Memorable quotes
First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms’ most profitable customers generally don’t want, and indeed initially can’t use, products based on disruptive technologies. By and large, a disruptive technology is initially embraced by the least profitable custom ers in a market. Hence, most companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late.
With few exceptions, the only instances in which mainstreamfirms have successfully established a timely positionin a disruptive technology werethose in which the firms’ managers set up an autonomous organization charged with building a new and independent business around the disruptive technology. Such organizations, free of the power of the customers of the mainstream company, ensconce themselves among a different set of customers—those who want the products of the disruptive technology
Creating an independent organization, with a cost structure honed to achieve profitability at the low margins characteristic of most disruptive technologies, is the only viable way for established firms to harness this principle.
But while a $40 million company needs to find just $8 million in revenues to grow at 20 percent in the subsequent year, a $4 billion company needs to find $800 million in new sales. No new markets are that large.Asa consequence, the larger and more successful an organization becomes, the weaker the argument that emerging markets can remain useful engines for growth
The evidence is strong tha t formal and informal resource allocation processes make it very difficultfor large organizations to focus adequate energy and talent on small markets, even when logic says they might be big someday
In many instances, leadership in sustaining innovations—about which information is known and for which plans can be made—is not competi tively important. In such cases, technology followers do about as well as technology leaders. It is in disruptive innovations, where we know least about the market, tha t there are such strong first-mover advantages. This i s the innova tor ‘ s di l emma
Companies whose investment processes demand quantification of mar ket sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies
In their efforts to stay ahead by developing competitively superior products, many companies don’ t realize the speed at which they are mov ing up-market, over-satisfying the needs of their original customers as they race the competition toward higher-performance, higher-margin ma r kets. In doing so, they create a vacuum at lower price points into which competitors employing disruptive technologies can enter
Simply put, when the best firms succeeded, they did so because they listened responsively to their customers and invested aggressivelyin the technology, products, and manufacturing capabilities tha t satisfied their customers’ next-generation needs. But, paradoxically, when the best firms subse quently failed, it was for the same reasons—they listened responsively to their customers and invested aggressivelyin the technology, products, and manufacturing capabilities tha t satisfied their customers’ next-generation needs. This is one of the innovator’s dilemmas: Blindly following the maxim tha t good managers should keep close to their customers can some t ime s be a f a t a l mi s t
Inliterally every case ofsustaining technology change inthe disk drive industry, established firms led in development and commercialization. The emergence of new disk and head technologies illustrates this.
When faced with sustaining technology change tha t gave existing customers something more and better in whatthey wanted, the leading practitioners of the prior technology led the industry in the development and adoption of the new. Clearly, the leaders in this industry did not fail because they became passive, arrogant, or risk-averse or because they couldn’t keep up with the stunning rate of technological change. My technology mudslide hypothesis wasn’t correct
3Generally disruptive innovations were technologically straightforward, consisting ofoff-the-shelf components put together ina product architec ture that was often simpler than prior approaches.8 They offered less of what customers in established markets wanted and so could rarely be initially employed there
As the 8-inch products penetrated the mainframe market, the established manufacturers of 14-inch drives began to fail. Two-thirds of them never introducedan 8-inch model. The one-third that introduced 8-inch models did so about two years behind the 8-inch entrant manufacturers. Ulti mately, every 14-inch drive maker was driven from the industry
Their failure resulted from delay in making the strategic commitment to enter the emerging market in which the 8-inch drives initially could be sold. Interviews with marketing and engineering execu tives close to these companies suggest that the established 14-inch drive manufacturers were held captive by customers. Mainframe computer man ufacturers did not need an 8-inch drive
Seagate’s program manager lowered his 3.5-inch sales estimates, and the firm’s executives canceled the program. Their reasoning? The markets for 5.25-inch prod ucts were larger, and the sales generated by spending the engineering effort onnew 5.25-inch products would create greater revenues forthecompany than would efforts targeted at new 3.5-inch products
Seagate’s marketers tested the 3.5-inch prototypes with customers in the desktop computing market italready served—manufacturers like IBM, and value-added resellers of full-sized desktop computer systems. Not surprisingly, they indicated little interest in the smaller drive. They were looking for capacities of 40 and 60 megabytes for their next-generation machines, while the3.5-inch architecture could provide only 20MB—and at higher costs.
. But when established firms wait until a new technology has become commercially mature in its new applications and launch their own version of the technology only in response to an attack on their home markets, the fear ofcannibalization can become a self-fulfilling prophecy
The first is that the disruptive innovations were technologically straightforward. They generally packaged known technologies in a unique architecture and enabled the use of these products in applications where magnetic data storage and retrieval previously had not been technologi cally or economically feasible
It was as if the leading firms were held captive by their customers, enabling attacking entrant firms to topple theincumbent indus try leaders each time a disruptive technology emerged
Because an organization’s structure and how its groups work together may have been established to facilitate the design of its dominant produc t , the direction of causality may ultimately reverse itself: The organization’s structure and the way its groups learn to work together can then affect the way it can and cannot design new products.
Scholars who support this view find tha t established firms tend to be good at improving wha t they have long been good at doing, and tha t ent r ant firms seem better suited for exploiting radically new technologies,
The engineers then showed their prototypes to marketing personnel, ask ing whether a market for the smaller, less expensive (and lower perfor mance) drives existed. The marketing organization, using its habitual procedure for testing the market appeal of new drives, showed the proto types to lead customers of the existing product line, asking them for an evaluation.16 Thus, Seagate marketers tested the new 3.5-inch drives with IBM’s PC Division and othe r makers of XT- and AT-class desktop personal computers—even though the drives had significantly less capacity than the mainstream desktop market demanded. Not surprisingly, therefore, IBM showed no interest in Seagate’s disruptive 3.5-inch drives. IBM’s engineers and marketers were looking for 40 and60MB drives, and they already had a slot for5.25-inch drives designed into their computer; they needed new drives that would take them further along their established performance trajectory. Finding little customer interest, Seagate’s marketers drew up pessimistic sales forecasts. In addition, because the products were simpler, with lower performance, forecast profit margins were lower than those for higher performance products, and Seagate’s financial analysts, therefore, joined their marketing col leagues in opposing the disruptive program
New companies, usually including frustrated engineers from established firms, were formed to exploit the disruptive product architecture. The founders of the leading 3.5-inch drive maker, Conner Peripherals, were disaffected employees from Seagate andMiniscribe, the two largest 5.25- inch manufacturers.
The founders of these firms sold their products without a clear marketing strategy— essentially selling to whoever would buy. Outofwhat was largely a trialand-error approach to the market, the ultimately dominant applications for their products emerged
Incontrast to the unattractive margins and market size that established firms saw when eyeing the new, emerging markets for simpler drives, the entrants saw the potential volumes and margins in the upscale, high-performance markets above them as highly attractive
The S-curve framework, therefore, asks the wrong question when it is used to assess disruptive technology. What matters instead is whether the dis ruptive technology is improving from below along a trajectory that will ultimately intersect with what the market needs
Working harder, being smarter, investing more aggressively, and listening more astutely to cus tomers are all solutions to the problems posed by new sustaining technol ogies. But these paradigms of sound management are useless—even count e rproduc t ive , in many instances—when dealing wi th disruptive tech nology
Indeed, disruptive technologies havesuch a devastating impact because the firms that first commercialized each generation of disruptive disk dr ive s chos e not to r ema in cont a ined wi thin the i r ini t i a l va lue ne twork. Rather, they reached as far upmarket as they could in each new product generation, until their drives packed the capacity to appeal to the value networks above them. It is this upward mobility that makes disruptive technologies so dangerous to established firms—and so attractive to ent r ant
The di f f e r enc e s in the size of the s e ma rke t s and the cha r a c t e r i s t i c cos t structures across these value networks created serious asymmetries in the combat among these firms. Firms making 8-inch drives for the minicom puter market, for example, had cost structures requiring gross margins of 40 percent. Aggressively moving downmarket would havepitted them against foes who had honed their cost structures to make money at 25 percent gross margins. On the other hand, moving upmarket enabled them to take a relatively lower-cost structure into a market tha t was accustomed to givingits suppliers 60 percent gross margins. Which direc tion made sense
There had, therefore, to be a reason why good managers consistently made wrong decisions when faced with disruptive technological change. The reason is that good management itselfwas the root cause. Managers played the game the way it was supposed to be played. The very decision making and resource-allocation processes tha t are key to the success of established companies are the very processesthat reject disruptive technol ogies:listening carefully to customers;tracking competitors’ actions care fully; and investing resources to design and build higher-performance, higher-quality products that willyield greater profit.
As we have seen in the disk drive industry, companies were willing to bet enormous amounts on technologically risky projects when it was clear tha t their customers needed the resulting prod ucts. But they were unable to muster the wherewithal to execute much simpler disruptive projects if existing, profitable customers didn’t need the products. This observation supports a somewhat controversial theory called re source dependence, propounded by a minority of management scholars,1 which posits tha t companies’ freedom of action is limited to satisfying the needs of thos e entities outside the firm (customers and investors, primarily) tha t give it the resources it needs to survive
t , then, should managers do when faced wi th a disruptive technology tha t the company’s customers explicitly do not want? One option is to convince everyone in the firm that the company should pursue it anyway, tha t it has long-term strategic importance despite rejection by the customers who pay the bills and despite lower profitability than the upma rke t alternatives. The other option would be to create an independent organization and embed it among emerging customers tha t do need the technology
a single organization might simply be incapable ofcompetently pursuing disruptive technology, while remaining competi tive in mainstream markets, bothers some “can-do” managers—and, in fact, most managers try to do exactly what Micropolis and DEC did: maintain their competitive intensity in the mainstream, while simultane ously trying to pursue disruptive technology. The evidence is strong that such efforts rarely succeed; position in one market will suffer unless two separate organizations, embeddedwithin the appropriate value networks, pursue their separate customers.
The ma th is simple:A $40 million company that needs to grow profitably at 20 percent to sustain its stock price and organizational vitality needs an additional $8 million in revenues the first year, $9.6 million the following year, and so on; a $400 million company with a 20 percent targeted growth rate needs new business wor th $80 million in the first year, $96 million in the next, and so on; and a $4 billion company with a 20 percent goal needs to find $800 million, $960 million, and so on, in each successive year. This problem is particularly vexing for big companies confronting dis ruptive technologies. Disruptive technologies facilitate the emergence of new markets, and there are no $800 million emerging markets. But it is precisely when emerging markets are small—when they are least attractive to large companies in search of big chunks of new revenue—that entry into them is so c r i t i c a l .
The second point on which I would base my marketing approach is that no one can learn from market research what the early market(s) for electric vehicles will be. I can hire consultants, but the only thing I can know for sure is tha t their findings will be wrong
The only useful information about the market will be what I createthrough expeditions into the market,through testing and probing, trial and error, byselling realproducts to realpeople who pay realmoney
The third point is that my business plan must be a plan for learning, not one for executing a preconceived strategy
a far more tractable management challenge. In a small, independent organization I will more likely be able to create an appropriate attitude toward failure. Our initial stab into the market is not likely to be successful. We will, therefore, need the flexibility to fail, but to fail on a small scale, so tha t we can try again wi thout having destroyed our credibility. Again, there are two ways to create the proper tolerance towa rd failure: change the values and culture of the mainstream organization or create a new organization. The problem with asking the mainstream organization to be more tolerant of risk-taking and failure is that, in general, we don’ t want to tolerate marketing failure when, as is most often the case, we are investing in sustaining technology change. The mainstream organization is involved in taking sustaining technologi cal innovations into existing markets populated by known customers with researchable needs. Getting it wrong the first time is not an intrinsic pa r t of these processes: Such innovations are amenable to careful planning
in many instances, the information required to make large and decisive investments in the face of disruptive technology simply does not exist. It needs to becreated through fast, inexpensive, and flexible forays into the market and the product. The risk is very high thatany particular idea about the product attributes or market applications of a disruptive technology may not prove to be viable. Failure and interative learning are, therefore, intrinsic to the search for success with a disruptive technology. Successful organizations, which ought not and cannot tolerate failure in sustaining innovations, find it difficult simultaneously to tolerate failure in disruptive ones
Because disruptive technologies rarely make sense during the years when investing in them is most im portant, conventional managerial wisdom at established firms constitutes an entry and mobility barrier that entrepreneurs and investors can bank on. It is powerful and pervasive