Clayton Christensen’s “The Innovator’s Dilemma”: Book Review, Notes + Analysis

Poor Ash’s Almanack > Book Reviews > Business / Finance

Overall Rating: ★★★★ (4/7) (acceptable for its category)

Per-Hour Learning Potential / Utility: ★★★★ (4/7)

Readability: ★★★★ (4/7)

Challenge Level: 3/5 (Intermediate) | 288 pages official

Blurb/Description: In this acclaimed classic, HBS professor Clayton Christensen provides a detailed analysis of why well-regarded, well-managed firms that focus on their customers and drive improved product performance can quickly be blindsided by “disruptive” technologies that start off serving a small, low-margin niche, then rapidly explode upmarket.

Summary: This is one of those books that it took me surprisingly long to read – it’s been on my bookshelf for several years, but I never got to it until summer 2017.  I thought it was a thought-provoking book that, even if not 100% explanatory of business disruption, serves as a useful jumping-off point.

Highlights: The “resource dependence” discussion of internal organizational politics and its impact on the effective translation of capability to practice, particularly the Woolworth’s discussion (impactful, although brief).

Lowlights: The chapter about disk drives is overly detailed and tedious; you can skim it with no real loss of effect, and in fact I would strongly recommend that because the book really picks up after that chapter and gets really interesting midway through.  

It’s also a theory that is easy to “over-apply,” and one that doesn’t wholly explain other types of potentially disruptive innovation (for example, Tesla starting upmarket and coming down rather than vice versa).

As such, for people who don’t invest in (or run) businesses that are disruptors (or at risk of disruption), there are fewer cross-applicable lessons here than I’d expect.

Mental Model / ART Thinking Points: local vs. global optimizationtrait adaptivitymargin of safety

You should buy a copy of The Innovator’s Dilemma if: you frequently invest, or run a business in, sectors where disruptive change has or could happen.

Reading Tips: skim heavily… the details and methodology usually don’t add much… Christensen’s work is undoubtedly important, but his interpretations are sufficient to convey the point (unless you want to get really deep into the weeds).

Pairs Well With:

Behind the Cloud ( BtC review + notes) by Marc Benioff – Salesforce seems like a classic “disruptor” and Benioff’s a great storyteller.

The Upstarts ( TUS review + notes) by Brad Stone – more disruption.

Zero to One ( Z21 review + notes) by Peter Thiel – a little different look at disruption.

 

Reread Value: 2/5 (Low)

More Detailed Notes + Analysis (SPOILERS BELOW):

IMPORTANT: the below commentary DOES NOT SUBSTITUTE for READING THE BOOK.  Full stop. This commentary is NOT a comprehensive summary of the lessons of the book, or intended to be comprehensive.  It was primarily created for my own personal reference.

Much of the below will be utterly incomprehensible if you have not read the book, or if you do not have the book on hand to reference.  Even if it was comprehensive, you would be depriving yourself of the vast majority of the learning opportunity by only reading the “Cliff Notes.”  Do so at your own peril.

I provide these notes and analysis for five use cases.  First, they may help you decide which books you should put on your shelf, based on a quick review of some of the ideas discussed.  

Second, as I discuss in the memory mental model, time-delayed re-encoding strengthens memory, and notes can also serve as a “cue” to enhance recall.  However, taking notes is a time consuming process that many busy students and professionals opt out of, so hopefully these notes can serve as a starting point to which you can append your own thoughts, marginalia, insights, etc.

Third, perhaps most importantly of all, I contextualize authors’ points with points from other books that either serve to strengthen, or weaken, the arguments made.  I also point out how specific examples tie in to specific mental models, which you are encouraged to read, thereby enriching your understanding and accelerating your learning.  Combining two and three, I recommend that you read these notes while the book’s still fresh in your mind – after a few days, perhaps.

Fourth, they will hopefully serve as a “discovery mechanism” for further related reading.

Fifth and finally, they will hopefully serve as an index for you to return to at a future point in time, to identify sections of the book worth rereading to help you better address current challenges and opportunities in your life – or to reinterpret and reimagine elements of the book in a light you didn’t see previously because you weren’t familiar with all the other models or books discussed in the third use case.

The premise of The Innovator’s Dilemma is studying businesses that were cut down by upstart competitors despite generally good management and track records of success – companies like Sears, DEC, Xerox, and so on.  Clayton believes that this implies:

“… many of what are now widely accepted principles of good management are, in fact, only situationally appropriate.  There are times at which it is right not to listen to customers, right to invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small, rather than substantial, markets.

Trait adaptivity, in other words.

While the word “disruptive” is thrown around a lot, Clayton has a very specific definition of it: disruptive technologies are those that “bring to market a very different value proposition than had been available previously,” generally being “cheaper, simpler, smaller, and frequently, more convenient” even though they are lower performance.  

On the other hand, sustaining technologies “improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.”  The idea is that most organizations are optimized to go after the second, but when confronted with the first, traditional management methods fail.

The first case study is the disk drive industry, which has gone through many iterations… generally speaking, incumbent firms did a good job of delivering higher-performance drives in existing formats, which was accomplished via technological innovation, but they failed to provide solutions for emerging, less performance-intensive technologies (think: mainframe -> computer, computer -> desktop, etc).  

Over time, the performance of these “good-enough” technologies caught up to take share in legacy markets, as performance of high end disks was in fact increasing more rapidly than underlying customer demand… i.e. in some sense it’s nice that your Lambo can do 0-60 in whatever, but I’m just going to the grocery store, man – that’s a nice feat of engineering but it’s no longer useful to me.  

Christensen comes back to this point later in the book, noting that once you’ve reached a level where the incremental value of performance on one dimension is essentially zero, competition starts to happen on other dimensions; Christensen believes the order is functionality-reliability-convenience-price (via the Windermere Associates buying hierarchy).

While Christensen’s analysis doesn’t go this far, I see a similar pattern in areas like hard drives -> SSDs (may not perfectly fit the bill), or cheap mobile processors vs. high end computer processors (at some point, processing power doesn’t matter if you’re only using Facebook… [note: it turns out Christensen does, at least in this edition, eventually talk about flash memory vs. hard drives].)  

On the other hand though, it seems like it might be easy to “over-apply” his theory – while PC manufacturers have been disrupted by mobile phones in a way, it’s not at all clear that mobile chips will displace PC chips or server chips – there has been a lot of “noise’ about this for the past five years but seemingly little market share progress – maybe it’s coming; I don’t know (I don’t really follow INTC anymore) – but it’s also important not to over-apply the doom and gloom scenario.

Christensen proceeds to discuss the concept of “value networks,” i.e., the ecosystems in which companies operate (such as the mainframe ecosystem, the PC ecosystem, etc) and how characteristics of those ecosystems drive (or necessitate) different gross margins.  He essentially makes the contention that:

“innovations that are valued within a firm’s value network, or in a network where characteristic gross margins are higher, will be perceived as profitable…

technologies [with lower gross margins] … will not be viewed as profitable, and are unlikely to attract resources or management interest.

Without reviewing the data, I think this is a little reductionistic – on the previous page, he notes some of the major differences between the mainframe market and the PC market – one is high volume while the other is low, one has significant sales force and field maintenance while the other is basically selling cardboard boxes at retail, and so on and so forth.  

Christensen earlier dismissed the idea of capabilities being the major driver here, arguing that all of the disk drive companies were technologically capable (and in fact superior to) the upstarts, but at least so far, I think he’s failing to differentiate between engineering capabilities and go-to-market capabilities; putting on my manager’s hat for a second, I don’t think it’s so much that oh, this new product line has lower gross margins, because if it delivers incremental bottom line on the existing infrastructure, who really cares?  The problem is that you don’t have the infrastructure or the knowledge of how to go to market there…

Christensen’s next topic is how the invention of hydraulics similarly “disrupted” the market for power shovels – at first, the big manufacturers dismissed hydraulics because they only worked on small machines that could move small amounts of dirt (i.e. Bobcats), but over time, as the hydraulics got more powerful, they disrupted the market for construction, mining, etc.  While the disk drive section was way too detailed, this section was insufficiently detailed, and I didn’t really come away with any new insights.

The next chapter does propose a good and reasonable hypothesis for why disruption happens: it’s easier from an internal-resources perspective to move upmarket than down, because you know the market is there, the margins are higher, etc – vs. betting on a speculative/unproven market at the lower end of the spectrum.  

The anecdote about Honda and 1.8-inch-drives is, to this point, the most impactful of the book (and I’ll talk about it in a little while once I’ve synthesized my thoughts) – essentially, the company actually developed 1.8-inch drives but couldn’t figure out how to sell them because their existing customers didn’t want them…

Christensen moves on to cover the story of steel mini-mills: players like Nucor started out at the low end of the market making rebar in smaller furnaces, while the bigger players were focused on high-quality steel for higher-margin applications like cars.  Eventually, after the introduction of technology (by another player) that allowed Nucor to move upmarket into sheet metal, they caught up…

The book really picks up at this point.  Christensen brings up the theory of “resource dependence” and discusses (with some seemingly strong support) why he thinks single organizations have real trouble selling to very different customers/markets (i.e., they compete for resources).  

Among the few firms that responded successfully to disruptive change, he identifies a commonality: a separate organization was set up, often physically distant, and was allowed to pursue its own market with a different cost structure and oversight; he offers an example of a company (Woolworth’s) that successfully entered a disruptor category (discounting) with a new entity (“Woolco”) but once management of that entity was consolidated, it rapidly lost its ability to operate independently, and saw its financial metrics converge with that of the non-discounter parent…

On the other hand, HP, which set up an independent unit to go after the (disruptive) ink-jet market and compete with its existing laser-jet printers, eventually ended up succeeding in that market, and Christensen alleges that it would not have done so had it tried to manage both businesses.  

(A good modern parallel is discussed in Brad Stone’s The Everything Store – TES review + notes – Bezos set up a separate team to develop the Kindle, with not just permission, but the mission ofdisrupting their existing book business.)

I think this is a very strong point – while I may disagree a bit with how Christensen gets here, I agree with where he’s gotten – insofar as you could in some cases summarize this as: when a business is trying to protect its own profitable legacy business and is afraid of a new product/market cannibalizing that business, it will eventually lose that business to someone who is not burdened by the legacy “asset” and can therefore go full-bore after that market.   Local vs. global optimization.

From an organizational dynamics standpoint, the new product threatens the old (profits, jobs, status, etc) and therefore does not have the full backing of the organization… makes total sense.  He cites a bunch of examples here.

Christensen believes that creating new markets is less risky and more rewarding than entering established markets, but the bigger the company gets, the harder this gets to do (for both the reason of materiality, i.e. the opportunity doesn’t move the needle, and organizational resistance).  He also discusses how being a leader in producing sustaining advantages – i.e., being good at playing the game (my words) – doesn’t help you compete in disruptive markets (i.e., playing a new game).  E-commerce would seem to be a good example of this…

There is a Great A&P (The Great A&P – GAP review + notes) reference on page 138!!! (Sorry, I just get really excited about those for reasons I can’t wholly explain.)  

One risk is in overinvesting in an emerging market, in the sense that if you put your standard resources into it and develop a product that’s too high end, you risk overshooting what the demand is actually for… I guess the takeaway is “MVP” (minimum viable product) although Christensen doesn’t mention this (at least here).

Christensen discusses Honda’s entry into the U.S. market, which he claims is misanalyzed – it turns out that Honda actually tried to introduce a Harley-like bike but failed; its U.S. presence (completely by accident) created the dirt bike market when they rode their bikes in the mountains to relieve some frustration.

Christensen notes that since expert forecasts are usually wildly wrong, they’re not very helpful in figuring out which market to go after; he further notes, very astutely in my opinion, that:

“guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources… so that new business initiatives get a second or third stab at getting it right.  

Those that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.”  

Margin of safety?

He also notes that failure is intrinsic; from a management standpoint, my takeaway is obviously that executives should be supportive of going after new markets.  See also Richard Thaler on “dumb principals” in “ Misbehaving ( M review + notes).

In my version of the book, Christensen concludes with an interesting (if dated) discussion of how he would run an electric-car project as an auto executive… what is particularly interesting is that Tesla has actually come at this market from the opposite perspective, starting with high-priced toys for wealthy buyers and eventually coming downmarket.

 

First Read: July 2017

Last Read: July 2017

Number of Times Read: 1

Planning to Read Again?: no

 

Review Date: July 2017

Notes Date: July 2017