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The Innovator’s Dilemma

#### Introduction

## What’s in it for me? Learn about a key concept of economics.

Disruptive Innovation A Key Idea, taken from Clayton Christensen's The Innovator's Dilemma Business cycles move fast, so fast, in fact, that theories about what's going on rarely outlast them. Such theories, let me quote an economist article here, live and die like fruit flies. Every so often, though, an idea with lasting power comes along, an idea that won't die. The concept of disruptive innovation is one of them.
Revolutions can be violent. If you want to create something utterly new, you have to break something. Now, in economics, this is not an entirely new concept. A long time ago, in the 1940s, Austrian-born author Joseph Schumpeter came up with the term creative destruction. According to him, destruction is a good thing because it helps to advance and restructure the economy. Half a century later, it was Clayton Christensen who offered a significant update to this idea.
It's hard to overstate the splash his book The Innovator's Dilemma made when it was published in 1997. Steve Jobs said it had deeply influenced his thinking. Michael Bloomberg sent 50 copies to his friends. Andy Gove, the CEO of Intel, said it was the most important book of the decade. The book sold over half a million copies within a year. Why was the book so successful?
Well, it predicted how a significant part of the economy would function in the new millennium, long before apps and e-commerce were omnipresent. And Christensen was right. Today, it feels obvious that innovation has a destructive side. After all, Uber disrupted the conventional taxi system, Amazon disrupted the business of brick and mortar stores, and so many other companies are trying to do the same to their industries.
So let's zoom in. In this short blink, I'd like to focus on the key concept of The Innovator's Dilemma. I'd like to focus on disruptive innovation. Let's start with a story.

#### Chapter 1 of 3

## Who needs cheap radios?

We're in the United States and it's the early 50s. The war's over, people feel hopeful, the economy is booming, more households have more disposable income than ever before, and they're spending it. That's good news for all kinds of industries, from carmakers to the manufacturers of refrigerators. It's also great for consumer electronics companies like RCA and Zenith.
One of their top sellers is the Vacuum Tube Music Console, a handsomely veneered cabinet with an integrated radio that sits at the center of middle-class living rooms across the nation. These consoles are well-made, sturdy objects. More to the point, they're highly engineered and sound great. All that makes them expensive, but that's not a problem. This is an age of affluence, and people can afford to pay top dollar for what matters to them – quality. And so that's what companies focus on.
They tinker and improve and continue making big, expensive consoles that sound great. And that's when a small Japanese firm called Sony enters the picture. Founded in 1946 with around $6,000 startup capital, it still has fewer than 20 employees. But Sony's chairman, Akio Morita, has an idea. He takes up residence in a cheap hotel in New York City and starts negotiating a license to patented transistor technology owned by the American telecommunications company AT&T. Morita gets his license, but AT&T executives are baffled by his plan to use the technology to build small radios.
Why would anyone care about small radios, they ask. His answer is cryptic. Let's see. Sony's portable transistor radio appears on the market in 55. If you're an affluent household that values sound quality, there's no chance you're buying a Sony radio. But what if you don't have a lot of disposable cash?
What if, in other words, you're a typical American teenager? Well, the alternative to crappy transistor radios for 50s teenagers is no radio. And so they start buying a lot of Sony radios. You can probably guess where this story is going. Sony's crappy radios give the company a crowbar to prize open the American market. And slowly but surely, transistor technology improves.
By the time it's so good that it becomes interesting to more affluent market segments, those teenagers' parents say, it's already too late for companies like RCA and Zenith to catch up to Sony. That is how Sony came to dominate the radio market in the United States. Business analysts had a neat explanation of why established companies like RCA and Zenith end up losing out to upstarts like Sony.

#### Chapter 2 of 3

## Convenience trumps quality.

It goes like this. Technological change is fast and furious. You have to run to stand still. Managers, though, often lose sight of this fact.
They're so focused on what works in the present that they fail to plan for the future. That's how they get picked off. Call it complacency, call it lack of innovation, call it bad management. For Christensen, that isn't the moral of the Sony story, or any of the many other stories that follow the same pattern. When he looked at industries in which incumbents were overtaken by new entrants, he realized that technological breakthroughs were rarely the work of plucky startups. They were typically developed in the well-funded R&D departments of big companies.
As we saw, Sony, a new entrant to the radio market, piggybacked the sophisticated technology of an established player, AT&T. Then there's Kodak, the market leader in photographic film for much of the 20th century, before it was devoured by digital entrants. The first digital camera, though, was developed by a Kodak engineer in the late 70s. There are countless other examples. So the real question isn't why big companies fail to innovate. It's why they don't capitalize on the breakthrough technologies they often have a hand in developing.
Christensen's answer is that breakthrough technologies usually suck. That's not quite how he puts it, of course, but that's basically what he's saying in The Innovator's Dilemma. More precisely, they're worse than what already exists. Sony's portable radios sounded terrible. The first cell phone cameras took awful pictures. The first car Toyota released in the American market, the Corona, couldn't hold a candle to the vehicles rolling off GM and Ford's production lines.
Christensen sees low-quality innovation of this kind as fundamentally disruptive. He compares it to sustaining innovation, the constant tinkering that leads to higher performance. To go back to radios, companies like RCA and Zenith were constantly innovating their core product, which sounded better and better over time. Sony disrupted that pattern. Akio Morita didn't work in his lab until his transistor radios could compete with the radios made by the industry's big hitters. Instead, he gambled on finding a new market which would value portability and low cost over quality.
It had to be a new market, too. Established companies' customers aren't often interested in breakthroughs. They already have something that's proven to work really well. And from a manager's perspective, it's perfectly rational to ignore shoddy new products that have no existing market and focus a company's resources on improving the high-margin products that do have customers. Thing is, though, those new markets often end up being hugely profitable. Teenagers will buy crappy radios if they're cheap and portable.
Cell phone cameras were so convenient people used them, even though they took grainy photos. Toyota's Coronas looked like rust buckets, but they got people to work for less money than GM or Ford's cars. All these products were extremely useful. Which brings us to the dilemma in the book's title. You can't invest in every dumb-sounding new idea. That's how you bankrupt a company.
But say you continue pursuing those high margins while waiting to see if that dumb idea turns out to be a stroke of genius. By the time you find out that it is, it's already too late. The new market that's suddenly interesting enough to enter has already been cornered. Even worse, the shoddy low-end products created by upstarts are likely to improve to the point that they become attractive to your customers. That's also a recipe for bankruptcy.

#### Chapter 3 of 3

## Why Gillette is stuck on the horns of a dilemma.

Let's recap. There's sustaining innovation. And there's disruptive innovation. Sustaining innovation improves existing products.
We can take Gillette as an example. A company which proudly states on its website that it'll only stop making razors when it can't make them any better. First-generation Gillette razors were fairly straightforward pieces of a kit. A two-piece safety razor with a double-edged blade attached to a reusable handle. Today's battery-powered razors, by contrast, feature five anti-friction blades, lubricating strips, and a precision trimmer for sideburns. Are new Gillette razors better than the old ones?
Sure. Are they also over-engineered and over-complicated? The Dollar Shave Club, a new entrant to the razor market, thought so. Lots of people don't want to spend small fortunes on complicated razors, the startup thought. They want something that's simple and cheap and works. Offer to deliver those razors directly to people's doors, and you've created a new market in which comfort trumps quality.
Lots of people don't want to spend small fortunes on complicated razors, the startup thought. They want something that's simple and cheap and works. Offer to deliver those razors directly to people's doors, and you've created a new market in which comfort trumps quality. That's disruptive innovation. Unfortunately for incumbents like Gillette, new entrants move upstream into high-value markets. That's what companies offering home delivery of razors are now doing.
The American brand Harry's, for example, now sells its products online and in department stores. Gillette's old stomping ground. Gillette, in other words, is stuck on the horns of a dilemma. The innovator's dilemma.

#### Conclusion

## Final summary

Stuck in the innovator's dilemma. That's a scary place to be. Is there a way out? In Gillette's case, it's too early to tell.
We'll have to wait to see if its own home delivery subscription service will be enough to fend off competitors. But Christensen's book isn't really about finding a way out. Its biggest lesson is that managers have to avoid the trap in the first place. As Paul Steinberg, the chief technology officer for Motorola Solutions, put it, Christensen's message is that companies must learn to incubate new ideas or perish.
Steinberg adds that that message scared the crap out of him when he first read the innovator's dilemma. He wasn't alone. Christensen's greatest legacy may well be that he taught a generation of business leaders that fear is often the best guide on the path to success.
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The Innovator’s Dilemma
Clayton Christensen
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