HARVARD RESEARCHER SAYS BEST PRACTICES CAN
HURT YOU: AN INTERVIEW WITH CLAYTON CHRISTENSEN
Harvard Business School professor Clayton Christensen has just written a new book that should cause product developers and strategists to sit up and take notice. It centers on a provocative and radical thesis: great firms can fail because they do everything right! In The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, the one-time chairman and president of Ceramics Process Systems Corp. argues that there are not-uncommon circumstances—particularly when emerging technologies mean a potential disruption in the marketplace—in which faithful adherence to many of the best practices chronicled in this newsletter can cause you to fail over the long haul. Based on his look at practices in leading companies, Christensen has a compelling point: training a laser focus on current wants and needs of today’s best customers can mean that you cede the future to someone more entrepreneurial.
BPR: The "innovator’s dilemma" is the paradox that the same practices that allow a great company to succeed can also lead it to fail. Can you explain this?
Christensen: "Sound market research, skillful planning, and a strong customer focus, followed by diligent execution according to plan, are readily accepted as the classic hallmarks of good management. And it’s true—when applied to sustaining an existing business, such practices are invaluable. But blindly following these maxims can be a fatal mistake. For example, business planners need to conduct careful market research. And the evidence is strong that in existing markets they can forecast demand quite accurately. But when new markets for new technologies emerge, companies have consistently dismal records in forecasting demand for innovations that can ultimately lead to the new markets and customers that secure long-term growth. In fact, the only thing we know for sure when we read experts’ forecasts about how large their emerging markets will become is that they are wrong."
BPR: So then do radical new innovations somehow cause good firms to fail?
Christensen: "Not always. But when good firms fail, it is not the technology itself, rather the firm’s reaction to these new ideas, that lays the groundwork for eventual failure. I describe such radical innovations, in The Innovator’s Dilemma, as ‘disruptive technologies.’ Although they initially emerge in small markets that seem remote from the mainstream, they are disruptive because they subsequently can become full-blown competitors against established products.
"Ironically, it’s the firms with the strongest customer relationships that find it the hardest to convert disruptive technologies into new revenue streams. It’s not that pleasing your best customers is itself dangerous, but pleasing them exclusively means that the growth opportunities presented by new markets will go ignored and uncultivated. It is difficult to find the resources to focus energy and talents on small markets, even when logic says that they will be big some day.
"Of course, keeping close to customers is critical for current success. But long-term growth and profit depend upon a very different managerial formula. Quite simply, disruptive technologies are often the catalysts for emerging markets. And finding new markets—and exploiting them—is crucial if a company is to enjoy continued growth well into the future."
BPR: How do companies fall into the trap of the innovator’s dilemma?
Christensen: "Many high-performing companies have well-developed systems for killing ideas and products that their customers don’t want. It’s part of an entrenched philosophy that focuses resources on the most lucrative markets of the moment. As a result, these companies find it very difficult to invest in disruptive technologies—lower-margin opportunities that their customers don’t want at this time—until their customers realize they want them. And by then it’s too late.
"Companies that demand market data and financial justification before pursuing a new possibility are vulnerable—in fact, their hesitation actually helps faster, more-entrepreneurial companies to catch the next great wave of industry growth. And yet, the cycle inevitably repeats itself once these aggressive, entrepreneurial companies succeed and grow, making it progressively more difficult for them to enter the even-newer small markets destined to become the larger ones of the future. Finding new applications and markets for your products seems to be a capability that many successful firms exhibited once, only to surrender it as they establish a strong customer base and fall victim to the ‘good company’ practices that brought down their predecessors."
BPR: Is it possible to manage disruptive technologies?
Christensen: "Managers can be extraordinarily effective with even the most difficult innovations if they work to understand and harness the principles of disruptive technology. There are, in fact, sensible ways to deal effectively with this challenge. With few exceptions, the only instances in which mainstream firms have successfully addressed a disruptive technology were those in which the firm’s managers set up an autonomous organization charged with building a new and independent business around the disruptive technology. Such organizations, free of the power and influence of the mainstream company’s customers, can align themselves with a different set of customers—those who want the products of the disruptive technology.
"It is very difficult for a company whose cost structure is tailored to compete on high-end markets to be profitable in low-end markets as well. The only viable way to address this is to create an independent organization, a sanctioned ‘skunk works,’ if you will, with a cost structure honed to achieve profitability at the low margins characteristic of most disruptive technologies."
BPR: Does this mean firms need to radically reinvent their organization?
Christensen: "No—companies must not throw out the capabilities, organizational structures, and decision-making processes that have made them successful in their mainstream markets just because they don’t work in the face of disruptive technological change. The vast majority of technology challenges they will face will require just such established and reliable practices. Managers simply need to recognize that these practices are not appropriate for meeting every challenge."
BPR: Are there any warning signs that might indicate a company is susceptible to the innovator’s dilemma?
Christensen: "The biggest red flag is when a cheaper, simpler version of your product is introduced by a new company somewhere, only to be rejected by your customers, marketing managers, and finance staff as unattractive and inefficient. They reach these conclusions because they’re comparing the disruptive technology with the established technology, and are giving the right answer to the wrong question.
"The important question is whether the disruptive technology is on a trajectory of improvement such that some day it might be good enough to meet what is needed in the market. Often, disruptive technologies take root in lower-end markets or entirely new ones.
"Historically, the more successful approach to commercializing disruptive technologies has been to find an entirely new market that values the disruptive technology for what it is. That’s the primary goal of The Innovator’s Dilemma, to help established companies overcome the powerful obstacles they face when presented with an opportunity to do what does not fit their proven model for making money.
To order The Innovator’s Dilemma, call Harvard Business School Press at 617-495-6117. Outside Massachusetts: 800-545-7685.
This article originally appeared in the Product Development Best Practices Report.
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