This last week I’ve been hanging out at The LeanStartup conference – a week long event for fans of Eric Ries book and related modern business practices.
One of the best things about the conference was the great people I got to meet; easily one of the most fun and interesting groups I’ve met at any event. A subject of a well-known book, The Innovator’s Dilemma by Clay Christensen came up repeatedly in sessions and conversations. In principle I was familiar with the idea but had never actually read the complete book. With some assistance from my Kindle I was able to cover the book in the gaps between sessions and socializing (this conference was epic, sessions would often run to 10pm). I wanted to take a shot at explaining the core ideals of the book here – for reference in later posts.
The Innovators in question are some of the most successful companies in history, for example: Sears, DEC, IBM, HP and many more. The Dilemma is the struggle and forces facing such companies in avoiding disruption from emerging markets, products and business models.
The word ‘disruption’ is probably over-applied, but if we think of the result of genuine disruption as the destruction of existing markets – this rules out some of the smaller innovations that otherwise meet the bar to be called ‘disruptive’.
The hallmark of such disruptive ideas in Christenen’s “Failure Framework” is that it appears unattractive to the dominant player. Usually the margins are weaker and the market, at least initially, is smaller. To make this material, I’ll borrow two examples from the book – one a success story and the first, a failure.
Mini to Micro
Digital Equipment Corporation (DEC) was arguably the major player in the computer industry in the 60s, 70s and early 80s. Most famous for their minicomputers, DEC had previously been part of a disruptive wave that saw the beginning of the end for mainframe computers. Minicomputers were smaller and cost less than mainframes. Of course, as you know today, DEC fell victim to the subsequent disruptive wave in the same segment: micro or personal computers (PCs). This emerging market was unattractive to the executives at DEC due to lower margins and DEC’s influential customers had no use for PCs at the time.
The idea that successful incumbents become dependent on their customers is another hallmark of the dilemma. Typically, the current business is moving up-market and increasingly monetizes the biggest businesses in the world considering these their premium customers. These customers are often the slowest to need the new platform and have no interest; reinforcing the belief that the emerging market is neither interesting or threatening.
Regrettably for DEC, these disruptive innovations create markets that offer a significant advantage to first-movers. Businesses that are late to react tend to lose, just like DEC.
Bubbles and lasers
Hewlett Packard (HP) has done business in just about every dimension of the tech industry. A household name, HP are well known for their printing technology for home, small and large business. In the 80s HP had a very successful laser printing business. Laser-printers printed at a very high resolution with tremendous accuracy and did so fast. The improvement over the incumbent dot-matrix printer was immeasurable. When bubble-jet (or inkjet) printers arrived on the market they were slower and produced much lower quality images – but they were smaller and had the potential to be much cheaper than their faster, higher-quality laser-based counterparts.
In this instance, HP were smart. They incubated an inkjet printer business in a new autonomous division. If the inkjet business had been situated alongside the laser division it would almost certainly have been the victim of underinvestment and lack of focus – leaving the door open for other first movers. Instead, the new inkjet team were excited about their initial market size and revenues that would have been laughable by their friends working on laser printers. Look forward to today and, whilst the margins are lower, the overall market-size for the inkjet printer completely eclipses the laser market.
In this instance, by smart recognition of the disruptive threat and creation of a separate autonomous business to target the emerging market HP was able to avoid fate seen by DEC. What’s more, they successfully moved upmarket with laser printers to make very large margins on a smaller number of units whilst simultaneously riding the inkjet wave.
This, Christensen postulates, is the key to surviving the Innovators Dilemma. I suspect most of my peers in tech have read this book already, but if like me you missed it – I recommend grabbing a copy and enjoying the full text.
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