Clayton Christensen Disruptive Innovation Quotes

Motivation is the catalyzing ingredient for every successful innovation. The same is true for learning.

Disruptive technologies typically enable new markets to emerge.

There are more than 9,000 billing codes for individual procedures and units of care. But there is not a single billing code for patient adherence or improvement, or for helping patients stay well.

disruptive technology should be framed as a marketing challenge, not a technological one.

the best way to get a good idea is to get a lot of ideas.

One quarter of Medicare beneficiaries have five or more chronic conditions, sees an average of 13 physicians each year, and fills 50 prescriptions per year.

First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms’ most profitable customers generally don’t want, and indeed initially can’t use, products based on disruptive technologies.

The reason is that good management itself was the root cause. Managers played the game the way it was 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 carefully 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 technological change.

When commercializing disruptive technologies, they found or developed new markets that valued the attributes of the disruptive products, rather than search for a technological breakthrough so that the disruptive product could compete as a sustaining technology in mainstream markets.

recent IBM poll of fifteen hundred CEOs identified creativity as the number-one “leadership competency” of the future.

With few exceptions, the only instances in which mainstream firms have successfully established a timely position in a disruptive technology were those in which the firms’ managers set up an autonomous organization charged with building a new and independent business around the disruptive technology.

We adhere to the saying, “if it ain’t broke, don’t fix it,” while not really questioning whether “it” is “broke.

It turns out that for most people who have chronic diseases with deferred consequences, "improve my financial health" is a much more pervasively experienced job than "maintain my physical health.

Disruptive innovations, in contrast, don’t attempt to bring better products to established customers in existing markets. Rather, they disrupt and redefine that trajectory by introducing products and services that are not as good as currently available products. But disruptive technologies offer other benefits—typically, they are simpler, more convenient, and less expensive products that appeal to new or less-demanding customers.3

The key point here is that large companies typically fail at disruptive innovation because the top management team is dominated by individuals who have been selected for delivery skills, not discovery skills. As a result, most executives at large organizations don’t know how to think different. It isn’t something that they learn within their company, and it certainly isn’t something they are taught in business school. Business schools teach people how to be deliverers, not discoverers.

If good management practice drives the failure of successful firms faced with disruptive technological change, then the usual answers to companies, problems—planning better, working harder, becoming more customer- driven, and taking a longer-term perspective—all exacerbate the problem.

They must be plans for learning rather than plans for implementation. By approaching a disruptive business with the mindset that they can’t know where the market is, managers would identify what critical information about new markets is most necessary and in what sequence that information is needed.

this is a serious development for our medical training establishment is that a host of technological enablers will fuel the disruption of specialists by primary care physicians in the future.

Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use. There

Will flash cards invade the disk drive makers’ core markets and supplant magnetic memory? If they do, what will happen to the disk drive makers? Will they stay atop their markets, catching this new technological wave? Or will they be driven out?

Keeping high-volume procedures within general hospitals allows hospitals to subsidize the unique, low-volume specialized capabilities that are so central to the value proposition of their solution shops- being able to diagnose and embark on a therapy for anything that might be wrong.

But was the Newton a failure? The timing of Newton’s entry into the handheld market was akin to the timing of the Apple II into the desktop market. It was a market-creating, disruptive product targeted at an undefinable set of users whose needs were unknown to either themselves or Apple. On that basis, Newton’s sales should have been a pleasant surprise to Apple’s executives: It outsold the Apple II in its first two years by a factor of more than three to one. But while selling 43,000 units was viewed as an IPO-qualifying triumph in the smaller Apple of 1979, selling 140,000 Newtons was viewed as a failure in the giant Apple of 1994.

First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms’ most profitable customers generally don’t want, and indeed initially can’t use, products based on disruptive technologies. By and large, a disruptive technology is initially embraced by the least profitable customers in a market. Hence, most companies 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.

By that time, Bezos and his executives had devoured and raptly discussed another book that would significantly affect the company’s strategy: The Innovator’s Dilemma, by Harvard professor Clayton Christensen. Christensen wrote that great companies fail not because they want to avoid disruptive change but because they are reluctant to embrace promising new markets that might undermine their traditional businesses and that do not appear to satisfy their short-term growth requirements. Sears, for example, failed to move from department stores to discount retailing; IBM couldn’t shift from mainframe to minicomputers. The companies that solved the innovator’s dilemma, Christensen wrote, succeeded when they “set up autonomous organizations charged with building new and independent businesses around the disruptive technology.”9 Drawing lessons directly from the book, Bezos unshackled Kessel from Amazon’s traditional media organization. “Your job is to kill your own business,” he told him. “I want you to proceed as if your goal is to put everyone selling physical books out of a job.” Bezos underscored the urgency of the effort. He believed that if Amazon didn’t lead the world into the age of digital reading, then Apple or Google would. When Kessel asked Bezos what his deadline was on developing the company’s first piece of hardware, an electronic reading

American Girl dolls are nice. But they aren’t amazing. In recent years Toys“ R” Us, Walmart, and even Disney have all tried to challenge American Girl’s success with similar dolls (Journey Girls, My Life, and Princess & Me)—at a fraction of the price—but to date, no one has made a dent. American Girl is able to command a premium price because it’s not really selling dolls. It’s selling an experience. When you see a company that has a product or service that no one has successfully copied, like American Girl, rarely is it the product itself that is the source of the long-term competitive advantage, something American Girl founder Pleasant Rowland understood. “You’re not trying to just get the product out there, you hope you are creating an experience that will do the job perfectly,” says Rowland. You’re creating experiences that, in effect, make up the product’s résumé: “Here’s why you should hire me.” That’s why American Girl has been so successful for so long, in spite of numerous attempts by competitors to elbow in. My wife, Christine, and I were willing to splurge on the dolls because we understood what they stood for. American Girl dolls are about connection and empowering self-belief—and the chance to savor childhood just a bit longer. I have found that creating the right set of experiences around a clearly defined job—and then organizing the company around delivering those experiences (which we’ll discuss in the next chapter)—almost inoculates you against disruption. Disruptive competitors almost never come with a better sense of the job. They don’t see beyond the product.

The most vexing managerial aspect of this problem of asymmetry, where the easiest path to growth and profit is up, and the most deadly attacks come from below, is that “good” management—working harder and smarter and being more visionary—doesn’t solve the problem. The resource allocation process involves thousands of decisions, some subtle and some explicit, made every day by hundreds of people, about how their time and the company’s money ought to be spent. Even when a senior manager decides to pursue a disruptive technology, the people in the organization are likely to ignore it or, at best, cooperate reluctantly if it doesn’t fit their model of what it takes to succeed as an organization and as individuals within an organization. Well-run companies are not populated by yes-people who have been taught to carry out mindlessly the directives of management. Rather, their employees have been trained to understand what is good for the company and what it takes to build a successful career within the company. Employees of great companies exercise initiative to serve customers and meet budgeted sales and profits. It is very difficult for a manager to motivate competent people to energetically and persistently pursue a course of action that they think makes no sense.

is embedded in an organization in which most people are continually questioning why the project is being done at all. Projects make sense to people if they address the needs of important customers, if they positively impact the organization’s needs for profit and growth, and if participating in the project enhances the career opportunities of talented employees. When a project doesn’t have these characteristics, its manager spends much time and energy justifying why it merits resources and cannot manage the project as effectively. Frequently

One of the most vexing dilemmas that stable corporations face when they seek to rekindle growth by launching new businesses is that their internal schools of experience have offered precious few courses in which managers could have learned how to launch new disruptive businesses. In many ways, the managers that corporate executives have come to trust the most because they have consistently delivered the needed results in the core businesses cannot be trusted to shepherd the creation of new growth. Human resources executives in this situation need to shoulder a major burden. They need to monitor where in the corporation’s schools of experience the needed courses might be created, and ensure that promising managers have the opportunity to be appropriately schooled before they are asked to take the helm of a new-growth business. When managers with the requisite education cannot be found internally, they need to ensure that the management team, as a balanced composite, has within it the requisite perspectives from the right schools of experience.

the deliberate strategy process often becomes a subsequent impediment to a company’s efforts to launch new waves of successful disruptive growth. This happens in two ways. First, the filters in the resource allocation process of successful companies become so well attuned to the successful strategy that they filter out all but the initiatives that sustain the existing business—causing them to ignore the disruptive innovations that create the next waves of growth. Just as important, once deliberate strategy processes have become embedded within organizations, they find it difficult to employ emergent processes again when launching new businesses.

A new-market disruption is an innovation that enables a larger population of people who previously lacked the money or skill now to begin buying and using a product and doing the job for themselves.

As Harvard Business School professor and author Clayton Christensen has taught, successful companies will get pushed aside if they do not hearken to the threat of disruptive innovations and adjust their strategies in response. We would emphasize that strategic change is not what’s hard. What’s really hard is organizational change to accommodate strategie change. Processes, structures, measures, information systems, people systems, continuous improvement protocols, and cultural beliefs all must coalesce around a new strategic idea, or it will never deliver the desired results.

In dealing with disruptive technologies leading to new markets, however, market researchers and business planners have consistently dismal records.

Put simply, innovative thinkers connect fields, problems, or ideas that others find unrelated.

You need to define an opportunity that is disruptive relative to all the established players in the targeted market, or you should not invest in the idea.

When the corporation’s investment capital becomes impatient for growth, good money becomes bad money because it triggers a subsequent cascade of inevitable incorrect decisions. Innovators who seek funding for the disruptive innovations that could ultimately fuel the company’s growth with a high probability of success now find that their trial balloons get shot down because they can’t get big enough fast enough. Managers of most disruptive businesses can’t credibly project that the business will become very big very fast, because new-market disruptions need to compete against nonconsumption and must follow an emergent strategy process. Compelling them to project big numbers forces them to declare a strategy that confidently crams the innovation into a large, existing, and obvious market whose size can be statistically substantiated. This means competing against consumption.

Most universities cannot afford to offer so many subjects to such diverse types of students or to require their professors to compete in a world of research scholarship that is becoming increasingly expensive and conceptually narrow. The burden of these choices, adopted by Harvard emulators lacking the financial resources necessary to bear them, have made most American-style universities vulnerable to competitive disruption.

I’ve puzzled for years over the question of why some companies fail to adapt quickly enough to what Clayton Christensen called “disruptive innovation,” while others don’t. Reflecting on cases in our research studies, I’ve concluded that the primary answer is really quite simple—failure to apply productive paranoia, not just in the short term, but also with a fifteen-plus-year time frame. When executive teams visit my management lab in Boulder, I often ask them the following three questions: What significant changes in your world (both inside your company and in the external environment) are you highly confident will have happened by fifteen years from now? Which of those changes pose a significant or existential threat to your company? What do you need to begin doing now—with urgency—to march ahead of those changes?

They planned to fail early and inexpensively in the search for the market for a disruptive technology. They found that their markets generally coalesced through an iterative process of trial, learning, and trial again.

In reality, spinning out is an appropriate step only when confronting disruptive innovation.

To measure market needs, I would watch carefully what customers do, not simply listen to what they say. Watching how customers actually use a product provides much more reliable information than can be gleaned from a verbal interview or a focus group. Thus, observations indicate that auto users today require a minimum cruising range (that is, the distance that can be driven without refueling) of about 125 to 150 miles; most electric vehicles only offer a minimum cruising range of 50 to 80 miles. Similarly, drivers seem to require cars that accelerate from 0 to 60 miles per hour in less than 10 seconds (necessary primarily to merge safely into highspeed traffic from freeway entrance ramps); most electric vehicles take nearly 20 seconds to get there. And, finally, buyers in the mainstream market demand a wide array of options, but it would be impossible for electric vehicle manufacturers to offer a similar variety within the small initial unit volumes that will characterize that business. According to almost any definition of functionality used for the vertical axis of our proposed chart, the electric vehicle will be deficient compared to a gasolinepowered car. This information is not sufficient to characterize electric vehicles as disruptive, however. They will only be disruptive if we find that they are also on a trajectory of improvement that might someday make them competitive in parts of the mainstream market. The trajectories of performance improvement demanded in the market—whether measured in terms of required acceleration, cruising range, or top cruising speed—are relatively flat. This is because traffic laws impose a limit on the usefulness of ever-more-powerful cars, and demographic, economic, and geographic considerations limit the increase in commuting miles for the average driver to less than 1 percent per year. At the same time, the performance of electric vehicles is improving at a faster rate—between 2 and 4 percent per year—suggesting that sustaining technological advances might indeed carry electric vehicles from their position today, where they cannot compete in mainstream markets, to a position in the future where they might.

understand and harness the principles of disruptive innovation.

But in disruptive situations, action must be taken before careful plans are made. Because much less can be known about what markets need or how large they can become, plans must serve a very different purpose: They must be plans for learning rather than plans for implementation.

The evidence summarized in this matrix may be of some use to venture capital investors, as a general way to frame the riskiness of proposed investments. It suggests that start-ups which propose to commercialize a breakthrough technology that is essentially sustaining in character have a far lower likelihood of success than start-ups whose vision is to use proven technology to disrupt an established industry with something that is simpler, more reliable, and more convenient.

The structure of today's health-care industry is essentially structured around taking our problems to the solution. In the other industries we've studied, disruption inverts this system, so the solution is delivered to the problem. Downloadable

On the other hand, the shortage of primary care physicians is so severe that 43.7 percent of the 21,885 residency positions in internal medicine in 2005 were filled by graduates of foreign medical schools30—because most of those coming out of American medical schools opt for training as specialists. This

Rather, in our distorted fee-for-service world, the work to coordinate and oversee care just isn't as profitable as other activities.

The job that an EHR is designed to do is a systemic job, not a local one. It is designed to enable different providers in different locations to see what kinds of care other doctors and institutions have given or are rendering to a patient. It

But there is not a single billing code for patient adherence or improvement, or for helping patients stay well.

Meanwhile, expecting expensive institutions to become more cost efficient, and asking expensive professionals to take pay cuts while squeezing in more and more patients, are not viable avenues for making health care affordable and available. Afford-ability and accessibility come instead from disruptive innovations that enable less expensive caregivers, and less expensive venues of care, to become capable of doing progressively more sophisticated things, with equal or better quality than their high-cost counterparts.

The Indivo system resolves the Problem of Mutual Accommodation of Interdependent Systems summarized earlier by inserting a layer of virtualization between two interdependent structures. It makes the data open, modular, and conformable, so that the applications using the data can be optimized. By being modular (open source), the data in PHRs are commoditized—it is no longer a strategic asset, nor where money can be made. Instead, profit in the industry will be made by firms that build applications that use the data. Some

Disruptive innovation, as made popular by Harvard Business School professor Clayton M. Christensen, results when a company uses a new technology to disrupt the prevailing business model in an existing market that is filled with overserved customers. This approach to innovation is different.

In sustaining circumstances—when the race entails making better products that can be sold for more money to attractive customers—we found that incumbents almost always prevail. In disruptive circumstances—when the challenge is to commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customer set—the entrants are likely to beat the incumbents.

The structures and initial conditions that are required for successful growth are enumerated in the chapters of this book. They include starting with a cost structure in which attractive profits can be earned at low price points and which can then be carried up-market; being in a disruptive position relative to competitors so that they are motivated to flee rather than fight; starting with a set of customers who had been nonconsumers so that they are pleased with modest products; targeting a job that customers are trying to get done; skating to where the money will be, not to where it was; assigning managers who have taken the right courses in the school of experience and putting them to work within processes and organizational values that are attuned to what needs to be done; having the flexibility to respond as a viable strategy emerges; and starting with capital that can be patient for growth. If you start in conditions such as these, you do not need to see deeply into the future. Attractive choices that lead to success will present themselves. It is when you start in conditions that are opposite to these that attractive options may not appear, and the right choices will be difficult to make.

Low-end disruption has occurred several times in retailing.16 For example, full-service department stores had a business model that enabled them to turn inventories three times per year. They needed to earn 40 percent gross margins to make money within their cost structure. They therefore earned 40 percent three times each year, for a 120 percent annual return on capital invested in inventory (ROCII). In the 1960s, discount retailers such as Wal-Mart and Kmart attacked the low end of the department stores’ market—nationally branded hard goods such as paint, hardware, kitchen utensils, toys, and sporting goods—that were so familiar in use that they could sell themselves. Customers in this tier of the market were overserved by department stores, in that they did not need well-trained floor sales-people to help them get what they needed. The discounters’ business model enabled them to make money at gross margins of about 23 percent, on average. Their stocking policies and operating processes enabled them to turn inventories more than five times annually, so that they also earned about 120 percent annual ROCII. The discounters did not accept lower levels of profitability—their business model simply earned acceptable profit through a different formula.17

Interestingly, even though MinuteClinic employs no doctors in its clinics, it has never been sued for malpractice. The reason is that malpractice lawsuits arise primarily in cases of mis-diagnosis and flawed therapeutic judgment.16 Because MinuteClinic practices in the realm of precision medicine, its diagnoses are precise and its therapies predictably effective.

any program for resolving our runaway health-care costs that does not have a credible plan for changing the way we care for the chronically ill can't make more than a small dent in the total problem.

Finally, we recommend most strongly that medical educators must begin teaching tomorrow's doctors to become much better at creating, improving, and managing processes and systems.

Few people have physically and emotionally survived more than one SAP implementation project.42

People who don't want to do something that they know they should do have marvelously inventive abilities to ignore what they know. They

What would the cost of [a] hamburger at TGI Fridays be if, instead of paying for the outcome of good food delivered in a congenial location by friendly service, we actually just paid for the number of cooks . . . and how many wait staff that went by . . . What would happen to the price of a hamburger?

As Medicare, Medicaid, and private health assistance companies pervasively inserted themselves between patients and providers, the market ultimately evolved toward what economists call monopsony—where a few huge, powerful buyers essentially determine the prices they will pay to their more fragmented suppliers.

Doctors today are under such pressure to see more patients that they simply don't have the time to spend with drug company salespeople. And doctors are much less dependent upon detailers to learn about drugs: there are alternatives. The Internet enables physicians to search for the right drug, and to refresh their knowledge of its side effect profile and possible interactions with other drugs, even while the patient is in the office.

We will get growth and affordability in health care not by replicating the expertise of today's physicians in the form of new physicians. We will get it by embodying their expertise in devices and equipment, so expertise becomes widely available, more affordable, and much easier to obtain. This

The fact that hospitals and physicians' practices are not job-focused, but instead aspire to do anything for anybody, has caused them not to be integrated correctly. In their current configuration, they cannot be consumer-driven.

Reimbursement has become the primary mechanism through which the regulation of doctors occurs in the United States.2 To the extent that doctors cannot afford to do things they are not paid to do, and will gladly do more of those things they are paid handsomely to do, the decisions about whether, when, and how much to pay doctors for the various things they do has unwittingly become one of the most pervasive and powerful regulatory mechanisms ever devised.

What makes the encumbrance of reimbursement even more distortive and binding is that most prices insurers pay are not set by market forces. Rather, they are administered prices that reek of the pricing algorithms and backroom negotiations used in communist systems. Those

The patterns of success and failure we see among firms faced with sustaining and disruptive technology change are a natural or systematic result of good managerial decisions. That is, in fact, why disruptive technologies confront innovators with such a dilemma. Working harder, being smarter, investing more aggressively, and listening more astutely to customers are all solutions to the problems posed by new sustaining technologies. But these paradigms of sound management are useless—even counterproductive, in many instances—when dealing with disruptive technology.

In the instances studied in this book, established firms confronted with disruptive technology typically viewed their primary development challenge as a technological one: to improve the disruptive technology enough that it suits known markets. In contrast, the firms that were most successful in commercializing a disruptive technology were those framing their primary development challenge as a marketing one: to build or find a market where product competition occurred along dimensions that favored the disruptive attributes of the product.

To succeed predictably, disruptors must be good theorists. As they shape their growth business to be disruptive, they must align every critical process and decision to fit the disruptive circumstance.

While he was in school, we needed to pay our bills. I had to get a job. I'd majored in music (piano). I had no business credentials, connections, or confidence, so I started as a secretary to a retail sales broker at Smith Barney in midtown Manhattan. It was the era of Liar's Poker, Bonfire of the Vanities, and Working Girl. Working on Wall Street was exciting. I started taking business courses at night and I had a boss who believed in me, which allowed me to bridge from secretary to investment banker. This rarely happens. Later I became an equity research analyst and subsequently cofounded the investment firm Rose Park Advisors with Clayton Christensen, a professor at Harvard Business School. When I walked onto Wall Street through the secretarial side door, and then walked off Wall Street to become an entrepreneur, I was a disruptor. "Disruptive innovation" is a term coined by Christensen to describe an innovation at the low end of the market that eventually upends an industry. In my case, I had started at the bottom and climbed to the top—now I wanted to upend my own career. No wonder my friend thought I'd lost my sanity. According to Christensen's theory, disruptors secure their initial foothold at the low end of the market, offering inferior, low-margin products. At first, the disrupter's position is weak. For example, when Toyota entered the U.S. market in the 1950s, it introduced the Corona, a small, cheap, no-frills car that appealed to first-time car buyers on a tight budget.

Take Brooksley Born, former chair of the Commodity Futures Trading Commission (CFTC), who waged an unsuccessful campaign to regulate the multitrillion-dollar derivatives market. Soon after the Clinton administration asked her to take the reins of the CFTC, a regulatory backwater, she became aware of the over-the-counter (OTC) derivatives market, a rapidly expanding and opaque market, which she attempted to regulate. According to a PBS Frontline special: "Her attempts to regulate derivatives ran into fierce resistance from then-Fed Chairman Alan Greenspan, then-Treasury Secretary Robert Rubin, and then-Deputy Treasury Secretary Larry Summers, who prevailed upon Congress to stop Born and limit future regulation." Put more directly by New York Times reporter Timothy O'Brien, "they ... shut her up and shut her down." Mind you, Born was no dummy. She was the first female president of the Stanford Law Review, the first woman to finish at the top of the class, and an expert in commodities and futures. But because a trio of people who were literally en-titled decided they knew what was best for the market, they dismissed her call for regulation, a dismissal that triggered the financial collapse of 2008. To be fair to Greenspan et al., their resistance was not surprising. According to psychologists Hillel Einhorn and Robin Hogarth, "we [as human beings] are prone to search only for confirming evidence, and ignore disconfirming evidence." In the case of Born, it was the '90s, the markets were doing well, and the country was prospering; it's easy to see why the powerful troika rejected her disconfirming views. Throw in the fact that the disconcerting evidence was coming from a "disconfirming" person (i.e., a woman), and they were even more likely to disregard the data. In the aftermath, Arthur Levitt, former chairman of the SEC, said, "If she just would have gotten to know us... maybe it would have gone a different way."12 Born quotes Michael Greenberg, the director of the CFTC under her, as saying, "They say you weren't a team player, but I never saw them issue you a uniform." We like ideas and people that fit into our world-view, but there is tremendous value in finding room for those that don't. According to Paul Carlile and Clayton Christensen, "It is only when an anomaly is identified—an outcome for which a theory can't account that an opportunity to improve theory occurs."13 One of the ways you'll know you are coming up against an anomaly is if you find yourself annoyed, defensive, even dismissive, of a person, or his idea.

In general, the successful entrants accepted the capabilities of hydraulics technology in the 1940s and 1950s as a given and cultivated new market applications in which the technology, as it existed, could create value. And as a general rule, the established firms saw the situation the other way around: They took the market’s needs as the given. They consequently sought to adapt or improve the technology in ways that would allow them to market the new technology to their existing customers as a sustaining improvement. The established firms steadfastly focused their innovative investments on their customers. Subsequent chapters will show that this strategic choice is present in most instances of disruptive innovation. Consistently, established firms attempt to push the technology into their established markets, while the successful entrants find a new market that values the technology.

In the theory of classic disruption, established customers initially reject the inferior, good-enough offer, and hence create a liability for incumbents, for whom allocating resources to the disruptive offer meant going against the feedback of their best customers. This was the tension at the root of the dilemma in Clayton Christensen’s The Innovator’s Dilemma.3 In contrast, established customer relationships are an asset in introducing ecosystem disruption, as they open the door to credibility and ecosystem carryover

That work led to my theory of disruptive innovation,1 which explains the phenomenon by which an innovation transforms an existing market or sector by introducing simplicity, convenience, accessibility, and affordability where complication and high cost have become the status quo—eventually completely redefining the industry.

In a graph often cited by the late Clayton Christensen, a noted expert on disruptive innovation, in 1981, 50 percent of the average investment of profits was allocated to research and development and 50 percent to shareholder dividends. Today, 50 percent of that investment is allocated to stock buybacks, 49 percent to dividends, and a meager 1 percent to research and development.

while keeping close to our customers is an important management paradigm for handling sustaining innovations, it may provide misleading data for handling disruptive ones.

Managers who don’t bet the farm on their first idea, who leave room to try, fail, learn quickly, and try again, can succeed at developing the understanding of customers, markets, and technology needed to commercialize disruptive innovations.

Why do well-managed companies fail? He concludes that they often fail because the very management practices that have allowed them to become industry leaders also make it extremely difficult for them to develop the disruptive technologies that ultimately steal away their markets.

Unlike VCs, corporations usually prefer to invest in evolutionary products due to the lower risk and compatibility with existing corporate businesses, structures, practices, systems, and channels. Revolutionary technologies can disrupt the corporation’s business strategies, markets, and channels. Although there now is greater awareness of the existential dangers to corporations from disruptive innovations and revolutionary technologies, due to the work of researchers such as Clayton Christensen, the problems many corporations face include the high risk to executive careers from high-risk ventures and the potential for cannibalization of existing cash flow. Other hurdles to corporate adoption of revolutionary technologies are the lack of sales history for the products, and uncertainty about the timing for takeoff and the strategy that will succeed.

Managers who confront disruptive technological change must be leaders, not followers, in commercializing disruptive technologies.

that leadership is more crucial in coping with disruptive technologies than with sustaining ones, and that small, emerging markets cannot solve the near-term growth and profit requirements of large companies.

Experts’ forecasts will always be wrong. It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be. An important corollary is that, because markets for disruptive technologies are unpredictable, companies’ initial strategies for entering these markets will generally be wrong.

When disruptive change appears on the horizon, managers need to assemble the capabilities to confront the change before it has affected the mainstream business. In other words, they need an organization that is geared toward the new challenge before the old one, whose processes are tuned to the existing business model, has reached a crisis that demands fundamental change.

If history is any guide, companies that keep disruptive technologies bottled up in their labs, working to improve them until they suit mainstream markets, will not be nearly as successful as firms that find markets that embrace the attributes of disruptive technologies as they initially stand.

it means that disruptive technologies that may underperform today, relative to what users in the market demand, may be fully performance-competitive in that same market tomorrow.

Figure I.1 The Impact of Sustaining and Disruptive Technological Change

Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

they reached as far upmarket as they could in each new product generation, until their drives packed the capacity to appeal to the value networks above them. It is this upward mobility that makes disruptive technologies so dangerous to established firms—and so attractive to entrants.

The leading firms in the established technology remain financially strong until the disruptive technology is, in fact, in the midst of their mainstream market.

sensible resource allocation processes were at the root of companies’ upward mobility and downmarket immobility across the boundaries of the value networks in the disk drive industry.

There had, therefore, to be a reason why good managers consistently made wrong decisions when faced with disruptive technological change.

SnapTax competes directly with one of Intuit’s flagship products: the fully featured TurboTax desktop software. Usually, companies like Intuit fall into the trap described in Clayton Christensten’s The Innovator’s Dilemma: they are very good at creating incremental improvements to existing products and serving existing customers, which Christensen called sustaining innovation, but struggle to create breakthrough new products—disruptive innovation—that can create new sustainable sources of growth.

Frederick Herzberg’s assertion that the most powerful motivator isn’t money; it’s the opportunity to learn, grow in responsibilities, contribute, and be recognized.

The strategies and plans that managers formulate for confronting disruptive technological change, therefore, should be plans for learning and discovery rather than plans for execution. This is an important point to understand, because managers who believe they know a market’s future will plan and invest very differently from those who recognize the uncertainties of a developing market.

The Innovator’s Dilemma, by Harvard professor Clayton Christensen. Christensen wrote that great companies fail not because they want to avoid disruptive change but because they are reluctant to embrace promising new markets that might undermine their traditional businesses and that do not appear to satisfy their short-term growth requirements.

But the better you are at asking the right questions, engaging in the right observations, eliciting ideas and feedback through networking with the right people, and running experiments, the less likely you are to fail.

Innovators were simply much more likely to question, observe, network, and experiment compared to typical executives. We published the results of our research in Strategic Entrepreneurship Journal,

It is in disruptive innovations, where we know least about the market, that there are such strong first-mover advantages. This is the innovator’s dilemma.

Companies whose investment processes demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies. They demand market data when none exists and make judgments based upon financial projections when neither revenues or costs can, in fact, be known. Using planning and marketing techniques that were developed to manage sustaining technologies in the very different context of disruptive ones is an exercise in flapping wings.

Called discovery-based planning, it suggests that managers assume that forecasts are wrong, rather than right, and that the strategy they have chosen to pursue may likewise be wrong. Investing and managing under such assumptions drives managers to develop plans for learning what needs to be known, a much more effective way to confront disruptive technologies successfully.