Clayton Christensen asked 2 questions in a presentation:
1. Why is it so difficult to sustain success over time (i.e., to innovate again and again)? and
2. Is innovation really as much of a random event as it seems?
His tongue-in-cheek conclusion is that the principles of good management taught in places like Harvard actually sew the seeds of failure and ensure that innovation doesn’t succeed.
These are the accepted management principles he faults for the failure of innovation at most firms:
1. You should listen to your customers to develop innovation ideas
2. Focus your investments on those opportunities with the highest margins
3. Outsource whatever possible, whatever is not your “core competency”
4. The value of an innovation can be expressed in net-present-value terms
5. You should ignore fixed and sunk costs, and focus on marginal outlays
6. Large markets represent the biggest growth opportunties
7. Understanding the customer is the key to successful innovation
Disruptive technologies often aren’t as “good” as the incumbent technology or product, but are still highly useful to customers. Some innovations make imminent sense in a vacuum but are simply impossible for incumbent companies to do.
In the auto industry, for instance, disruptive innovators (from Japan) started with cheap products that weren’t worth defending on the part of the larger companies. Now of course “the game is over,” because the US manufacturers never defended the least profitable parts of the business. And why would they? There’s no margin in those cheap cars, but of course the disrupters migrated to higher and higher margin product lines.
And now who’s killing Toyota? Hyundai, and maybe soon Tata, that’s who.
One irony in this is that when the low-cost competitor succeeds in completely dislodging a high-cost competitor from one of the lower end products, the disrupter’s margins immediately decline. This is because a low-cost strategy only works as long as there is a high-cost competitor. Therefore, once one low-cost product at a time is “captured” by the disrupter, the disrupter MUST keep going uphill, trying to capture the next low-cost product.
As for the incumbent, it always makes sense to let go of the low-margin, low-end product, because doing so is how you protect your margins. So they aid and abet the disrupters with their own completely logical decisions.
Also, in the history of disruptive innovation, what happens is an initial product is too expensive or technically difficult for everyone to use, but the more low-end, simple products are introduced, the broader the market will become. Example, Digital Equipment used to make a mini-computer, was doing very well operating beneath the mainframe, until around 1988 when they fell off the cliff. Explanations of their success attributed it to brilliant management, and explanations of their failure attributed it to stupid management, even though the management hadn’t changed.
Digital’s product was about $250K, so they had to sell direct, with a sales structure that required a 45% margin to pay for the marketing. As they improved their product they chipped away at the high-margin lower end of the mainframe. When the early PCs came out, the market for computing substantially broadened. The PC didn’t have great capability, but did get better and better, and it began sucking up the low-end apps from mini computers.
Digital’s managers looked at the PC business, and not a single one of their customers was able to use a PC for their tasks at least for the first ten years that PCs were available, because they didn’t have enough capability. So by listening to their customers Digital concluded that there was not a big threat from PCs. And they had nice margins on the products that their customers did buy.
So the dilemma was – “should we make better products at higher margins that our customers really want, or should we make poorer products at lower margins that our customers aren’t interested in?”