59 pages • 1 hour read
Clayton M. ChristensenThe Innovator's Dilemma: When New Technologies Cause Great Firms to Fail
Nonfiction | Book | Adult | Published in 1997A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Part 1, Chapters 3-4Chapter Summaries & Analyses
Part 1: “Why Great Companies Can Fail”
Part 1, Chapter 3 Summary: “Disruptive Technological Change in the Mechanical Excavator Industry”
Christensen briefly discusses the history of the excavator industry, which widely used cable-actuated systems from the time of its invention. After World War II, innovators developed the hydraulically actuated system that would grow to dominate the industry by the 1970s. Entrant firms created a value network with the residential sewage construction market, which cable shovels could not easily penetrate because of their size. When this network assessed hydraulic excavators, also called backhoes, they employed different metrics from the ones used to evaluate cable shovels. Over the next 30 years, hydraulics firms endeavored to integrate sustaining innovations to backhoes. The rate of improvement in hydraulic technology accelerated much more quickly than the rate of improvement demanded in mainstream excavator markets. This acceleration brought the technology upmarket.
To respond to the disruption, leading cable shovel firms entered the hydraulics business but found that the product could not be marketed to their primary customer base. In 1951, they introduced new products that combined hydraulic and cable-actuated technologies to appeal to the needs of their customer base. Still, this product did not succeed in their native value network. Because entrant firms discovered the market that would value the capabilities of hydraulic technology, they gained a strong position that enabled them to attack established firms. Christensen notes that even though cable-actuated technology still performs better than hydraulic products in certain areas, the former failed to maintain its market relevance when the latter met customers’ basic needs. As a result, hydraulic products came to be viewed as the more reliable product.
Part 1, Chapter 4 Summary: “What Goes Up, Can’t Go Down”
Christensen observes that although companies can easily move upmarket, they find it difficult to move down into markets where disruptive technologies have value. Because upmarket value networks promise greater margins on a low-cost structure, established firms are compelled to pursue the possibility of improved financial performance. Christensen discusses two descriptive models that explain resource allocation to further explore asymmetric mobility. The first model presents allocation as a top-down process of selecting an investment plan that aligns with corporate strategy and profitability. The second model approaches allocation from the bottom up by screening investment proposals through middle managers; these managers then determine which investment ideas will likely clear bureaucratic hurdles and succeed. In the second model, the burden is placed on the middle manager to ensure the presence of the market where the investment will have value. The middle managers choose projects that have the highest guarantee of market success and pitch them in a way that gains senior management’s approval. In this context, “good” management sense hinders companies from adequately defending themselves against entrant firms that are moving upmarket.
To show how this behavior impacts financial performance in the long run, Christensen discusses his research on the disruptive 1.8-inch disk drive. Recalling a conversation with the chief executive of one of the industry’s largest companies, he points to the executive’s dismissal of an existing market for the drives. Though the company had already developed a product with several iterations of sustaining innovations, the executive insisted that they were waiting on the market to emerge. Soon afterward, Christensen encountered a student who discussed the use of 1.8-inch disk drives in Honda’s automotive navigation systems. When asked who supplied the drive, the student pointed out that none of the disk drive leaders sold them; the technology could only be obtained from entrant firms. Christensen reiterates his insight that although the multibillion-dollar firm had the lead on the disruptive technology, they could not justify diverting resources to a multimillion-dollar market. Moreover, the basis of their financial performance was so firmly rooted in the computer industry that they could not conceive of assessing new standards of performance in a different market.
Christensen identifies three factors that prevent companies from moving downmarket: upmarket profit projections, customer migrations into upmarket segments, and inflexible cost structures. However rational and attractive the choice to move upmarket appears to be, it leaves a supplier gap in emerging value networks, inviting entrant firms with more relevant cost structures and technological applications to gain a foothold. Christensen examines this pattern in the global steel mill industry, where the dominance of integrated mills in North America is being disrupted by emerging low-cost minimill technology.
The North American phenomenon is explained by minimill companies targeting rebar production, one of the lowest-value markets in the steel-making business. Minimill firms utilized the minimal cost structure of the rebar business to build their resource base. They also improved their product quality to target an expanded range of upmarket sales. In the span of 15 years, these firms managed to capture the lowest segment of integrated mills’ customer base. The established firms, who wanted to prioritize commercializing their highest-margin products, shook off what they considered to be relatively negligible loss. Hence, the minimill companies continued to attack upward, though they could not meet the demands of integrated mill firms’ most valuable markets. Christensen implies that with the introduction of thin-slab casting (a new disruptive technology that massively improves the quality of minimill products), the trend is likely to continue until minimills corner integrated mills with performance-competitive products.
Part 1, Chapters 3-4 Analysis
The end of Part 1 provides several bold implications for the framework of Christensen’s book. So far, he has shared examples of entrant firms successfully leveraging disruptive innovations to trigger a shift in market hierarchy. However, as he continues to discuss the characteristics of his framework, there is no discussion of an established firm that successfully leverages the disruptive technology to defend its market position.
In fact, Chapter 3 presents a case study that suggests the opposite, and Christensen once again leverages real-world data to support his interpretation. As he states, when the established cable-actuated excavator firms saw hydraulic machines on the rise, they immediately moved to introduce their own hydraulic products to the mix but were startled to find that their response did not work. Cable-actuated products that integrated hydraulic technology in their design failed to create the same impact that inferior hydraulic-exclusive products made upon their arrival in a lower-margin market. This contrast introduces a complication in Christensen’s framework, implying that it isn’t just the disruptive technology that matters; the value network itself is also important.
This discussion paves the way for Chapter 4, which explains why it isn’t so easy for companies to just breach a new value network the way entrant firms do. As Christensen previously explained in Chapter 2, companies are held captive to their customer base. In Chapter 4, he shows how a company’s cost structures and profit agenda also prevent it from seriously considering a long-term investment in disruptive technology. Christensen deploys an anecdote to demonstrate this insight further, recalling first a conversation with an executive at a mainstream disk drive firm and comparing it with the experience of a student who had participated in the new value network where the disruptive 1.8-inch disk drive had created value. In the conversation with the executive, Christensen characterizes the man’s behavior as dismissive, pointing out that although the company had already developed the product that entrant firms still needed to create on their own, he was waiting for the market to actually gain value before engaging with it. Meanwhile, in the conversation with the student, Christensen shows that the executive was already too late. The market had value, but its scale differed from the perspective of the executive. The contrast in the two conversations also underscores The Influence of Underserved Markets, showing how small firms engage with market applications that are far outside the computer industry, allowing them to gain a stronger position and to carve out a more diverse customer base.
Just as Christensen promised in the Introduction, the first part of the book introduces a framework that describes the natural forces dictating market dynamics. As this part closes, it is clear that Christensen’s framework presents an overwhelming bias toward entrant firms. In any situation, newer companies will always find a position from which to strike at the market leaders. Meanwhile, established firms are always doomed to retreat upmarket until they fail because they can no longer meet the customer demand. As Christensen’s analysis shows, this failure occurs because of conditions that established firms are unable to change.
It is important to note that thus far, the book takes a problematic and rather fatalistic view of market dynamics. This stance does not address the examples of companies that have survived multiple market upheavals, including some of the organizations that Christensen has mentioned already. As mentioned in the introduction, however, Christensen acknowledges that although the critical failure of established firms due to disruptive innovations is avoidable, it is a common occurrence because of the passive behavior that established firms assume once they occupy a successful position. Wiser companies have survived over the decades because they did not demonstrate the same passive behavior when faced with disruption. Since the author has established that the next part of the book will lean on the framework’s more practical insights, the ground is prepared for a deeper discussion of these very organizations.
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By Clayton M. Christensen
