The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (1997) by Clayton Christensen

One of the most influential business books of all-time, Clay Christensen’s “The Innovator’s Dilemma” is a must-read for anyone interested in business strategy.

The author’s paradoxical conclusion is that what is often perceived as good management practice – listen to and faithfully serve your current customer base – actually exacerbates the problems associated with dealing with new technologies. Customers may not be interested in the disruptive technology at first, and it may offer lower margins and open up a small market in the short run. Thus, incumbent market leaders are liable to overlook the potential of the new technology. Ultimately, the author says, the existing technology “overshoots” the customer needs while the disruptive technology becomes a convenient and often lower cost alternative. By the time companies in a market leadership position react it is often too late. Smaller companies that initially focused on the disruptive technology quickly eat away at the mature market from below.

Christensen offers several case studies to make his point. The best one, in my opinion, deals with the mechanical excavator industry, which encapsulate the core thesis of the book.

The mature industry of mechanical shovel manufacturers (Bucyrus, Thew, Marion) that had successfully adopted to earlier “sustaining technology” innovations, such as the transition from steam power to gasoline engines and then to diesel and electric, were upended by the emergence of hydraulic powered shovel technology. The sustaining technology change was radical, but still met current customer demands across three established markets: 1) general contractors (i.e. digging basements for houses); 2) sewer and piping contractors (long, narrow ditches); and 3) strip mining. The two key metrics for each of these industries was the same: reach and shovel load.

When hydraulic powered shovels came on the market after World War II they suffered from severe handicaps that prevented them from serving the existing excavator community. The reach was much shorter than needed (about six feet); the shovel capacity was just ¼ cubic yard (far below the 2 ½ cubic yards needed for the largest market segment, the general construction contractor). The original models were designed to hitch on to a small tractor (i.e. the “backhoe”) and could only pivot 180 degrees, unlike cable excavators that could go 360 degrees.

Christensen says that the existing mechanical shovel manufacturers were well aware of the hydraulic technology and tried to adopt it as soon as it became available. However, for the first decade it simply didn’t meet the demands of existing customers. Meanwhile, a group of new entrants got into the small hydraulic digger market (Caterpillar, Bobcat, John Deer, Hitachi, Kamatsu). They marketed their backhoes to a completely different customer base and emphasized different things in the machine’s capabilities compared to the cable excavator companies. Their main market became the small contractors putting in short sewer lines in the exploding community track housing complexes that emerged post World War II. They emphasized the width of the shovel rather than its load and the maneuverability of the tractor rather than the range or reach of the digger.

Meanwhile, the bucket sizes of the hydraulic diggers grew rapidly and eventually caught up to the needs of the established customer bases being served by the cable-powered excavators. By the time the technology caught up to the existing markets needs, the established companies couldn’t recover. The hydraulic companies had more experience with the technology and their products could now compete effectively against cable diggers on the issue of reliability (they didn’t break down as much, not to mention the danger of a snapped cable). So once the key metrics of the hydraulic lift became “good enough,” especially for bucket size, the cable excavators rapidly lost share.

Christensen argues that the cable excavator companies imperiled their future by working hard to satisfy their current customer’s demands. In hindsight, they should have established a hydraulic line to serve the new customer base and then allow that to grow over time. Instead, they were “disrupted” and ultimately pushed out of business.

Christensen suggests a range of actions that incumbents can take to avoid the disruption trap. Technology may progress faster than market demand, so technologies that are not deemed relevant today may squarely address your customer’s needs tomorrow. It is during this period of customer irrelevance when the investments in the disruptive technology need to be made, even when the required data to support such an investment is lacking. The key thing with disruptive technology is finding the right and new customer base to adopt it at first and provide the company with the needed experience, expertise and brand in the technology. Thus, disruptive technology presents established firms with a marketing challenge more than a technological one. Finally, being a first mover in the disruptive technology is important; established firms can be followers in sustaining technology, but not those that are disruptive.