Clayton Christensen
I published a new podcast episode. Eric Flaningam, writer of Generative Value, joined me to discuss everything about The Innovator’s Dilemma. This topic has fascinated me for almost a year now. For this article, I thought it could be useful to summarize some of the big ideas I learned from Clayton.
Podcast episode link: The Innovator’s Dilemma – With Eric Flaningam
The Innovator’s Dilemma
Business success is very difficult to sustain. Managers of leading firms need to allocate capital and have the following avenues for investment:
Sustaining technology. This implies making marginal improvement to your already established product. Your customers want it and will pay a premium for it. The risk of failure is low and will deliver returns in the short term. Increases returns on capital and margins.
Efficiency technology. Companies can improve the process of manufacturing or delivery of a product, allowing them to sell the same thing, at the same price, but a lower cost. Improves margins and returns on capital. Low risk of failure and has short-term returns.
Disruptive technology. Investing in a product that currently has no market or is aimed at the low-margin tier of your market. Your main customers don’t want it. High risk of failure and returns come after 5-10 years. Depresses your margins and returns on capital.
What do you do?
Disruption as a Process
Disruption can occur by attacking the low-end of an industry, where margins are the lowest. The disruptor’s cost advantage will make established firms begin their retreat upmarket. Incumbents are happy to leave this tier of the market because they have the privilege of competing in higher margin products. Disruptors are happy to enter.
If the disruptive technology has a technological extensible core, it can be improved so that it grants the company access to higher and higher tiers of the market. One by one, the disruptor will make the leading firms leave market segments, happily.
What Gives Room for Disruption
When a product gets created, it receives subsequent incremental improvements, sustaining innovations. Eventually, companies overshoot the customer. They supply more than what clients can utilize. Thereafter, there’s room for disruption because customers are paying for what they don’t need.
How Industries Evolve
Industries are composed of concentric circles, each of which represents larger and larger percents of the population. All industries begin at the inner circle. Technologies are first aimed at clients with the most money and skill. The role of disruption is to make things less complex and more accessible.
Jobs Needed to be Done
Customers are the wrong unit of analysis. Don’t ask them what they want. Out there, there are jobs that we need to get done. On a daily, weekly and lifetime basis. When these jobs arise, we hire products and companies. It is crucial to focus on the job a product is meant to do. Otherwise, its delivery cannot be improved. ‘A customer rarely buys what a company thinks it’s selling them’.
The Base for Competition Changes
Products are created with a specific job in mind, whereupon their main measurement of performance derives. Sustaining innovations done to this measurement are what follows. But as a product’s lifecycle goes by, the base for competition changes. When a customer gets oversupplied of a measurement of performance, there’s room for disruption, jumping to new dimensions.
Business Models
A business model is the interlocking of four different elements and how they interact with one another. The most fundamental business models are:
Solution shops
Facilitated networks
Value-adding processes
Personal Commentary
I think this is an article I’ll come back to a lot. Not all of Clayton’s ideas and theories are included here. His work is absolutely fascinating. Hope you found this piece useful!
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