Fluent Essays

Review and analyze the following material: Christensen’s, The Innovator’s Dilemma, Ch.10 Case Study of Electric Cars Refer to the above material for your 4-5 paragraph discussion of the following: Electric cars have come a long way! Now we also are seeing disruptive technology in the form of self-driving vehicles. Consider how the electric car and self-driving vehicle pose a legitimate disruptive threat to companies making traditional vehicles. In what ways do they constitute an opportunity for profitable growth? In what ways could they lead to potential failure? Think outside the box. To measure market needs, would you watch carefully what customers do, not simply listen to what they say? Why or why not? Christensen writes, “I would not... follow the lead of other automakers in my search for customers.” Why wouldn’t he? Should we advise to hold “back from the market, waiting for laboratory researchers to develop a breakthrough battery technology?” Why or why not? Why is it that “no one can learn from market research what the early market(s) for electric vehicles [or self-driving vehicles] will be?” What kind of a plan will his business plan be? What markets does he guess at? Why do disruptive technologies and new distribution channels frequently go hand-in-hand and what does this mean for electric cars and self-driving vehicles? Deliverable for Week 6 Discussion Post Assignment Type your 4-5 paragraph discussion directly into the text box or paste in the shared document link. Provide detailed explanations for your assertions, and use logic, research, and real-world examples to support your position. Use citations and references. Attachments area 1 2 The Innovator’s Dilemma When New Technologies Cause Great Firms to Fail CLAYTON M. CHRISTENSEN Harvard Business School Press Boston, Massachusetts 3 Copyright © 1997 by the President and Fellows of Harvard College All rights reserved The Library of Congress has catalogued the hardcover edition of this title as follows: Christensen, Clayton M. The innovator’s dilemma : when new technologies cause great firms to fail / Clayton M. Christensen. p. cm. — (The management of innovation and change series) Includes index. ISBN 0-87584-585-1 (alk. paper) 1. Creative ability in business. 2. Industrial management. 3. Customer services. 4. Success in business. I. Title. II. Series. HD53.C49 1997 658—DC20 96-10894 CIP ISBN 0-87584-585-1 (Microsoft Reader edition) 4 Contents In Gratitude Introduction PART ONE: WHY GREAT COMPANIES CAN FAIL 1 How Can Great Firms Fail? Insights from the Hard Disk Drive Industry 2 Value Networks and the Impetus to Innovate 3 Disruptive Technological Change in the Mechanical Excavator Industry 4 What Goes Up, Can’t Go Down PART TWO: MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE 5 Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them 6 Match the Size of the Organization to the Size of the Market 7 Discovering New and Emerging Markets 8 How to Appraise Your Organization’s Capabilities and Disabilities 9 Performance Provided, Market Demand, and the Product Life Cycle 10 Managing Disruptive Technological Change: A Case Study 11 The Dilemmas of Innovation: A Summary The Innovator’s Dilemma Book Group Guide About the Author 5 In Gratitude Although this book lists only one author, in reality the ideas it molds together were contributed and refined by many extraordinarily insightful and selfless colleagues. The work began when Professors Kim Clark, Joseph Bower, Jay Light, and John McArthur took the risk of admitting and financing a middle-aged man's way into and through the Harvard Business School's doctoral program in 1989. In addition to these mentors, Professors Richard Rosenbloom, Howard Stevenson, Dorothy Leonard, Richard Walton, Bob Hayes, Steve Wheelwright, and Kent Bowen helped throughout my doctoral research to keep my thinking sharp and my standards for evidence high, and to embed what I was learning within the streams of strong scholarship that had preceded what I was attempting to research. None of these professors needed to spend so much of their busy lives guiding me as they did, and I will be forever grateful for what they taught me about the substance and process of scholarship. I am similarly indebted to the many executives and employees of companies in the disk drive industry who opened their memories and records to me as I tried to understand what had driven them in the particular courses they had taken. In particular, James Porter, editor of Disk/Trend Report, opened his extraordinary archives of data, enabling me to measure what has happened in the disk drive industry with a level of completeness and accuracy that could be done in few other settings. The model of the industry’s evolution and revolution that these men and women helped me construct has formed the theoretical backbone for this book. I hope they find it to be a useful tool for making sense of their past, and a helpful guide for some of their decisions in the future. During my tenure on the Harvard Business School faculty, other colleagues have helped refine this book’s ideas even more. Professors Rebecca Henderson and James Utterback of MIT, Robert Burgelman of Stanford, and David Garvin, Gary Pisano, and Marco Iansiti of the Harvard Business School have been particularly helpful. Research associates Rebecca Voorheis, Greg Rogers, Bret Baird, Jeremy Dann, Tara Donovan, and Michael Overdorf; editors Marjorie Williams, Steve Prokesch, and Barbara Feinberg; and assistants Cheryl Druckenmiller, Meredith Anderson, and Marguerite Dole, have likewise contributed untold amounts of data, advice, insight, and work. I am grateful to my students, with whom I have discussed and refined the ideas put forward in this book. On most days I leave class wondering why I get paid and why my students pay tuition, given that it is I who have learned the most from our interactions. Every year they leave our school with their degrees and scatter around the world, without understanding how much they have taught their teachers. I love them and hope that those who come across this book will be able to recognize in it the fruits of their puzzled looks, questions, comments, and criticisms. My deepest gratitude is to my family—my wife Christine and our children Matthew, Ann, Michael, Spencer, and Catherine. With unhesitating faith and support they encouraged me to pursue my lifelong dream to be a teacher, amidst all of the demands of family life. Doing this research on disruptive technologies has indeed been disruptive to them in terms of time and absence from home, and I am forever grateful for their love and support. Christine, in particular, is the smartest and most patient person I have known. Most of the ideas in this book went home on some night over the past five years in half-baked condition and returned to Harvard the next morning having been clarified, shaped, and edited through my conversations with her. She is a great colleague, supporter, and friend. I dedicate this book to her and our children. 6 Clayton M. Christensen Harvard Business School Boston, Massachusetts April 1997 7 Introduction This book is about the failure of companies to stay atop their industries when they confront certain types of market and technological change. It’s not about the failure of simply any company, but of good companies—the kinds that many managers have admired and tried to emulate, the companies known for their abilities to innovate and execute. Companies stumble for many reasons, of course, among them bureaucracy, arrogance, tired executive blood, poor planning, short-term investment horizons, inadequate skills and resources, and just plain bad luck. But this book is not about companies with such weaknesses: It is about well-managed companies that have their competitive antennae up, listen astutely to their customers, invest aggressively in new technologies, and yet still lose market dominance. Such seemingly unaccountable failures happen in industries that move fast and in those that move slow; in those built on electronics technology and those built on chemical and mechanical technology; in manufacturing and in service industries. Sears Roebuck, for example, was regarded for decades as one of the most astutely managed retailers in the world. At its zenith Sears accounted for more than 2 percent of all retail sales in the United States. It pioneered several innovations critical to the success of today’s most admired retailers: for example, supply chain management, store brands, catalogue retailing, and credit card sales. The esteem in which Sears’ management was held shows in this 1964 excerpt from Fortune: “How did Sears do it? In a way, the most arresting aspect of its story is that there was no gimmick. Sears opened no big bag of tricks, shot off no skyrockets. Instead, it looked as though everybody in its organization simply did the right thing, easily and naturally. And their cumulative effect was to create an extraordinary powerhouse of a company.”1 Yet no one speaks about Sears that way today. Somehow, it completely missed the advent of discount retailing and home centers. In the midst of today’s catalogue retailing boom, Sears has been driven from that business. Indeed, the very viability of its retailing operations has been questioned. One commentator has noted that “Sears’ Merchandise Group lost $1.3 billion (in 1992) even before a $1.7 billion restructuring charge. Sears let arrogance blind it to basic changes taking place in the American marketplace.”2 Another writer has complained, Sears has been a disappointment for investors who have watched its stock sink dismally in the face of unkept promises of a turnaround. Sears’ old merchandising approach—a vast, middle-of-the-road array of mid-priced goods and services—is no longer competitive. No question, the constant disappointments, the repeated predictions of a turnaround that never seems to come, have reduced the credibility of Sears’ management in both the financial and merchandising communities. 3 It is striking to note that Sears received its accolades at exactly the time—in the mid-1960s—when it was ignoring the rise of discount retailing and home centers, the lower-cost formats for marketing name-brand hard goods that ultimately stripped Sears of its core franchise. Sears was praised as one of the best-managed companies in the world at the very time it let Visa and MasterCard usurp the enormous lead it had established in the use of credit cards in retailing. In some industries this pattern of leadership failure has been repeated more than once. Consider the computer industry. IBM dominated the mainframe market but missed by years the emergence of minicomputers, which were technologically much simpler than mainframes. In fact, no other major manufacturer of mainframe computers became a significant player in the minicomputer business. 8 Digital Equipment Corporation created the minicomputer market and was joined by a set of other aggressively managed companies: Data General, Prime, Wang, Hewlett-Packard, and Nixdorf. But each of these companies in turn missed the desktop personal computer market. It was left to Apple Computer, together with Commodore, Tandy, and IBM’s stand-alone PC division, to create the personal-computing market. Apple, in particular, was uniquely innovative in establishing the standard for user-friendly computing. But Apple and IBM lagged five years behind the leaders in bringing portable computers to market. Similarly, the firms that built the engineering workstation market— Apollo, Sun, and Silicon Graphics—were all newcomers to the industry. As in retailing, many of these leading computer manufacturers were at one time regarded as among the best-managed companies in the world and were held up by journalists and scholars of management as examples for all to follow. Consider this assessment of Digital Equipment, made in 1986: “Taking on Digital Equipment Corp. these days is like standing in front of a moving train. The $7.6 billion computer maker has been gathering speed while most rivals are stalled in a slump in the computer industry.”4 The author proceeded to warn IBM to watch out, because it was standing on the tracks. Indeed, Digital was one of the most prominently featured companies in the McKinsey study that led to the book In Search of Excellence. 5 Yet a few years later, writers characterized DEC quite differently: Digital Equipment Corporation is a company in need of triage. Sales are drying up in its key minicomputer line. A two-year-old restructuring plan has failed miserably. Forecasting and production planning systems have failed miserably. Cost-cutting hasn’t come close to restoring profitability. . . . But the real misfortune may be DEC’s lost opportunities. It has squandered two years trying halfway measures to respond to the low-margin personal computers and workstations that have transformed the computer industry.6 In Digital’s case, as in Sears, the very decisions that led to its decline were made at the time it was so widely regarded as being an astutely managed firm. It was praised as a paragon of managerial excellence at the very time it was ignoring the arrival of the desktop computers that besieged it a few years later. Sears and Digital are in noteworthy company. Xerox long dominated the market for plain paper photocopiers used in large, high-volume copying centers. Yet it missed huge growth and profit opportunities in the market for small tabletop photocopiers, where it became only a minor player. Although steel minimills have now captured 40 percent of the North American steel market, including nearly all of the region’s markets for bars, rods, and structural steel, not a single integrated steel company—American, Asian, or European—had by 1995 built a plant using minimill technology. Of the thirty manufacturers of cable-actuated power shovels, only four survived the industry’s twenty-five- year transition to hydraulic excavation technology. As we shall see, the list of leading companies that failed when confronted with disruptive changes in technology and market structure is a long one. At first glance, there seems to be no pattern in the changes that overtook them. In some cases the new technologies swept through quickly; in others, the transition took decades. In some, the new technologies were complex and expensive to develop. In others, the deadly technologies were simple extensions of what the leading companies already did better than anyone else. One theme common to all of these failures, however, is that the decisions that led to failure were made when the leaders in question were widely regarded as among the best companies in the world. 9 There are two ways to resolve this paradox. One might be to conclude that firms such as Digital, IBM, Apple, Sears, Xerox, and Bucyrus Erie must never have been well managed. Maybe they were successful because of good luck and fortuitous timing, rather than good management. Maybe they finally fell on hard times because their good fortune ran out. Maybe. An alternative explanation, however, is that these failed firms were as well-run as one could expect a firm managed by mortals to be—but that there is something about the way decisions get made in successful organizations that sows the seeds of eventual failure. The research reported in this book supports this latter view: It shows that in the cases of well-managed firms such as those cited above, good management was the most powerful reason they failed to stay atop their industries. Precisely because these firms listened to their customers, invested aggressively in new technologies that would provide their customers more and better products of the sort they wanted, and because they carefully studied market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership. What this implies at a deeper level is that many of what are now widely accepted principles of good management are, in fact, only situationally appropriate. There are times at which it is right not to listen to customers, right to invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small, rather than substantial, markets. This book derives a set of rules, from carefully designed research and analysis of innovative successes and failures in the disk drive and other industries, that managers can use to judge when the widely accepted principles of good management should be followed and when alternative principles are appropriate. These rules, which I call principles of disruptive innovation, show that when good companies fail, it often has been because their managers either ignored these principles or chose to fight them. Managers can be extraordinarily effective in managing even the most difficult innovations if they work to understand and harness the principles of disruptive innovation. As in many of life’s most challenging endeavors, there is great value in coming to grips with “the way the world works,” and in managing innovative efforts in ways that accommodate such forces. The Innovator’s Dilemma is intended to help a wide range of managers, consultants, and academics in manufacturing and service businesses—high tech or low—in slowly evolving or rapidly changing environments. Given that aim, technology, as used in this book, means the processes by which an organization transforms labor, capital, materials, and information into products and services of greater value. All firms have technologies. A retailer like Sears employs a particular technology to procure, present, sell, and deliver products to its customers, while a discount warehouse retailer like PriceCostco employs a different technology. This concept of technology therefore extends beyond engineering and manufacturing to encompass a range of marketing, investment, and managerial processes. Innovation refers to a change in one of these technologies. THE DILEMMA To establish the theoretical depth of the ideas in this book, the breadth of their usefulness, and their applicability to the future as well as the past, I have divided this book into two parts. Part One, chapters 1 through 4, builds a framework that explains why sound decisions by great managers can lead firms to failure. The picture these chapters paint is truly that of an innovator’s dilemma: the logical, competent decisions of management that are critical to the success of their companies are also the reasons why 10 they lose their positions of leadership. Part Two, chapters 5 through 10, works to resolve the dilemma. Building on our understanding of why and under what circumstances new technologies have caused great firms to fail, it prescribes managerial solutions to the dilemma—how executives can simultaneously do what is right for the near-term health of their established businesses, while focusing adequate resources on the disruptive technologies that ultimately could lead to their downfall. Building a Failure Framework I begin this book by digging deep before extending the discussion to draw general conclusions. The first two chapters recount in some detail the history of the disk drive industry, where the saga of “good- companies-hitting-hard-times” has been played out over and over again. This industry is an ideal field for studying failure because rich data about it exist and because, in the words of Harvard Business School Dean Kim B. Clark, it is “fast history.” In just a few years, market segments, companies, and technologies have emerged, matured, and declined. Only twice in the six times that new architectural technologies have emerged in this field has the industry’s dominant firm maintained its lead in the subsequent generation. This repetitive pattern of failure in the disk drive industry allowed me first to develop a preliminary framework that explained why the best and largest firms in the early generations of this industry failed and then to test this framework across subsequent cycles in the industry’s history to see whether it was robust enough to continue to explain failures among the industry’s more recent leaders. Chapters 3 and 4 then deepen our understanding of why the leading firms stumbled repeatedly in the disk drive industry and, simultaneously, test the breadth of the framework’s usefulness by examining the failure of firms in industries with very different characteristics. Hence, chapter 3, exploring the mechanical excavator industry, finds that the same factors that precipitated the failure of the leading disk drive makers also proved to be the undoing of the leading makers of mechanical excavators, in an industry that moves with a very different pace and technological intensity. Chapter 4 completes the framework and uses it to show why integrated steel companies worldwide have proven so incapable of blunting the attacks of the minimill steel makers. WHY GOOD MANAGEMENT CAN LEAD TO FAILURE The failure framework is built upon three findings from this study. The first is that there is a strategically important distinction between what I call sustaining technologies and those that are disruptive. These concepts are very different from the incremental-versus-radical distinction that has characterized many studies of this problem. Second, the pace of technological progress can, and often does, outstrip what markets need. This means that the relevance and competitiveness of different technological approaches can change with respect to different markets over time. And third, customers and financial structures of successful companies color heavily the sorts of investments that appear to be attractive to them, relative to certain types of entering firms. Sustaining versus Disruptive Technologies 11 Most new technologies foster improved product performance. I call these sustaining technologies. Some sustaining technologies can be discontinuous or radical in character, while others are of an incremental nature. What all sustaining technologies have in common is that they improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued. Most technological advances in a given industry are sustaining in character. An important finding revealed in this book is that rarely have even the most radically difficult sustaining technologies precipitated the failure of leading firms. Occasionally, however, disruptive technologies emerge: innovations that result in worse product performance, at least in the near-term. Ironically, in each of the instances studied in this book, it was disruptive technology that precipitated the leading firms’ failure. 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. There are many examples in addition to the personal desktop computer and discount retailing examples cited above. Small off-road motorcycles introduced in North America and Europe by Honda, Kawasaki, and Yamaha were disruptive technologies relative to the powerful, over-the-road cycles made by Harley-Davidson and BMW. Transistors were disruptive technologies relative to vacuum tubes. Health maintenance organizations were disruptive technologies to conventional health insurers. In the near future, “internet appliances” may become disruptive technologies to suppliers of personal computer hardware and software. Trajectories of Market Need versus Technology Improvement The second element of the failure framework, the observation that technologies can progress faster than market demand, illustrated in Figure I.1, means that in their efforts to provide better products than their competitors and earn higher prices and margins, suppliers often “overshoot” their market: They give customers more than they need or ultimately are willing to pay for. And more importantly, it means that disruptive technologies that may underperform today, relative to what users in the market demand, may be fully performance-competitive in that same market tomorrow. Many who once needed mainframe computers for their data processing requirements, for example, no longer need or buy mainframes. Mainframe performance has surpassed the requirements of many original customers, who today find that much of what they need to do can be done on desktop machines linked to file servers. In other words, the needs of many computer users have increased more slowly than the rate of improvement provided by computer designers. Similarly, many shoppers who in 1965 felt they had to shop at department stores to be assured of quality and selection now satisfy those needs quite well at Target and Wal-Mart. Figure I.1 The Impact of Sustaining and Disruptive Technological Change 12 Disruptive Technologies versus Rational Investments The last element of the failure framework, the conclusion by established companies that investing aggressively in disruptive technologies is not a rational financial decision for them to make, has three bases. 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 customers 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. TESTING THE FAILURE FRAMEWORK This book defines the problem of disruptive technologies and describes how they can be managed, taking care to establish what researchers call the internal and external validity of its propositions. Chapters 1 and 2 develop the failure framework in the context of the disk drive industry, and the initial pages of chapters 4 through 8 return to that industry to build a progressively deeper understanding of why disruptive technologies are such vexatious phenomena for good managers to confront successfully. The reason for painting such a complete picture of a single industry is to establish the internal validity of the failure framework. If a framework or model cannot reliably explain what happened within a single industry, it cannot be applied to other situations with confidence. Chapter 3 and the latter sections of chapters 4 through 9 are structured to explore the external validity of the failure framework—the conditions in which we might expect the framework to yield useful insights. Chapter 3 uses the framework to examine why the leading makers of cable excavators were driven from the earthmoving market by makers of hydraulic machines, and chapter 4 discusses why the world’s integrated steel makers have floundered in the face of minimill technology. Chapter 5 uses the model to examine the success of discount retailers, relative to conventional chain and department stores, and to probe the impact of disruptive technologies in the motor control and printer industries. 13 Chapter 6 examines the emerging personal digital assistant industry and reviews how the electric motor control industry was upended by disruptive technology. Chapter 7 recounts how entrants using disruptive technologies in motorcycles and logic circuitry dethroned industry leaders; chapter 8 shows how and why computer makers fell victim to disruption; and chapter 9 spotlights the same phenomena in the accounting software and insulin businesses. Chapter 10 applies the framework to a case study of the electric vehicle, summarizing the lessons learned from the other industry studies, showing how they can be used to assess the opportunity and threat of electric vehicles, and describing how they might be applied to make an electric vehicle commercially successful. Chapter 11 summarizes the book’s findings. Taken in sum, these chapters present a theoretically strong, broadly valid, and managerially practical framework for understanding disruptive technologies and how they have precipitated the fall from industry leadership of some of history’s best-managed companies. HARNESSING THE PRINCIPLES OF DISRUPTIVE INNOVATION Colleagues who have read my academic papers reporting the findings recounted in chapters 1 through 4 were struck by their near-fatalism. If good management practice drives the failure of successful firms faced with disruptive technological change, then the usual answers to companies’ problems—planning better, working harder, becoming more customer-driven, and taking a longer-term perspective—all exacerbate the problem. Sound execution, speed-to-market, total quality management, and process reengineering are similarly ineffective. Needless to say, this is disquieting news to people who teach future managers! Chapters 5 through 10, however, suggest that although the solution to disruptive technologies cannot be found in the standard tool kit of good management, there are, in fact, sensible ways to deal effectively with this challenge. Every company in every industry works under certain forces—laws of organizational nature—that act powerfully to define what that company can and cannot do. Managers faced with disruptive technologies fail their companies when these forces overpower them. By analogy, the ancients who attempted to fly by strapping feathered wings to their arms and flapping with all their might as they leapt from high places invariably failed. Despite their dreams and hard work, they were fighting against some very powerful forces of nature. No …