The Innovator’s Dilemma
Back in 2017 I wrote a blog about the inevitable failure of the world’s most successful businesses. At the time I thought it was edgy and controversial – it wasn’t. Upon re-reading my spew a few years on, I realized that there was a fundamental gap in my reasoning. Call it youthful ignorance, maybe just innocent naivety, never-the-less, I must set the record straight – there’s another important contributor to the disruption of incumbent businesses.
So, what could it be? They’re well managed, responsive to their customers, possess some of the world’s greatest talent and they’re market leaders. And yet despite doing everything right, they fail to see the next wave of innovation coming. Why?
In 1997 Clayton Christensen published a book called The Innovators Dilemma which demonstrated how large companies can do everything “right”, yet still lose their market share, or, in extreme scenarios, fail. The reasoning boiled down to two very simple factors.
The first is attributed to the value of innovation, which follows an S-curve that looks something like this:
New innovations are initially cumbersome and the number of relevant applications are few. Improvement takes many iterations, time and resources. Initially, iterations yield little value and progress is slow, at this point incumbents tend to lose interest due to low ROI and lack of alignment with existing markets or product architectures.
But the new entrants persevere! Their agility and efficiency enabling them to further develop the technology, even in small markets. As they approach the knee of the S-curve, a breakthrough is made, and the right application and markets are identified, leading to exponential progress in a short space of time. In essence, the smaller markets are the guinea pigs that help the technologies advance in preparation for much larger and lucrative markets. Now the big dogs are starting to take notice, but it’s too late.
As the most valuable improvements are completed the value per iteration begins to normalize and eventually the S-curve plateaus. At this point the innovation has realized its potential and mass market share is captured. A good example in this space at the moment is Tesla, who have overcome massive obstacles including charging infrastructure and battery-pack development, causing huge disruption in the automotive industry.
The second reason for disruption is all about perspective. Incumbent businesses are so focused on their products and customers that very often they lose sight of the bigger picture – let me explain. These businesses have the luxury of huge market segments but with that come high sales expectations and pressure from shareholders, stealing focus away from the real opportunities out in the market.
The veil of success very often clouds the judgement of businesses and execs get comfortable. Then… BAM! A new entrant who has been razor focused on creating value blindsides you and steals your lunch, your customers and your competitive advantage. Leaving you sobbing in the fetal position in only your undies.
One of the trademarks of the innovator’s dilemma is a company’s success, smooth operations, great products, and happy customers. That’s one of the things that makes it a dilemma: A company doesn’t realize anything’s wrong, because, well, nothing is.
The trick comes in evaluating immature opportunities with a futuristic frame of mind. Asking yourself whether these new technologies could develop and mature to such an extent that they could make inroads to larger markets and if so, does investing in them today at the risk of cannibalizing your existing business make sense in the longer term?
You may be a big fish in a big pond, but are you aware of the minnows playing in the shallow end, those outliers trying outlandish things that you’re sure won’t ever work? Well don’t be so sure.
You’ve got to ask yourself whether what you’re doing today is contributing toward ringfencing your clients in the future. How will your customers react if a competitor offering a better product at a lower price point in a more convenient way comes along tomorrow? Are your relationships strong enough, Is your service good enough, are you digitally empowering your customers?