The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail

Having outlined the market forces that cause corporate failure, Christensen now transposes his framework over the automotive industry to show how he might manage the electric vehicle as a disruptive technology.

After discussing the origins of the electric vehicle, Christensen assesses the opportunities and risks that the technology poses to the established gasoline-powered automobile market. He evaluates the electric vehicle’s capabilities against present market needs, which measure performance trajectory according to minimum cruising range, acceleration power, and variety. He finds that the electric vehicle does not meet market criteria to compete with the established firms, and he turns to the electric vehicle’s trajectory of improvement to find out if it will eventually reach the functionality of gasoline cars. Seeing that this is the case, he concludes that electric vehicles qualify as a disruptive technology.

At the time of the book’s writing, Christensen posits that most established firms will appraise the electric vehicle as being worthless in the current market since they are viewing electric vehicles along the same performance trajectory as gasoline-powered automobiles, rather than plotting the technology out on its own. Christensen searches for a market where electric vehicles will create value, acknowledging once again that this will not be found in the mainstream market segments at first. He moves away from asking market consultants to tell him about the market, precisely because the market doesn’t exist yet. Throughout this process of discovery, he leaves himself open to learning rather than implementation, so that he can learn the right ways to apply the technology in the market as it matures.

Christensen considers two leads for building a new market: families with high school students and the transportation or logistics sectors in dense Southeast Asian cities. Although this conflicts with the ways in which most established firms develop their products, it also deters any of the pessimism that those firms are currently experiencing as they design their products for the mainstream market. The challenge that Christensen’s engineers face is how to tailor their product toward a market that is still being defined. Christensen assumes that because the electric vehicle’s function will eventually overshoot the performance demanded by the market, the engineers can design according to later preferential criteria like simplicity, reliability, and convenience. He also guides the engineers to develop a low-cost capability that enables them to easily change facets of product design, anticipating the possibility of leaving their initial markets if they are not suited to the product. The final market condition he enforces is that the product must be made available to consumers at a low price point in spite of high operating costs.

With these design principles in place, Christensen prevents the engineering team from incorporating any other new technologies, so that the product can drive a unique product with a clear disruptive technology. Mainstream firms, on the other hand, will be caught trying to solve technological issues that cater to the demands of their lead customers. Incidentally, the issues they are trying to resolve will likely be addressed in new value networks like the one Christensen is trying to create. As for distribution, Christensen stresses the need to avoid established distributor networks, preferring a new distribution channel that will benefit from access to novel products like the electric vehicle.

Because he is dealing with a disruptive technology, Christensen sets up an autonomous organization to commercialize the disruptive product, preventing the employees from being diverted according to existing corporate values. Its operations will have minimal impact on the parent company’s capital base while it becomes profitable on its own terms. Any success that the new organization achieves will generate encouragement toward securing further sales success. Meanwhile, failure can be learned from and worked around without incurring any substantial losses. To ensure that the new organization develops a culture that benefits the development of the disruptive technology, Christensen assigns a heavyweight team to execute the project.

Christensen shares his relief upon learning that the innovator’s dilemma cannot be resolved by increasing the intensity of good management practices. However, this doesn’t mean that companies should be willing to abandon the capabilities that made them successful just to chase disruptive technology. What it does suggest is that capabilities are valuable in context, rather than being applicable across an industry’s evolution. Christensen summarizes his insights in seven points for easy review.

First, he asserts that the market demand for performance improvement may differ from the rate of technological improvement. Plotting both trajectories can help managers to understand whether an innovation will eventually find value among mainstream customers. Next, the resource allocation process is directly related to the innovation management process, which means that projects are usually allotted resources according to their expected profitability. Third, it is crucial to find a market whose needs match the functionality of the technology, not the other way around.

Christensen also states that organizational capabilities are developed in the process of leveraging technologies as products and in the context of commercializing them in specific value networks. Once these capabilities are set by resolving operational issues, the organization usually becomes inflexible to new processes and values. He claims that it is impossible to make an accurate forecast for disruptive technologies because the market that informs that forecast doesn’t exist yet. Disruptive technologies are risky investments, but this risk can be managed to minimize impact while yielding critical information about the value network.

Thus, companies should assess whether they stand to gain more from first-mover advantages or from waiting for others to develop the technology. Finally, Christensen maintains that the most powerful barriers for mobility across markets are usually related to resources. Established firms find it difficult to justify moving to lower market tiers simply because it does not meet their business requirements. The best way to overcome these barriers is to understand the context that prevents the company from leveraging these innovations, and then create a new context that aligns their capabilities with managing both sustaining and disruptive technologies.