this industry was the ability to excavate large quantities of dirt quickly. Hydraulic excavators gained a foothold with small residential contractors who valued their ability to attach them to tractors and perform tasks like digging narrow ditches for water, sewage, or utility cables—jobs traditionally done by hand. The compact size and maneuverability of hydraulic excavators also made them versatile for various tasks, as they could be fitted with different attachments for multiple roles on job sites. Some examples of this were road construction, forestry and land clearing, and demolition. As hydraulic technology advanced, it began to compete directly with cable excavators in shovel size and power. By the time the incumbent companies recognized this shift it was too late: only 4 of the top 30 companies survived the transition.
Focus On Emerging Customers
In each of the shifts discussed, demand came from a small portion of customers that the larger incumbents could not focus their resources on. Smaller or newer companies were able to enter the market and meet this demand. As the newer technology improved and became capable of meeting the demands of the mainstream market, incumbent companies struggled to transition due to structural or strategic commitments to existing technologies. An example of this is how Honda initially entered the US motorcycle market with very small engines that were inexpensive. These motorcycles appealed to new customer segments such as students and urban commuters, which larger motorcycle manufacturers like Harley-Davidson were not serving. As Honda’s technology and products improved, they expanded into larger motorcycles and began to capture significant market share from the incumbents.
More Money, More Problems
Companies often overlook certain customer segments because these groups typically represent a smaller portion of their total clientele and generate less revenue. As companies grow, they focus increasingly on scaling their revenue. For example, achieving a 25% revenue growth might initially require an additional $1 million, but as the company grows this percentage would now need an extra $100 million. The largest companies concentrate on their largest, most profitable customers, hiring top managers who reinforce this focus on high-margin, quality-driven products over cost competitiveness. This strategic choice leads them to move upmarket, targeting premium market segments and neglecting customers with different or less profitable needs.
Companies are especially vulnerable during periods of high revenue growth when it is easy to ignore emerging disruptive technologies when they are flushed with cash and growing stock prices. Incumbents often lack the capacity or technical expertise to shift production to these new, innovative products, resulting in missed opportunities and potential decline. This cycle highlights a critical challenge in corporate strategy: balancing the pursuit of immediate, high-margin gains with the need to adapt to evolving market dynamics and technological advancements.
Solution
The book outlines several approaches to avoid this trap of complacency. One key strategy is resource allocation, with emphasis on finding new growth opportunities systematically. Companies should empower managers and frontline employees the authority to suggest and invest in emerging technologies and markets before they are broadly recognized as lucrative opportunities.
One of the book’s key recommendations for companies is the establishment of independent organizations within larger corporations. These entities should focus exclusively on the development of disruptive technologies and operate with significant flexibility. These entities should not be pressured to deliver immediate returns as disruptive technologies can take time to become profitable at scale. They should be allowed to explore multiple solutions and avoid taking massive risks on a single approach.
Leaders must cultivate an environment that is open to innovation and encourages employees to explore projects that spark their interest. A now famous strategy is Google’s “20% Time,” which allows employees to spend a fifth of their working hours on projects unrelated to their primary responsibilities, fostering creativity and potential innovation. These approaches ensure that established companies can adapt and win even as new technologies continually reshape the their industries.
Final Thoughts
Reading “The Innovator’s Dilemma” was a challenging yet enlightening experience that forced me to rethink what I knew about successful businesses. The book delves into disruptive technologies, offering a fresh perspective on creating a business by highlighting how large, established companies often overlook smaller, less obvious opportunities. This just means that there will always be potential for smart businesses to service a need..
The book also made me confront the importance of staying informed about technological advancements. Having learned about coding, data science, and AI, it’s tempting to feel ahead of the curve when the majority of people misuse the word AI. The reality is that there will always be technological breakthroughs that will meet the needs of a new and emerging market. This makes the world we live in that much more exciting to participate in.
This story does come with a cautionary tale for disruptors. Excavation companies could not have anticipated being disrupted by the new technologies, as changes happen over the course of decades and not years. At the same time disruption can take longer than expected, it is important for one to have both sustaining improvements in their products and be flexible for disruptive technology. We are still waiting for crypto to disrupt the financial services industry. We’ve seen many companies emerge and dissolve in a short period of time because they thought the disruption would take place right away and they burned through their cash. In finance, it’s not only necessary to be right, but it’s also necessary to be right at the right time.
“There is a tide in the affairs of men
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat;
And we must take the current when it serves,
Or lose our ventures.”
― William Shakespeare , Julius Caesar