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An excellent explanation of a recurrent strategic problem
am 27. April 1998
The Innovator's Dilemma offers a compelling explanation forwhy large and well-respected firms lose their dominant positionswithin a market, following what Christensen styles as 'disruptive innovation'.
Innovation takes two forms: sustaining and disruptive. Competition in oligopolistic markets is manifest in continuous product improvement, or sustaining innovation. This contrasts with a disruptive innovation, which fundamentally changes a product's nature, offering new functionality, although often at the expense of performance.
Typically, when disruptive innovation occurs, incumbents will reject the new technology; where markets do exist for such innovative products, they tend to be small and offer slim margins. Despite this, the book cites evidence of upstart firms with a low cost configuration and lower profit expectations, which have successfully exploited these marginal opportunities.
Refinement of the innovative product to a standard acceptable to traditional customers coupled with additional functionality enables the niche player to compete head on with established firms. They do so by pricing aggressively. Market incumbents typically respond by quickly incorporating the innovative technology into their products, only to find that they are able to make little impact in the developing new market (weak brand name) and cannibalise their existing customer base at lower margins. A new technology standard has been set.
The few firms that have survived a disruptive innovation have embraced the new technology early and recognised the need for a different approach to operation within the market. This demands a different corporate mentality and ultimately, organisational design, which is only possible by establishing a virtually autonomous and sometimes geographically separate subsidiary. Eventually, this may reverse acquire the parent.
The Innovator's Dilemma provides an interesting perspective on a seemingly recurrent problem. It does so in a fashion that is both insightful and easy to read. The main themes in the book are qualified with numerous examples and some rudimentary analysis, whilst avoiding being unduly repetitive.