Blog #3 - Innovator's Dilemma

Why is success difficult to sustain? Why was it hard for the big, rich companies who were admired and emulated by everyone, find it difficult to sustain their dominance? They are ranked among the top 10 in a certain year, and years later struggle to be in the middle or just disappear. Was it because technology moved on and the older companies couldn’t catch up with it? Or bad leadership and managerial decisions?

The Innovator’s Dilemma is an important and fascinating study on the relationship between organizational culture and the ability to innovate. The article ‘Innovator’s Dilemma: Why good companies fail to thrive in fast-moving industries’ by Clayton Christensen revolves around two main themes:

a) Sustaining vs disruptive technologies

b) Companies overshooting the needs of the customers

A lot of leading firms fail to experiment with new products/services and thus miss out on opportunities to serve the new market segment. This is because companies invest aggressively and overshoot the needs of their existing customers. Companies fail to realize that disruption occurs either at the low end of the market or by creating a new market.

Once Henry Ford was quoted saying: “If I had asked people what they wanted, they would have said faster horses.” The customers need faster horses. Is it possible to produce one just because the customers had asked for it? The real key to creating disruption is discernment. Knowing your market and the job that is expected out of it is the key to success. Here, the desired outcome of the customer need is to go ‘faster’ and not on the perceived solution ‘horses’.

“The reason [for why great companies failed] is that good management itself was the root cause. Managers played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors’ actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technology change.” [1] 

I came across an interesting real-time example that relates to Innovator’s Dilemma which involves Toyota vs Ford and General Motors [2], supported by the above-mentioned quote. How did a Japanese automaker make its way to the US automotive industry? How did the Big-3 allow Toyota to make its place in the industry by etching away their preeminence?

When Toyota entered the industry, the Big-3 were focused on the powerful engines and large cars (which was the trend in the 1960’s). Rather than attacking the incumbents, Toyota focused on catering the lower tier of the market by providing compact, fuel-efficient cars at an affordable price. Toyota came in with rusty little subcompacts like Corona and Corolla, which struck a chord with people who were willing to buy smaller cars with less powerful engines for a cheaper price. The Big-3 watched as Toyota started to capitalize upward on their market share pushing them into Innovator’s Dilemma: Should we fight to preserve the lower tier market or continue to manufacture big cars serving the highly profitable customers?

Just like in the case of Integrated Mill and Mini Mill as described in the article [1], The Big-3 were happy to be freed from the lower-tier market, effectively paving way for Toyota to make an upward move in the market. Though the Big-3 did not completely shut down on the low tier market, but they were not as motivated as Toyota to cater that segment by cutting back on design programs for smaller cars. Toyota gradually moved upward by moving away its competition from low-end cars to high-end cars, over the long haul creating the luxury-end cars such as the ‘Lexus’.

Dominating the industry is not a one time-event, rather it is a continuous process. In the current century, Kia has taken up the role of Toyota by serving the economically constrained customers. And Toyota is facing the Innovator’s Dilemma just like the Big-3. The organization must avoid the temptation of avoiding the lower-tier market in the pursuit of high profitability as they are losing out on even bigger opportunities to serve the entire market. If they choose to neglect, some other new entrant would serve as a formidable competitor. This in turn leads to increase in the number of competitors, thus reducing the market share too.

Citations: :

[1] Why Good Companies Fail to Thrive in Fast Moving Industries and Discovering New and Emerging Markets (Christensen, Introduction to and Chapter 7 of The Innovator’s Dilemma, 1997)

[2] https://www.newyorker.com/magazine/2012/05/14/when-giants-fail