I read with sadness the passing of Clayton Christensen who left us too early at the age of 67 years old. Christensen, who Forbes called one of the most influential business theorists of the past 50 years, was a best-selling author, Harvard Business School Professor, and avid business simulation creator. His book, “The Innovator’s Dilemma” was one of those rare works that changed the world of corporate strategic thinking forever by presenting a framework for how innovation takes place and why it is a common archetype for existing market leaders to fail at seizing the next wave of innovation in their markets.
Published in the hey-day of strategic thinking (Porter, The Value Discipline Model, The Hax System Lock-in Model, etc.), Christensen’s concepts are so good that they are more relevant in 2020 than they were in 1997 before the digital transformation. I think about the core theme of the book in the ever-expanding digital age of business:
Great companies fail because of good management. Managers in a business do the things they are taught to do and play the game to achieve the immediate success that drives shareholder value such as increasing revenue, profit growth, and free cash flow quarter-by-quarter. The problem of course is that by design, organizations focus on delivering what they are selling today and look to scale the efficiencies for further margin improvement through processes that reject disruptive technologies.
Which is the story of Kodak. Why would Kodak ever invest in digital photography when they were the 4th most valuable brand on the planet and owned the global camera, film, and paper-based photography business? Instead of listening to customers and tracking the weak signals of competitors entering the market, most successful companies “double down” on the existing business instead of looking for the next disruption of their market.
As we all know, innovation can be painful. It can take years if not decades to develop with many failures along the way. Imagine for a moment Kodak going to market with Version 1.0 of the digital camera. It simply didn’t work and if they had tried to launch any of the earlier versions of the digital camera it would have diminished the value of their existing brand (and the big corporate bonuses paid to their executives) which no leader at Kodak would ever think about doing. In 2020, the same concept can be applied to Netflix. What if they had stopped innovating after they realized that CD-ROMs sent back and forth in the mail would put Blockbuster out of business? Not only did they keep pushing the technology toward streaming, but they also vertically integrated their own supply chain by creating their own content which in many cases is a lot better than the other existing content.
In looking back over the past 23 years since Christensen wrote the book, there is a very common misunderstanding among business people and academics that existing market leaders get lazy and refuse to develop the next generation of disruption or embrace them due to the inability of the company to evolve itself by listening to customers, improving operational excellence, or investing in product leadership. In other words, there is a myth that existing management is unable to see new trends, invent new capabilities, or organize in a way that enables them to easily bring new products to market. I’ve seen firsthand from working with some of the most successful companies in the world that this myth is wrong, and the opposite is actually true!
I have seen over and over again that the market leaders – what Christensen called the market incumbents – are most often the ones to identify and develop new technologies and nimby reorganize themselves to take advantage of the market opportunities. The problem and why they fail is that they don’t really understand the new value proposition and try to take new ideas to existing customers and existing channels of distribution instead of finding new ones.
Often, new technologies and new innovations are too new for existing customers to accept and change for. When the moment comes to conduct the critical ROI analysis of investments in R&D and Marketing to bring the new product to the market of existing customers the value equation is flawed because the market is small and slow to grow. Think about Warby Parker. Coming up with an online eyeglasses business was not that revolutionary. Any of the existing manufacturers could have innovated the idea. The problem is the entire ecosystem and customer base of eyeglasses pre-Warby was to go to the eyeglasses store to buy eyeglasses from a local practitioner. The online component of the market was small and from a cost perspective not easy to pursue. Moving to a new market from an existing market has a lot of cost and structures that can’t provide reasonable margins. To a publicly traded company that is committing the ultimate sin.
As a result, new entrants, often founded by former frustrated employees of the existing business with little capital and little risk enter or create the new market. In the beginning, these new start-ups don’t pose a real threat as they struggle to master the value proposition, the message, and technology by failing fast and moving forward fast at low or no margins. Which is fine for them because there are no expectations.
But then comes the big error most legacy companies make. By delivering the right value proposition to the right customer with the right message, the new company is able to accelerate and hit the steepest part of the classic “S” growth curve quickly and then they enter to mature markets with instant disruption.
Basically, the upstarts are able to use the newer, smaller markets as a clinical trial to test the technologies to then go after the legacy market. In many cases the entry point markets are left behind (Netflix mail-in strategy) as the new technologies move into higher margin upstream segments due to their superior performance, brand, and service. And the legacy company is left to die, a shadow of its former self.
In summary, Christensen’s framework is critical today as leaders must evaluate their investment strategies with an eye toward the future. The key question is, if new technologies find new markets and new customers that are smaller than the existing legacy business how do you develop simultaneous approaches to overall strategy and operations of the business? This is the innovator’s dilemma.