The Innovator's Dilemma (Book Review) PART 2

Ferzona's Intro

The business eco-system is becoming increasingly complex. Consumer's expectations and desires are constantly fluctuating. Competition from startups and legacy companies fuel changes in technology and market structures that emerge just as the previous one is settling in. (Netflix relaxes, Disney Plus takes over; Disney+ slows down, watch out...FaceBook Watch)

It is ignorant(even more so now) to think that the position of market leader is a strength. The fast-paced nature of the market itself debunks that belief. The true strength of a business today lies not in market leadership but in leading the market. There is a word for it: Innovation!

Innovation comes in two variants: Sustaining and Disruptive. The book shows us how market leaders and successful companies have failed and will continue to fail in the face of disruptive innovation. The solution, it argues, is for them to become disruptors themselves.

[Another business Maxim: You can't serve everyone!]

The Book

Why do successful companies fail? Read on.

As mentioned in part 1, every business exist to make as much money as they possible can. This maxim is not necessarily because of greed. It is majorly (I hope) because of growth. The more money you have, the more you can invest in growing your business. If your business doesn't grow, it will not survive! Every day, business executives make decisions on what actions will (among other things) ultimately grow their business. They embark on good business practices such as excellent market research, pursuing logical investments and developing brilliant systems to achieve the goal of growth. These practices are the very ingredients that made many businesses of old the giants they are today. It worked then, it still works now. Another name for this is 'Good Management.'

The book states unequivocally that Good Management - the art of listening to your customers, giving them what they want, investing logically, and developing systems for growth is EXACTLY what causes great companies to fail.
"the logical , competent decisions of management that are critical to the success of their companies are also the reasons why they lose their positions of leadership"
This is the innovator's dilemma!

There is a method to this madness. The woes of such companies that fall victim to this dilemma[which there are a lot] are explained. Using empirical and analytical research the book presents a failure framework. The framework finds the following as concurring factors to the innovator's dilemma.

1. Sustaining vs Disruptive Technology:
This is where it all starts. Innovation in technology. [Technology used by the books means 'the processes by which an organization transforms labour, capital, materials, and information into products and services of greater value.'] Sustaining innovation has one aim: To improve existing products/services. Nothing more. It takes feedback from mainstream customers, redesign and improve the product/service to make it better and more appealing to the people who use them. It is not always an easy task(fulfilling people's desire), but it is simple enough and mutually beneficial to company and customers. [You ask, they tell, you make, they buy]

Disruptive innovation on the other hand seem to go against all business common sense: It produces cheaper, simple and low performance products that most mainstream consumers can't use and so they ignore it. However, it comes with new, different and unique features that main stream products don't have (See Typewriters vs Word Processors). Because of these unique features, a small percent of the population(usually new customers) adore it and are willing to forgive its' performance.
The paradox - Disruptive Innovation tend to borrow from sustaining technology's playbook and using feedback, improves on the under-performing technology overtime. The result is a uniquely different product with added functionality and the same (or even better) performance than standard mainstream products/services in the long run.
This creates a radical demand in the mainstream market, wiping out any need or use for previous technology. The market move (in its entirety) and adopt the new products and services. Ironically, what was rejected by the market becomes the market. [Disruptive innovation is disruptive because it creates a new market and eventually dismantles previous ones]

2. Technology Progress vs Market Need 
In a bid to stay ahead of competition and strengthen market position, there is a silent and aggressive race among businesses to produce the best and most capable products on the market. This race has a tendency to produce technology that far outweigh the current needs of consumers. It gives consumers more than they need or are currently willing to pay for (e.g The Fold-able Phone).
This means that technology that seems perfect for a market today tend to overshoot the market tomorrow AND technology that under-performs in the market today will meet the very needs of consumers tomorrow.

3. Rational Investments vs Disruptive Technology
Established companies tend to make flawed decision and refrain from investing in disruptive technologies because of three valid points.
  • Disruptive innovation tend to produce simple and cheaper products that generate less profit
  • Products of disruptive innovation are first marketed in emerging or insignificant markets.
  • Their most profitable customers don't need or can't use the produce of disruptive innovation [at least in its initial stages]
These points together with the maxim of business [They exist to make as much money as possible & You can't serve everyone] will see that successful and giant companies have put in place value systems that feeds off the needs and wants of their most profitable customers. And why not? That is EXACTLY what will enable them to grow and generate positive cash flow. They are essentially practicing Good Management.

Putting it together:

The book goes on in lengthy details to prove the validity of the framework across multiple industries and is solid! In essence it says:

A value network is the DNA of a company - "the way a company identifies and responds to customers' needs, solve problems, procures input, reacts to competitors, and strive for profit." This network is developed over time to embody what worked in the past and to reflect what is working at present. Most importantly, it is tied very closely to the feedback of lead customers. A successful company's value network is EXACTLY what is keeping it successful and growing at the very same time a disruptive innovation enters the market.  Now, here is the story...a disruptive innovation goes against the very DNA of a successful company and it makes literally zero sense for them to pursue what, as a company, they've come to understand as 'wouldn't work for us.' Because
  1. their mainstream market customers don't need it, 
  2. it generates low revenue [wouldn't meet growth target]
  3. they can't see(data-ly speaking) a market for it. 
In a dramatic turn of events, this innovation, (almost always spearheaded by entrepreneurs) goes on to create a market for itself [usually through trial and error], becoming better overtime and eventually infiltrates the mainstream market with lightning speed. [Best example: 3D Printing]
The reason successful companies fail to play catch up is because, once they decide it's finally time to adopt the disruptive technology (when the market has embraced it), it takes enormous amount of time to change deep-rooted value systems and networks to adapt to a new market that is rapidly evolving. [Remember: A disruptive innovation is disruptive because it creates a new market] However, the entrepreneurs on the other hand - at the helm of the disruptive technology, have the data, experience and skill they have gathered from trial and error to keep developing and scale-up quickly in this new market. [First mover advantage in grand style!]

Final Thoughts!

Everything you've read above is grounded in facts and it leads to a striking theory: Successful companies by the virtue of them being well-managed will always stand at a disadvantage in the face of the next big thing in its industry. One smart and competent move by an enterprising company can bring the reign of a giant to an ugly end. Sad...but True. This is very worrying to established and leading companies and an excitement for startups and entrepreneurs. But...where do we go from here?

The book is a gee...It presents to us very well developed principles of innovation. Principles that if understood and applied correctly can give market leaders and giant companies the skill in handling disruptive innovation. Caveat: They are not rules written in stone, they are organisational laws presented to be studied and understood. [Key word: Understand].

Principles of Innovation


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