Many well-managed companies fail because they don’t adapt to disruptive change. This book explains why, and what to do about it.
“Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.”
Important here to understand the difference between sustaining and disruptive technologies:
Companies tend to overshoot what the market needs with more and more sustaining technology. This leaves room for disruptive technologies to swoop in at a lower price point and differentiated value proposition.
However, established firms often believe it irrational to invest in disruptive technologies for three main reasons:
Therefore the dilemma is: invest in disruptive tech or not?
Some key principles here:
“When the performance of two or more competing products has improved beyond what the market demands, customers can no longer base their choice upon which is the higher performing product. The basis of product choice often evolves from functionality to reliability, then to convenience, and, ultimately, to price.”
Christensen looks extensively at several different market examples but chooses one particular market: disk drives. During the twentieth century, a huge amount of innovation took place in computing with the transition across several decades from mainframe computers to PCs and laptops. Disk drives were a big part of this, gradually shrinking in size and expanding in storage capacity.
His original hypothesis when studying the effects of disruptive technologies was that firms failed because they failed to keep up with the pace of change. New advances were taking place all the time. However, what he found was that existing/incumbent market leaders were always the ones who would push these advancements—sustaining technologies—forward. So it’s not just about “keeping up.”
The disruption came instead from a totally different attribute: size. Smaller drives were the main source of disruption in this industry over decades. He cites the example of 8” drives used in “minicomputers” (smaller and less powerful than a mainframe, bigger and more powerful than desktop computers). When 5.24” drives emerged, they performed worse than 8” drives but were much better suited in terms of size.
The same thing was also true with 14” drives in mainframes and 8” drives in the minicomputers. The companies that didn’t adopt the smaller format would go out of business:
“Their failure resulted from a delay in making the strategic commitment to enter the emerging market in which the 8” drives initially could be sold. Interviews with marketing and engineering executives close to these companies suggest that the established 14-inch drive manufacturers were held captive by customers. Mainframe computer manufacturers did not need an 8-inch drive. In fact, they explicitly did not want it: they wanted drives with increased capacity at a lower cost per megabyte.” Page 18
In both cases, the incumbent companies listened to their existing customers who didn’t want smaller drives. There was a lack of belief that there was any demand for the smaller drives because the market wasn’t ready for them yet.
But here’s the problem: by the time the market is ready, you’re already too late.
Traditionally, two reasons are cited for why successful firms stumble:
However, neither reason explains what happened in the disk drive industry. This is better explained by the idea of the value network:
“The concept of the value network: the context within which a firm identifies and responds to customers' needs, solves problems, procures input, reacts to competitors, and strives for profit” Page 32
How is the opinion of “economic value” shaped in the minds of people working at, and making decisions in, different companies and industries? It is usually determined by the previous choices made regarding market entry, and the customers attracted along the way. These are essentially just biases.
That is, if you start working with Customer A, you’ll subsequently then make product development decisions biased towards Customer A, and other customers you think might be out there that are like Customer A. Maybe you have many customers like A, maybe they spend a lot of money with you, and maybe they’re also heavily involved in influencing product development decisions. Why, in this context, would you make a decision that might favour Customer B?
“Companies are embedded in value networks because their products generally are embedded, or nested hierarchically, as components within other products and eventually within end systems of use.” Page 32
As firms work they gain experience and capabilities working within the value networks they already exist in. This affects their capabilities, structures, and cultures.
For example, there was a huge difference in the value placed on the ability to have smaller drives (in terms of cubic inches) between mainframe customers (no interest at all) and laptop customers (most important). And yet, if you went back in time to advise a mainframe disk drive manufacturer on their future strategy, any advice you might give them to “invest in smaller drives” would have been roundly ignored.
“S-curved” shaped tech performance curves can be managed well for sustaining technologies in an existing value network, but truly disruptive technologies will always emerge from entirely new and different value networks.
At the time of this book’s writing in the mid-90s, the big new disruptive tech in the disk drive space was “flash” memory. This was memory on chips rather than platters. This meant much lower storage capacity but much higher ruggedness.
It was, in the early 90s, not good enough for the laptop market in terms of memory capacity. Seagate, then a dominant firm, decided to withdraw their flash products from the market but they also decided to buy a 25% stake in a little flash memory company called SunDisk, later renamed to SanDisk. This was their way to not miss the boat.
A perfect application for this product turned out to be digital cameras (I personally have 100s of GBs of SanDisk products from my time as a photographer) and now all laptops have flash memory instead of disk platters.
The same thing happened in a totally different industry. Up until the middle of the twentieth century, the dominant technology for excavation was cable-actuated excavators. In 1947, hydraulics emerged as a disruptive technology.
At first, hydraulics didn’t perform very well. The main attribute valued at the time was bucket volume, and hydraulics couldn’t match what cables could do. However, they were much smaller and more maneuverable.
Because of this maneuverability, emerging firms broke into the residential contractor market. They didn’t have to move that much earth, but they valued how easy it was to move things around and get things done quickly. This was no big deal for the incumbent firms because the margins were much lower in this segment.
However, as these firms took over the residential market, they were able to use their revenue to make improvements to hydraulic technology and begin to attack value networks above them.
As we saw in hydraulic excavators, you can move upmarket. However, it’s incredibly hard to move downmarket.
During the 80s and 90s, Seagate retreated upmarket. This was easier to do than fighting entrant firms—with significantly lower cost structures—moving upwards.
The market size for established technology is always bigger than for emerging technologies, and different margins are required for different cost structures. As you move upmarket, your costs typically increase to service these more demanding customers. This makes it very difficult to ever move downward: lower margins aren’t going to help pay for your upmarket costs.
These decisions are seldom taken consciously by senior management. Instead, middle management are screening projects all the time, bringing them to senior management every so often for review. They’re more likely to present the projects with bigger payoffs, the slam dunks that can’t fail, the ones that will help propel their careers.
“In the tug-of-war for development resources, projects targeted at the explicit needs of current customers or at the needs of existing users that a supplier has not yet been able to reach will always win over proposals to develop products for markets that do not exist. This is because, in fact, the best resource allocation systems are designed precisely to weed out ideas that are unlikely to find large, profitable, receptive markets. Any company that doesn't have a systematic way of targeting its development resources toward customers' needs, in fact, will fail.” Page 84
At the same time as all of this, many customers may also be moving upmarket within their own value networks.
Christensen argues that the root cause behind failures to manage disruptive tech is the notion of “good management practices.” These practices usually demand that only high-margin projects are worth signing off on and that going after low-margin customers with what appears to be underperforming tech, is generally a bad idea.
Success typically takes five different things:
Argument: executives don’t control decisions, customers do.
Rationale: revenue dependence; the need to take actions that provide the resources necessary to continue as a business.
This is hard to get around. Christensen highlights one company (Quantum, a disk manufacturer) that found a novel way to do it, by creating a spinout (Plus Development). They maintained 80% ownership of Plus, but they had totally separate facilities and different executive leadership.
Plus Development were hugely successful in the new format 3.5” drives just as larger drive size sales began to shrivel up. Quantum then bought the remaining 20% of Plus and installed Plus executives into all of the senior positions.
Companies that don’t split out to create a new cost structure for the different value network almost always fail to sustain their activity.
Christensen cites the example of now-defunct US supermarket Woolworths’ failure to transition from high gross margin, low inventory turn retailer to low gross margin, high inventory turn discounter. (Places where Target, K Mart found success.)
Hewlett Packard also faced a significant decision in the mid-80s: should they invest in and grow laserjet printers, or inkjet printers? Laserjets could print many pages a minute, while Inkjets were incredibly slow. However, HP recognised they could potentially be disruptive.
So they decided to do both by setting up an autonomous inkjet division in Washington, a long way from their laserjet division in Idaho.
The inkjet division improved the technology and searched for ways to increase its market share with consumers while the laserjet division retreated profitably upmarket to service businesses.
“They exchanged a market risk, the risk that an emerging market for the disruptive technology might not develop after all, for a competitive risk, the risk of entering markets against entrenched competition.” Page 128
There is no market advantage to leading in sustaining technology, but a huge advantage in being small and leading in disruptive tech. How can large, incumbent companies deal with this problem? Christensen outlines three ways:
All have drawbacks. Only (3) has promise.
“The larger and more successful [incumbent companies] become, the more difficult it is to muster the rationale for entering an emerging market in its early stages, when the evidence above shows that entry is so crucial.” Page 128
Christensen lists three examples of companies that have used each of these three approaches:
“Every innovation is difficult. That difficulty is compounded immeasurably, however, when a project is embedded in an organization in which most people are continually questioning why the project is being done at all.” Page 134
“Not only are the market applications for disruptive technologies unknown at the time of their development, they are unknowable) The strategies and plans that managers formulate for confronting disruptive technological change, therefore, should be plans for learning and discovery rather than plans for execution.” Page 143
In the late 50s, three Honda salesmen were sent to the USA to sell bikes developed for the American market. To save money on transport, they took three “Super Cubs”—small, cheap motorbikes. The new bikes failed to sell, but the Super Cubs caught the attention of locals when the salesmen began using them for offroad biking. The American market that Honda ended up opening up was completely different to the one they had originally planned on.
Similarly, Intel executives completely failed to predict that the PC market would be big for them. Securing orders from IBM was considered a “small win” at the time.
A failed idea does not necessarily mean a failed business:
“Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources (or having the relationships with trusting backers or investors) so that new business initiatives get a second or third stab at getting it right. Those that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.” Page 155
Similarly, a failed manager also does not mean that it is a failed idea. The idea may simply not have its time yet. Plans to learn are better than plans to do.
“They [managers] assume that if the people working on a project individually have the requisite capabilities to get the job done well, then the organization in which they work will also have the same capability to succeed. This often is not the case. One could take two sets of identically capable people and put them to work in two different organizations, and what they accomplish would likely be significantly different.” Page 161
There are three classes of factors that affect what is possible:
There are then three ways to adopt new capabilities in this “RPV” model:
When a product attribute greatly exceeds what is demanded, it ceases to be a factor that customers bother considering. What they care about, and what they demand, completely changes.
For example, in disk drives, the attributes that were most valued over time were:
“Once the demand for capacity was satiated, other attributes, whose performance had not yet satisfied market demands, came to be more highly valued and to constitute the dimensions along which drive makers sought to differentiate their products.” Page 185
When all needs are met, products are likely to become commoditized.
“It may, in fact, be the case that the product offerings of competitors in a market continue to be differentiated from each other. But differentiation loses its meaning when the features and functionality have exceeded what the market demands.” Page 189
The weaknesses of disruptive tech are their strengths. Don’t wait for them to get stronger, embrace how they are currently weak and find where they would work right now, as-is.
Disruptive tech tends to be:
…than existing mainstream options, and often delivered at a lower cost and lower margin. Ask, though, if the technology appears to be improving over time and on a trajectory toward the lower bounds of what the mainstream market demands.
If so, it may just be disruptive.
I send updates to a few hundred people anytime I've got something worth sharing. New articles, new book notes, new commentary.
