Why established companies find it so hard to innovate
Technological innovations broadly fall into two categories: Sustaining technologies are incremental innovations that enable or sustain an existing product. Whereas Disruptive technologies are innovations that help create new markets and value networks, and eventually disrupt existing markets and value networks (over a few years or decades), displacing earlier technologies.
History shows many examples of established, successful companies that have ultimately failed to capitalise on the opportunities (and threats) presented by disruptive technologies. Why is this?
In his best-selling book ‘The Innovator’s Dilemma’, leading Harvard Business School Professor, Clayton M. Christensen asserted that successful, established companies can be brought to the point of failure by trying to manage the challenges associated with technological innovation according to ‘rules’ that apply to sustaining technologies rather than disruptive technologies. Christensen proposed his ‘Five Laws of Disruptive Technology’, and provided insight and guidance, based on extensive historical research into business success and failure in technology innovation, as to what these mean for companies looking to address the challenges that disruptive innovation poses. He further asserted that in order to increase the chance of dealing with the challenges presented by disruptive technologies and new competitors, companies need to acknowledge these Laws and align with them.
1 – Companies Depend on Customers and Investors for Resources
Companies find it tough to invest adequate resources in disruptive technologies – i.e. lower margin opportunities that their customers don’t want – until their customers want them, and by then it’s too late! The company should establish an independent group, with autonomy and authority to address a new customer segment – i.e a parallel market that is ripe for disruption.
2 – Small Markets Don’t Solve the Growth Needs of Large Companies
20% growth for a £25 million company represents a £5 million increase in revenues, whereas to achieve the same growth profile a £2 billion company would need to generate £400 million in new sales! No new markets are that large. The new organisation described in point 1 above should be scaled to match the size of the new market. The core business should be sustained, with the new business unit resourced in-line with considered and conservative business forecasts.
3 – Markets that Don’t Exist Can’t be Analysed
New tech creates new markets. Big companies generally focus on gaining extensive knowledge through research. You don’t necessarily need to know everything, but rather should adopt a discovery-based approach to planning.There are strong first-mover advantages partly because knowledge is limited.
4 – An Organisation’s Capabilities Define Its Disabilities
Established companies are defined by values and processes. These things are difficult to change. One way to address this, is for the company to actively build a framework to understand its own capabilities and disabilities. People can learn new skills, but it’s also necessary to change processes and bring in new people who can more easily align to the new direction.
5 – Technology Supply May Not Equal Market Demand
Technological progress quite often exceeds mainstream customer expectation. Product performance overshooting market demands is the primary mechanism that drives shifts in the phases of product life cycle. Work to understand the trends in how your customers actually use your product. This is a critical step in understanding what your real future ‘minimum viable product’ or MVP is.
Source: The Innovator’s Dilemma – C.M. Christensen / Harvard Business Review
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