Lecture 7

THE INNOVATION DILEMMA

 Structure of Lecture 7

1. Why were the firms down?

2. Case study: Hard disk drive industry

3. 5 Principles of disruptive innovation

4. Group work
WHY WERE THE FIRMS DOWN?
The Failure of the Firms
• Bureaucracy
• Arrogance
• Tired executive blood
• Poor planning
• Short-term investment horizons
• Inadequate skills and resources
• Bad luck
or:
• Well-managed companies that invest aggressively in new
technology and yet still lose market dominance!
“
Bureaucracy Arrogance Tired Poor
executive blood planning

Inadequate skills Short-term Bad luck

and resources investment
horizons
.. SO IN WHICH INDUSTRIES?
• Industries that moved fast or slow;
• Industries that were built on electronics technology,
chemical and mechanical technology;
• In manufacturing or in service industries.
CASE 1: Sears Roebuck
Industry: service
Field of business: retailer
Success factors:
• One of the most astutely managed retailers in the world.
• Accounted for more than 2% of all retail sales in the U.S.
(at its zenith)
• Pioneered several innovations (even critical to the
success of today’s retailers): supply chain management,
store brands, catalogue retailing, and credit card sales.
CASE 1: Sears Roebuck
“How did Sears do it?
In a way, the most arresting aspect of its story is that there
was no gimmick. Sears opened no big bag of tricks, shot off
no skyrockets. Instead, it looked as though everybody in its
organization simply did the right thing, easily and naturally.
And their cumulative effect was to create an extraordinary
powerhouse of a company” (Fortune, 5/1964).
“Sears has been a disappointment for investors who have
watched its stock sink dismally in the face of unkept
promises of a turnaround. Sears’ old merchandising
approach – a vast, middle-of-the-road array of mid-priced
goods and services – is no longer competitive…” (Forbes,
1990)
CASE 1: How did Sears do it?
Sears received its accolades in mid 1960s – when it was
ignoring the rise of discount retailing and home-center – the
lower-cost formats for marketing name-brand hard goods
à remove Sears of it core franchise.

Visa and MasterCard took the lead position, that Sear had
established in the use of credit cards in retailing. At that
time – Sears was praised as one of the best-managed
companies in the world.
CASE 2: The computer industry
• IBM (and no other major mainframe computer too) dominated
the mainframe market but missed by years the emergence of
minicomputers (technologically much simpler than).
• Digital Equipment Corporation, followed by Data General,
Prime, Wang, Hewlett-Packard, Nixdorf: significant players in
minicomputer business à but missed the desktop personal
computer market.
• Apple, Commodore, Tandy, and IBM: created the personal-
computing market. Apple – was uniquely innovative in
establishing the standard for user-friendly computing, but (with
IBM) lagged 5 years behind the leaders in bringing portable
computers to market.
• Apollo, Sun and Silicon Graphic – were all newcomers to the
workstation market.
CASE 2: The Digital Equipment Corp.
• “Taking on Digital Equipment Corp, these days is like
standing in front of a moving train. The $7.6 billion
computer maker has been gathering speed while most
rivals are stalled in a slump in the computer industry”
(Business Week, 24/3/1986).
• DEC is a company in need of triage. Sales are drying up
in its key minicomputer line. A two-year-old restructuring
plan has failed miserably. Forecasting and production
planning systems have failed miserably. Cost-cutting
hasn’t come close to restoring profitability… But the real
misfortune may be DEC’s lost opportunities (Business
Week, 9/5/1994).
Digital’s and Sears’ paradoxes
• The paradox: The very decisions that led to its decline were
made at the time it was so widely regarded as being an
astutely managed firm.
• Two ways to resolve this paradox:
1. Firms such as Digital, IBM, Apple, Sears must never have
been well managed. Maybe they were successful because of
good luck and fortuitous timing, rather than good
management. Then they finally fell on hard times as their
good fortune ran out.
2. These failed firms were as well-run as one could expect a
firm managed by mortals to be – but that there is something
about the way decisions get made in successful
organizations that sows the seeds of eventual failure.
The Paradox
• The paradox: good management was the most powerful
reason they failed to stay atop their industries.
• Because these firm:
• Listened to their customers.
• Invested aggressively in new technologies that would
provide their customers more and better products of
the sort they wanted.
• Carefully studied markets trends and systematically
allocated investment capital to innovations that
promised the best returns.
• à lost position of leadership.
What would be the right things to do?

ARE THERE TIMES:

1. Not to listen to customers?
2. Invest in developing lower-performance products that
bring lower profits.
3. Aggressively pursue small, rather than substantial,
markets.
REFERENCE
Clayton Christensen (1997), The Innovator's Dilemma:
When New Technologies Cause Great Firms to Fail,
Harvard: Harvard Business Review Press.
GROUP WORKING
MARKET OPPORTUNITY OF YOUR BUSINESS PROJECT
• TAM (Total Available Market) is the total market demand for a product/
service.
• SAM (Serviceable Available Market) is the segment of the TAM targeted by
your products and services which is within your geographical reach.
• SOM (Serviceable Obtainable Market is the portion of SAM that you can
capture).
Examples of Disruptive Technology

Company Disruptive Technology

Amazon Speed based delivery
Multiple delivery processes from drones to strategically located fulfillment
centers
Disruptive technology including processing the customer order before the
customer has even finished the purchase, so that the product is already
moving toward delivery

Uber and Lyft Ride sharing versus taxi driving

Apps and Beacon and Amp-color coded alert communication system
disrupted the taxi system

Bitcoin Digital currency not connected to a specific country or monetary standard

Value based on market forces
Toyota E-Palette Remote controlled driverless electric shuttle that brings the service to the
customer rather than the customer going to the service
Table 4.1
WHY GOOD MANAGEMENT
CAN LEAD TO FAILURE
THREE MAIN REASONS
1 Sustaining Technologies AND
• Sustaining technologies:
1. Most new technologies foster improved performance
of established products, along the dimensions of
performance that mainstream customers in major
markets have historically valued .
2. Some sustaining technologies can be discontinuous
or radical; others incremental.
3. Most technological advances in a given industry are
sustaining.
BUT
Most radically difficult sustaining technologies precipitated
the failure of leading firms.
… Disruptive Technologies
• Disruptive technologies:
1. Innovations that result in worse product performance,
at least in the near-term à underperform established
products in mainstream markets.
2. They have other features that a few (new) fringe
customers value.
3. Product based on disruptive technologies are
cheaper, simpler, smaller, and more convenient to
use.
4. Precipitated the leading firms’ failure.
Established vs. Disruptive Technologies
Established technologies
Silver halide photographic film
Vacuum tubes
Wireline telephone
Notebook computer
NY and NASDAQ stock exchanges
Bricks & mortar retailing
Industrial materials distributors
Classroom and campus-based
instruction
Standard textbooks
Windows
Open surgery
Established vs. Disruptive Technologies
Established technologies Disruptive Technologies
Silver halide photographic film Digital photography
Vacuum tubes Transistors
Wireline telephone Mobile phone
Notebook computer Smart mobile digital appliances (iPad,
Note, smartphone, etc.)
NY and NASDAQ stock exchanges Electronic Communications Networks
Bricks & mortar retailing On-line retailing
Industrial materials distributors Internet-based sites (eg. Chemdex
and E-steel)
Classroom and campus-based Digital education (via internet)
instruction
Standard textbooks Digital textbooks
Windows Internet protocols (IP), Java…
Open surgery Arthroscopic and endoscopic surgery
2. Market Need vs. Technology Improvement

• Technologies can progress faster than market

demand:
1. In efforts to provide better products than their
competitors and earn higher prices and margins à
firms often overshoot their market: give customers
more than they need or ultimately are willing to pay
for.
2. Disruptive technologies that may underperform today,
relatively to what users in the market demand, may be
fully performance-competitive in that same market
tomorrow.
The impact of Sustaining and Disruptive Technological Change
3. Disruptive Technologies vs. Rational Investment

• Established companies that investing aggressively in disruptive

technologies is not a rational financial decision for them to make:
1. Disruptive products are simper and cheaper; they generally promise lower
margins, not greater profits.
2. Disruptive technologies typically are the first commercialized in emerging or
insignificant markets.
3. Leading firms’ most profitable customers generally don’t want, and indeed
initially cant use, products based on disruptive technologies. A disruptive
technologies is initially embraced by the least profitable customers in the
markets.
à Most firms with a practiced discipline of listening to their best
customers and identifying new products that promise greater profitability
and growth are rarely able to build a case for investing in disruptive
technologies until it is too late.
CASE OF HARD DISK
DRIVE INDUSTRY
Primary Components of a Typical HD
Impact of New Read-Write Head Technologies
Capacity Demanded vs. Capacity Supplied
5 PRINCIPLES OF
DISRUPTIVE INNOVATION
34
5 Principles for Disruptive Innovation

1
Companies depend on
customers and investors for
resources

2 Small markets don’t solve the

growth needs of large companies
35

3 Markets that don’t exist cant

be analyzed

4
Firms’ capabilities need to exit
independently of people work
within them

5 Technology supply may

NOT equal market demand
5 Principles of disruptive innovation
1. Companies depend on customers and investors for
resources: while managers may think they control the
flow of resources in their firms, in the end it is really
customers and investors who dictate how money will be
spent as firms with investment patterns that don’t satisfy
their customers and investors don’t survive à very
difficult to invest adequate resources in disruptive
technologies.
2. Small markets don’t solve the growth needs of large
companies: $40 million company needs to find just $8
million in revenues to grow at 20% pa; $4 billion
company needs to find just $800 million in new sale.
5 Principles of disruptive innovation
3. Markets that don’t exist cant be analyzed: tips of sound
market research and good planning would not satisfied.
4. An organization’s capabilities define it disabilities: when
managers tackle an innovation problem, they
instinctively work to assign capable people to the job.
But once they’ve found the right ones, too many
managers then assume that org. in which they’ll work
will also be capable of succeeding at the task.
Dangerous!!!: orgs. Have capabilities that exits
independently of the people who work within them.
5. Technology supply may not equal market demand:
disruptive technologies can be fully performance-
competitive within the mainstream market against
established products.
GROUP WORKING
MARKET SIZE & COMPETITOR ANALYSIS OF YOUR
BUSINESS PROJECT