Book Review: The Innovator's Dilemma
The Innovator's Dilemma
When New Technologies Cause Great Firms to Fail
by Clayton M. Christensen
Harvard Business School Press
All technology investors should read this book. Even though it has been out since 1997, it
still reigns as one of the single most useful books for a technology investor.
The basic premise is very simple: existing, dominant technology is often toppled by
"disruptive technologies." Established firms, with strong marketing and technology, gets
sideswiped by a previously unknown startup and loses its dominant position. Defining and
understanding the disruptive technology phenomenon is the thesis of the book, followed by
extensive examples. The author is a Harvard Business School Professor who has
extensively studied the disk drive market, which he uses as the prime example of disruptive
technologies.
In many ways, the book reads like an academic thesis, and at times, you may find this
makes it more difficult than it could otherwise be. However, the resultant thoroughness of
the "proof" or examples, is simply overwhelming.
What is a disruptive technology? In short, a disruptive technology has the following traits:
Is a less featured, sometimes cheaper, version of an existing technology
Redefines the parameters of performance measurement in an industry
Does not have a defined market at the time of introduction
If adopted by existing players immediately, would require an undermining of their
existing product line
Often appears contrary to needs requested by customers, at introduction
Creates a new market, which eventually grows to destroy the existing technology
market
Mr. Christensen's main body of evidence for his "thesis" is his study of the disk drive
industry. This incredibly fascinating, detailed history is remarkable, because the disruptive
technology event occurs over and over again within a single industry, with the same results.
While it is easy to look back and make the logical deduction that disk drives should always
get smaller and have more capacity over time, it is also easy to forget that the dominant
company for each form factor changed over time. If you worked in the computer industry
during the 1980s, the chapter on the disk drive industry history is worth the entire price of
the book.
The most interesting single conclusion, to us, in the book is how established firms suffer, if
they ignore technology that doesn't address their customer's current needs. This is
contrary to the old adage: listen to your customers. On the face of this, it seems silly to be
concerned with any new technology which isn't requested by your customers, doesn't
solve any of their current problems, and doesn't look like it will make money. But what a
disruptive technology does is create a whole new market, which eventually attracts your
existing customers. By the time the established firm realizes what is going on, they have
become also-rans.
The PC, of course, fits this model very well. The PC was extremely poor in performance
compared to minicomputers. Existing minicomputer customers did not demand PC's. They
wanted better minicomputers. The PC attracted small business owners who couldn't buy
minicomputers. At Digital Equipment Corporation, the dominant minicomputer maker
when the PC was introduced, Ken Olsen told his VPs he would fire them if they ever
made a computer as "poorly made" as the PC. But the PC market simply grew until it
completely overtook the minicomputer market.
The internet also is a disruptive technology. Is it any wonder that the existing retail
behemoths have not fully addressed the internet? Their existing customers aren't
demanding it, it isn't as full-serviced as the store experience, and there didn't appear to be
a market when it first appeared. All characteristics of a disruptive technology.
Before you start buying more Amazon.com (AMZN) stock as a result of the previous
paragraph however, you should note that Mr. Christensen provides a plan of attack for
established companies to address disruptive technologies. It isn't a slam dunk certainty that
disruptive technology startups also topple the giants. In fact, much of the book is aimed at
corporate executives, to help them cope with disruptive technologies in their own
industries.
At Briefing.com, we find this book particularly interesting, because the internet truly fits the
model of a disruptive technology in the financial world. Online trading, and online
information, such as Briefing.com, started with no market at all, provided returns much too
small to concern the large players, and was much less "featured" than a full service
brokerage account. In addition, the biggest clients of most Wall Street firms weren't even
aware of the internet, much less asking for internet services. Many of the first online trading
customers were customers that the existing Wall Street firms were not concerned with. But
the online financial world has simply grown to huge proportions. The disruptive technology
model fits the online trading world quite well.
Why should investors read this book? Two reasons: First, if you own an established
technology stock at the time a disruptive technology arrives, you need to recognize the
threat. You may well see the problem before management does. At the very least, you
need to start wondering how your company will address the disruptive technology event.
Secondly, if you are able to identify a disruptive technology, before it reaches critical mass,
you are likely to be able to buy into a strong growth stock long before the financials have
driven the stock price up.
The disruptive technology concept is extremely useful when analyzing technology trends.
When a new technology trend occurs, you need to identify whether it is a sustaining
technology which benefits the existing firms, or a disruptive technology, which will
benefit a startup. Every technology investor should be familiar with the concepts described
in "The Innovator's Dilemma."
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