The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Summary)
Imagine you're the CEO of a top company. You do everything by the book: you listen to your best customers, focus on your most profitable products, and invest heavily in quality. So why does a smaller, scrappier startup with a seemingly inferior product end up putting you out of business? This isn't a fluke. It's a predictable pattern, and the very practices that made you successful are the ones that sow the seeds of your downfall.
Good Management is the Problem, Not the Solution
Established companies fail not because of bureaucracy or poor execution, but because their rational, well-managed processes are designed to serve existing customers and reject disruptive ideas that are initially smaller, less profitable, and more risky.
Digital Equipment Corporation (DEC) was a leader in minicomputers. When the personal computer emerged, they asked their high-paying customers if they wanted a cheaper, less powerful machine. The customers said no. By listening to their best customers, DEC focused on improving their minicomputers and completely missed the PC market that would ultimately make them irrelevant.
Disruptive Technologies Create New Markets
Innovations come in two flavors. Sustaining innovations improve existing products for current customers (e.g., a faster processor). Disruptive innovations are often worse on traditional metrics but are simpler, cheaper, and create a new market or value network.
The first transistor radios had terrible sound quality compared to the high-fidelity vacuum-tube radios of the day. But they were portable. They didn't compete for the living room; they created a new market for teenagers listening to music at the beach. Eventually, transistor technology improved enough to displace vacuum tubes everywhere.
Your Value Network Holds You Hostage
A company’s ability to pursue a new idea is determined by its value network—the customers, distributors, and investors it depends on. Disruptive technologies don't fit the profit margins or sales channels of the existing network, so they are starved of resources.
Integrated steel mills were extremely efficient at making high-quality steel for car manufacturers. When 'minimills' emerged, they could only make low-quality, low-margin rebar. The big mills' sales teams had no incentive to sell this cheap product, so they ignored the technology. Over time, minimill technology improved until it could produce high-quality automotive steel, disrupting the industry from the bottom up.
To Incubate Disruption, Create an Independent Spinoff
The only way for a large company to successfully commercialize a disruptive technology is to create a small, independent organization. This spinoff must have its own processes and profit formulas, allowing it to value small wins in small markets without being crushed by the parent company's expectations.
When Hewlett-Packard developed the inkjet printer, it was a disruptive threat to its own highly profitable laser printer business. Instead of killing the project, they set up a completely separate division in a different city (Vancouver, Washington) to develop it. This autonomy allowed the inkjet division to thrive by pursuing a different, lower-margin consumer market.
