In a traditional business life cycle, once a corporation has matured into a large entity, it can become difficult to explore new potential growth markets as the sheer size of the corporation dictates the amount of revenue needed to sustain operations. Essentially businesses get too big to be nimble enough to explore where the next disruptive technology (which will completely revamp their industry) will come from.
The innovator’s dilemma occurs when a company knows they need to innovate to grow but can’t afford to enter new emerging markets as predicted return on investment is insufficient.
The National Bestseller, The Innovator’s Dilemma, written by Clayton M. Christensen details the in-depth research of the rapid evolution of the computer disk drive industry from 1975 till 1994. The growth of the disk drive industry was carefully documented in the “Disk/Trend Report”, …a highly respected annual market research publication augmented with more detailed product-specification sheets obtained from the disk drive manufacturers themselves.
Some statistics from the book:
From 1976 to 1994 firms that led in launching disruptive products logged a cumulative total of $62 billion in revenues. Those that followed into the markets later, after those markets had become established, logged only $3.3 billion in total revenues.
It pays to be the leader in an emerging industry.
For firms that followed late into the markets enabled by disruptive technology, the average revenue per firm was $64.5 million. The average revenue per firm that led in a disruptive technology generated $1.9 billion.
In the final chapter in the book, Christensen does a thought experiment on how he would take an electric vehicle to market. He bases his strategy on concepts he talks about throughout the book and contradicts some conventional wisdom on business and marketing strategy.
“…my plan must be for learning, not one for executing a preconceived strategy. Although I will do my best to hit the right market with the right product and the right strategy the first time out, there is a high probability that a better direction will emerge as the business heads toward its initial target. I must therefore plan to be wrong and to learn what is right as fast as possible.”
The concept of business plans for learning rather than for executing a preconceived strategy was developed by Rita G. McGrath and Ian MacMillan in “Discovery-Driven Planning,” Harvard Business Review, July-August, 1995, 44-45.
Christensen further explains his strategy of taking the electric vehicle to market (as a metaphor for any new disruptive technology entering a market) by the fact that he knows and understands that his first plan will most likely fail, along with the second attempt as well. Being small enough to be able to adapt very quickly is a major asset, hence the disadvantage larger companies have at true innovation.
Failing early and acquiring the right feedback will ensure a more intelligent second attempt and so on. The more quality feedback he receives early on will help him create a better product increasing his chances of successes in this emerging market.
It’s humbling to think that a part of your business strategy may be understanding that you don’t know where a market is going and the best way to prepare for it is creating a very efficient feedback system.
In the beginning you’re introduced to the 5 principles of disruptive innovation and once again reviewed in the end. I think they sum it up quite well.
- Companies depend on Customers and Investors for Resources
- Small Markets Don’t Solve the Growth Needs of Large Companies
- Markets that Don’t Exist Can’t Be Analyzed
- An Organization’s Capabilities Define its Disabilities
- Technology Supply May Not Equal Market Demand
Is your industry entering or already going through a period of major change? You may find this book very helpful in understanding how to prepare for and navigate through a rapidly changing market.