Book of the Week: The Innovator's Dilemma

02 Mar 2013

The Innovator’s Dilemma was the perfect book to read after Crossing the Chasm. While Crossing the Chasm was about users, The Innovator’s Dilemma is about product. The book was first published in 1997, so we know what happened in the future with solid state drives replacing hard drives and the electric car. Knowing the future only reinforces the central thesis in the book. I liked this book. This book is about how being a good company sets up for failure. My point of view is that of the disrupter rather than the manager at a big company. This book like so many of the others I have read is split into two parts. If I had a dollar for every book that was split into two parts, I’d be wealthy. The first part of the book is about “Why Great Companies Can Fail”. This consists of examples to support the central thesis. The second part of the book is about “Managing Disruptive Technological Change”. Examples are given of companies that have successfully managed and those that have not. There are two types of technologies: sustaining and disrupting. Sustaining technologies make the existing product better for the mainstream customer. Disrupting technologies start up worse for the mainstream customer, but eventually get good enough to supersede the previous technology thereby screwing the companies that only invested in sustaining technologies. Being a leader in sustaining technology doesn’t make much a difference in the long run, but being a leader in disruptive technologies can pay huge dividends. When I was almost done reading the book, I realized this is a bit analogous to investing. Warren Buffett can’t invest in small companies now since they don’t make a dent in comparison to Berkshire Hathaway’s market cap. The opportunities may be greater with the small companies, but he has to play in a different league because of his size. The same can be said with companies. Established companies have an established customer base with certain needs and demands. Great companies provide things that the customer needs. Sustaining technologies are suited to taking care of those needs. Disruptive technologies start out unable to compete on the mainstream needs, but offer a different value set. The problem with big companies is that the value set of the disruptive technology does not match up with the value set of their existing customers. New entrants need to find new customers and create new markets for their disruptive technology. The company goals are aligned with the customer needs in this case. As the technology matures, it starts to gain mainstream customers, because old product and new product can fulfill their needs, but new product offers added value. Each disruptive technology is like a startup looking for a market and customer. Big established companies aren’t good at being startups, so a possible course of action is to spin out a separate entity that has separate goals from the parent company. If you decide the rules of the game you’re playing, you can win. A company with a disruptive technology should not play in established markets. They need to create new markets where they can win. A point where great companies failed is that they tried to play in their established market with their new disruptive technology. It seems to mean to succeed at this, you need a two-headed beast. One head to keep existing customers happy and another head to search for new opportunities. This is why there will always be startups that succeed where big companies fail. Purchase The Innovator’s Dilemma at Amazon.com or check it out from your local library.