Thursday, November 3, 2011

Why Good Companies Fail

This post is inspired by the first reading of week 3; A fresh look at industry and market analysis, by Stanley F. Slater and Eric M. Olson. I mostly agreed with the first part of their writing on the augmentation of Porters Five Forces model, however, the second part on the strategic positioning in competitive markets raised some issues with which I do not fully agree.

The authors refer to Christensen for his idea on disruptive and sustaining technologies. However, what they do not refer to is Christensen’s writing on “The Innovators Dilemma: Why do good companies fail?”. One of the suggestions Slater and Olson give to reduce the pressure of the competitive forces in their markets is to establish relationships with key customers and suppliers. However, this suggestion is one of the reasons Christensen gives of the failure of good companies.

Christensen writes in 1997 that good companies fail because of the same skills that lead to their success; they listen to customers, they invest aggressively in new technologies that would provide customers with more and better products of the type they wanted, and they carefully study market trends and systematically allocate investment capital to innovations that promise best return. These fit with some of the suggestions Slater and Olson make in their article. So how come these properties can lead to the failure of established companies?



According to Christensen there are three findings that help explain the failure of established firms:
1. There is a distinction between sustaining technologies and disruptive technologies.

According to Christensen, disruptive technologies cause a change in the rules of competition by changing the
dimensions of performance demanded by the market. They generally underperform established products in
mainstream markets, they have features that a few fringe customer’s value (niche market), and they are
cheaper, smaller, and more convenient.
2. The pace of technological progress can outstrip what markets need.
3. Investing aggressively in disruptive technologies is not a rational decision for established firms,
since:
- Disruptive products are cheaper and simpler, so promise lower margins and profits.
- They are first commercialized in emerging/insignificant markets
- Leading firms’ most profitable customers generally don’t want and can’t use disruptive technologies.

So the disruptive technology is initially embraced by the least profitable customers in a market, and companies listening to their best customers are rarely able to build a case for investing in disruptive technologies until it is too late. As good firms are held captive by customers and are not able to find a downward vision on their trajectory map, the company couldn’t find new markets for new products.

In conclusion, some of the suggestions given by Slater and Olson to reduce the pressure of the competitive forces in their markets may actually cause companies to fail. Companies must be really careful to not follow the situation Christensen described in his article. They should be careful, as the skills that make them successful may turn out to be the skills that make them fail.


One question that could be raised here is: How can the suggestions made by the authors in "A fresh look at industry and market analysis" be adjusted or expanded to make sure readers of the article will not fail due to factors explained by Christensen?



Sources:

- Slater, S.F., Olson, E.M. (2002). A fresh look at industry and market analysis. Business Horizons. January/February 2002

- Christensen, C. (1997) The Innovator's Dilemma. Cambridge, MA, Harvard Business SchoolPress.

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