When one does all the right things in all the right ways and still loses, it's time to rethink!
Over the years I have collected books that interest me in the consulting area, especially in areas of creativity, innovation, and competitiveness. As I was scanning my bookshelf, I pulled out a book (now 15 years old) I had not looked at for quite some time. It is about the reason great firms can fail even as they adopt new technologies. The Innovator's Dilemma is the title of the book (The Innovator's Dilemma -- When new technologies cause great firms to fail, by Clayton M. Christensen. Harvard Business School Press, Boston, 1997).
Do the observations in the book have relevance to today's businesses? Yes. The lessons learned are yet compelling. Christensen lists a number of companies in different industries that failed to stay atop their industries. The important point is that these were not poorly run companies. Indeed, these companies were well-managed, customer focused ones that lost market dominance. Sears Roebuck (missed on discount retailing), IBM (missed on personal computer), Xerox (missed on desktop copier), and others are discussed.
How do outstanding companies lose market share even when doing everything right? Breakthrough innovations (disruptive technologies) that are not used by their customers (yet) and hence not advocated by these high performing companies often cause the demise of these stellar firms. What these successful companies were doing was to keep close to their customers, provide exceptional products and services, and thus missed out on the emerging opportunities. They could not make the switch to catch the next wave of competitors. The challenge for these world-class firms is that sometimes it is right to not listen to your customers, to invest in lower-performing products (with lower margins), and to enter small markets.
Christensen recommends understanding the difference between sustaining versus disruptive technologies to begin to avoid difficulties. Sustaining technologies include improvements in products and services currently desired by customers. On the other hand, disruptive technologies are products and services that may not be in demand by one's customers. While disruptive technologies are not yet in the mainstream and underperform established products, these technologies are often cheaper, simpler, smaller, and often more convenient to use. It is about price and convenience where 'good enough is good enough!'
In the face of this challenge Christensen says, "planning better, working harder, becoming more customer-driven exacerbate the problem.' He offers four principles of disruptive technology: 1) Customers and investors control resources. Hence, ideas that do not meet the interest of customers and investors will not be supported; 2) Small markets do not solve growth needs of large companies. Hence, as disruptive technologies do not start with large markets, these would not be attractive to large firms; 3) Markets that don't exist (yet) cannot be analyzed. Hence, it is not possible to provide traditional market research to define, nor justify moving into such undefined markets; and 4) The technology exceeds what the current customers demand. Hence, the disruptive product will underperform (not be well received) in the marketplace.
Christensen details with a case study how an executive could succeed in the face of disruptive technologies. He shows how to address the above four principles. He says the solution to this dilemma is to create an independent organization with its own cost structure to succeed in the low margin market. The size of the new organization should be matched to the size of the targeted market.
Is this scenario still in play today? Most certainly is. Note the hospitals and large clinics and their decline because of increasing costs. The disruptive technology in this case are the mini clinics springing up in strip shopping malls, in grocery stores and in drug stores. They are taking away business from the large medical groups. Is there more? Just look for small service units at strip malls and see if there is a larger industry unit somewhere that is oblivious to the mini-units.
What dynamic business today might face a similar demise tomorrow?
© Baldwin H. Tom CMC
www.tbgroupconsultants.com