Notes on Clayton Christensen's The Innovator's Dilemma

I recently finished reading Clayton Christensen's The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. My notes are below. My Kindle highlights can be found here.

• The recurring theme of Christensen's book is that big companies end up "captured" by their existing customer base, paying too much attention to the current customers current demands.
• Christensen coined the term disruptive terminology. Christensen contrasts disruptive technology with sustaining technology (certainly the lesser used of the two terms in 2017). Sustaining technologies continue existing technology trajectories, sustaining existing markets. Disruptive technologies on the other hand tend to sneak up out of left field.
• Disruptive technologies start off satisfying only niche markets because they initially fail to compete on the features desired and delivered by the main stream sustaining technologies. After some time however, disruptive technologies get good enough to intersect the demands of mainstream markets, while offering some additional value proposition that the sustaining technology does not. Often times, the sustaining technology has by this point overshot market demand in the dimensions consumers care about. For example, physically smaller disk drives that start out with lower capacity than demanded by the mainstream market first find niche applications in low volume electronic devices. As disk capacity increases across all physical sizes faster than demand, the capacity of smaller drives eventually intersects the line of storage demand, at which point consumers change their purchasing criteria from capacity to physical size.
• A direct quote from Christensen describing disruptive technologies— "First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms’ most profitable customers generally don’t want, and indeed initially can’t use, products based on disruptive technologies."
• Christensen posits that big companies inability to capitalize on disruptive technologies has little to do with lack of talent, investment, or bad management per se. Rather, disruptive technologies fail to move the dial enough for big companies in the short-term. Big companies have a hard time justifying the allocation of resources to low-margin, low-volume technologies when there is an existing stream of income coming from high-margin, high-volume technologies. Even if companies do manage to allocate the resources, they do a poor job of creating a cost structure and culture within the larger company that is suited to the new smaller business.
• Christensen claims "there are times at which it is right not to listen to customers". Here, he is referring to the problem of big companies getting captured by/overfocusing on what current customers currently demand, not what current and future customers will demand in future.
• Christensen discusses cases from diverse domains including disk drives, steel mills, motorcycles, mechanical excavators, accounting software, insulin, transistor radios, and microprocessors.
• Christensen claims disruptive technologies need to be cultivated in independent organizations to avoid the pressure/biases of the present day bread and butter businesses: "Creating an independent organization, with a cost structure honed to achieve profitability at the low margins characteristic of most disruptive technologies, is the only viable way for established firms to harness this principle.".And, "Small organizations can most easily respond to the opportunities for growth in a small market. The evidence is strong that formal and informal resource allocation processes make it very difficult for large organizations to focus adequate energy and talent on small markets, even when logic says they might be big someday."
• Christensen suggests that trying to make quantitative projections on disruptive technologies is a fool's errand: "the only thing we may know for sure when we read experts’ forecasts about how large emerging markets will become is that they are wrong." And, "They demand market data when none exists and make judgements based upon financial projections when neither revenues or costs can, in fact, be known."
• For disruptive technologies, Christensen proposes organizations should use "discovery-based planning": assume forecasts are wrong rather than right, which drives managers to develop plans for learning what needs to be known, rather than plans for executing a preconceived strategy.
• Near the end of the book, Christensen discusses electric cars as a case study of a potentially disruptive technology, walking through how organizations should think about such a technology. It's fascinating to read this in the present day—The Innovator's Dilemma was first published in 1997, well before Telsa Motors was founded (2003). Quote: "No automotive company is currently threatened by electric cars, and none contemplates a wholesale leap into that arena. The automobile industry is healthy. Gasoline engines have never been more reliable. Never before has such high performance and quality been available at such low prices. Indeed, aside from governmental mandates, there is no reason why we should expect the established car makers to pursue electric vehicles."
• Christensen claims senior managers only think they're making resource allocation decisions, whereas in reality, the set of candidate projects has already been pre-filtered by middle management: "middle managers—acting in both their own and the company’s interest—tend to back those projects for which market demand seems most assured. They then work to package the proposals for their chosen projects in ways geared to win senior management approval." And, "Senior managers typically see only a well-screened subset of the innovative ideas generated." Reminds me of the phrase "Nobody ever got fired for choosing IBM."
• Christensen proceeds to describe a hypothetical scenario, where two respected employees, one from marketing, the other from engineering, run two very different ideas for new products past their common manager two levels above in the organization. The employee from marketing is pitching a higher-capacity, higher-speed disk drive. This employee describes quantitative revenue projections, talks about discussions he's recently had with existing customers, and when asked whether engineering thinks the project can be executed, states "They say it'll be a stretch, but you know them. They always say that." The employee from engineering is pitching a cheaper, smaller, slower, lower-capacity disk drive. When asked who is going to buy it, the employee states "Well, I'm not sure, but there's got to be a market out there somewhere for it. People are always wanting things smaller and less expensive. I could see them using it in fax machines, printers, maybe". When the manager probes the engineer about whether the idea has been run past customers, the engineer has only discussed the idea with a small number of individuals at trade shows. When the engineer is asked whether he thinks his project could make money, he responds: "Well, I think so, but that depends on how we could price it, of course." Christensen's take on which project will get backed: "In the tug-of-war for development resources, projects targeted at the explicit needs of current customers or at the needs of existing users that a supplier has not yet been able to reach will always win over proposals to develop products for markets that do not exist."
• Christensen, speaking on scenarios where disruptive technologies have been handled well by an organization, states, "They placed projects to develop disruptive technologies in organizations small enough to get excited about small opportunities and small wins. They planned to fail early and inexpensively in the search for the market for a disruptive technology. They found that their markets generally coalesced through an iterative process of trial, learning, and trial again."
• Speaking on established firms' propensity to pursue sustaining technologies at the expense of disruptive technologies, Christensen states: "They exchanged a market risk, the risk that an emerging market for the disruptive technology might not develop after all, for a competitive risk, the risk of entering markets against entrenched competition."
• Christensen states that most marketers have been schooled extensively in the art of listening to their customers, but few have any theoretical or practical training in how to discover markets that do not yet exist.
• Christensen alludes to incongruous risks/incentives of individual managers versus the company as a whole. Statistically, a company can recuperate the losses of many failures with a few big wins. A company gets many trials to do this. An individual manager might have the same Expected Value (EV), but fewer trials, meaning a greater chance of failure for individual managers than the business as a whole (reminds me a little of Simpson's paradox). Quote: "In most companies, however, individual managers don’t have the luxury of surviving a string of trials and errors in pursuit of the strategy that works. Rightly or wrongly, individual managers in most organizations believe that they cannot fail: If they champion a project that fails because the initial marketing plan was wrong, it will constitute a blotch on their track record, blocking their rise through the organization." And, "Because failure is intrinsic to the process of finding new markets for disruptive technologies, the inability or unwillingness of individual managers to put their careers at risk acts as a powerful deterrent to the movement of established firms into the value networks created by those technologies."
• Christensen alludes to an order of precedence in the set of criteria that customers use to evaluate purchasing decisions. In order: functionality, reliability, convenience. Once functionality is satisfied (including e.g. capacity) by two competing options, customers will use reliability as a tiebreaker. Once two competing options satisfy reliability, customers will use convenience as a tiebreaker.
• In Christensen's case study of electric cars, he points out that at time of writing (remember, book written in 1997), electric cars will be deficient when compared against gasoline cars along most dimensions consumers care about. To know whether electric cars might be a disruptive technology, one has to know if they're improving at a rate faster than the consumer demand along those dimensions, meaning electric cars functionality will eventually intersect consumer demand. Note: it only has to intersect consumer demand, not what gasoline vehicles offer, which may substantially overshoot consumer demand. Quote: "Industry experts may contend that electric vehicles will never perform as well as gasoline-powered cars, in effect comparing the trajectories of the two technologies. They are probably correct. But, recalling the experience of their counterparts in the disk drive industry, they will have the right answer to the wrong question."
• A fun quote on electric cars: "If present rates of improvement continue, however, we would expect the cruising range of electric cars, for example, to intersect with the average range demanded in the mainstream market by 2015, and electric vehicle acceleration to intersect with mainstream demands by 2020." Tesla has gotten there sooner, particularly on acceleration (albeit not at a mass-market price point yet).