The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail

Christensen explores the two leading theories on failure in the face of technological change. The first theory blames organizational structure. Organizational structuring siloes groups in a way that affects their ability to develop products. The second theory posits that a company’s ability to manage technological change is relative to the scale of that change. Established firms can easily anchor their efforts to innovations that build on perfected capabilities, also called incremental innovations, while entrant firms are better suited to developing products that require entirely new technological capabilities to create, also called radical changes. When established firms require new skills to deal with radical changes in their product development, the resulting imbalance may lead to disaster.

Christensen points out that the disk drive industry seemed to disprove both of these theories, especially as established firms found it difficult to adapt to the disruptive but technologically simple innovation of smaller disks. This analysis of the disk drive industry leads him to introduce the concept of the value network as “the context within which a firm identifies and responds to customers’ needs, solves problems, procures input, reacts to competitors, and strives for profit” (32). He proposes that the company’s relationship to the network in which it invests is very influential in determining its willingness to pursue disruptive technologies.

Christensen’s theory begins with the assumption that most companies produce goods that function as components within other products and in end-use systems. Hence, there exists a “nested network of producers and markets” (32), where disk drive companies produce components for computer companies, and so on. This nested network is Christensen’s value network concept in practice.

Value is quantified differently across each tier of the value network, which is why companies develop according to performance attribute requirements that don’t cross over into other tiers. However, value networks are also defined by the unique cost structures that businesses cover to manufacture and commercialize their products. Hence, sustained innovations, which are already valued by companies within their network, are typically seen as more profitable than disruptive technologies. Ultimately, firms that lead in one value network hesitate to exploit innovations in other value networks.

As a technology matures in a given value network, its rate of performance improvement steadily increases. Established firms gain experience and resources from developing predecessor technologies, and this process allows them to maintain their lead over entrants in the race to commercialize sustaining innovations. In time, the rate of improvement reaches a ceiling that requires greater effort to exceed. Much of the current research on development strategy revolves around predicting the improvement ceiling so that companies can prioritize successor technologies at the right time.

With disruptive innovations, however, it is impossible to measure their improvement against the conventional performance trajectory since, by definition, it shifts the basis for performance improvement. These innovations can only return to the original basis of performance when it has progressed enough to meet the sustaining product’s basic performance requirements. Entrant firms thus overtake established firms when they follow a disruptive technology to the point that its improvement supersedes that of sustaining technologies.

Christensen explains that it is not so easy for established firms to invest in low-margin disruptive products. Since companies operate with the priorities of their most relevant value network in mind, they cannot appreciate managerial decisions made by companies in other value networks. Hence, the largest challenge that established firms face is the decision of how to allocate resources between sustaining technology projects in their defined value network and disruptive projects in a new one. He outlines the pattern that reflects this insight and shows how entrant firms manage to steal the lead from established firms.

First, established firms pioneer the disruptive innovation, which is then disapproved by lead customers during market research. The firms stall development on the innovation, funneling resources into the innovations that resonate most with their customers. New firms enter the industry, building on the established firms’ disruptive product as a foundation for their own product development. Since they haven’t defined their value network yet, these entrants discover it through trial-and-error, selling to everyone until the value network becomes clear. Once they have established their position in a new market, the entrants gain access to greater resources that allow them to accelerate product development with sustaining technologies and less demanding cost structures. This approach brings the entrant firms upmarket, introducing performance-competitive products for a timely release that the established firms scramble to chase. By then, it is too late; the established firms have failed to protect their lead customer base.

Christensen tests the validity of the value network framework against the flash memory market emerging at the time of the book’s writing. Identifying flash memory as a disruptive technology, Christensen discusses its various applications as components in a diverse set of value networks. Relevant to the discussion on computing, however, flash memory technology resulted in the production of the flash card, which has the potential to disrupt the disk drive market. Since disk drive companies have developed competencies relevant to flash memory innovations, they stand a chance of retaining their lead over market entrants. Moreover, at the time of the book’s publication, disk drives have yet to cross their inflection threshold, meaning that they will continue to improve at a rate that surpasses flash memory development. On the other hand, Christensen recalls that only sustaining developments, not disruptive ones, can be traced along the same trajectory. Moreover, the radical novelty of flash memory architecture suggests that disk drive companies are likely to fail.

Christensen suggests that established firms can still succeed if they correctly value flash memory and deploy it in the relevant emerging markets. Entrant firms, meanwhile, face the challenge of developing their products in the rather wide spectrum of markets where flash memory technology can be applied.

Christensen discusses the key insights that the value network framework offers to companies that are interested in innovating. First, he notes that value networks greatly influence a company’s ability to divert assets toward innovation. Next, he points to the importance of understanding the needs of actors within a given value network and designing products to address those particular needs. Third, he cautions established firms to innovate before the disruptive technology becomes performance-competitive within a given value network. Then, he observes that entrant firms leveraging disruptive technologies maintain an advantage because they are entrenched in value networks where their innovations create value. Finally, he discusses the disadvantage that entrant firms face in leveraging technology: their lack of flexible cost structures and network entry approaches.