The Innovator’s Dilemma Debunked

 

In early 1988, four years before Clayton Christensen began working on his doctorate, focused specifically on the disc drive business, I was hired by Western Digital to be the financial shepherd of their newly acquired disc drive business purchased from Tandon Computers. At this time about 200 companies manufactured disk drives with at least 30 of these maintaining a significant manufacturing presence.

Mr. Christensen focused on one in particular: Seagate. Form factors for disk drives were 51/4 inches and some of the competitors were starting to develop a smaller 3½ inch version. Seagate’s customer IBM said they didn’t need these new smaller drives so consequently Seagate was late to this market and stumbled badly. It was through this study that Mr. Christensen began to develop his idea that unless you innovate, your firm will certainly fail.

Well. I spent four years in finance and in the mid 1990’s went on to become vice-president of manufacturing at Seagate. During this time many competitors left the market, consolidation was happening. But Seagate was growing from less than $3 billion in revenue in 1992, to $8.5 billion in 1996, to $15 billion this year. Seagate is both profitable and paying dividends today, with a market capitalization of $20 billion.

And the competition? Only Western Digital Corporation in the United States remains and Toshiba in Japan. Three companies remain to provide 600 million disk drives per year. I later returned to Western Digital Corporation as their vice-president of finance, only to enjoy the stable growth and consistent profitability you generally find in an oligopoly. So the company that should have predictively failed, according to Mr. Christensen, went on to grow and generate significant earnings and cash as over 90% of their competitors went out of business.

Joseph Schumpeter (1939) defined innovation as “bringing new products to market.” I think he had it right and the definition remains today. Whether we seek to alarm with terms like “Disruptive Innovation, Big Bang Disruption, of Devastating Disruption,” it is simply “a theory of history founded on a profound anxiety about financial collapse, an apocalyptic fear of global devastation, with shaky evidence.” (Lepore, 2014).

A huge industry has been built on innovation theory: Consulting, seminars, more and more books, with companies valiantly striving to get this right. Yet what I tried to find right in the notion of disruptive change (Christensen and Overdorf, 2000)) I found misguided instead. To stress resources, processes and values are to miss the primary driver that underpins both the behavior and the manner in which a given company conducts itself: Culture. Plaques proclaiming company values have always been a mystery to me, particularly when I find scant evidence that some or most tenets are even remotely adhered to. If you really want to understand a company then look into their culture. This investigation will take you to the leader, the president, the CEO. His culture, his values, his norms, his priorities, his belief in process and the extent of automation, these are the things that will define the operations of any given firm.

The story of Toyota’s Corolla car was equally off the mark (Christensen and Overdorf, 2000). This product is a success today. Yaris and RAV4 are also success stories. The new entrant, Echo, is off to a good start. It is not about going upstream into higher margin territory, it is about stratifying a fragmented market and correctly dialing in to know how each segment can be accretive. Whenever a company pushes its own technology in order to command higher gross margins, it finds that a commodity, open standard, less-expensive and perhaps even less offered to consumers qualitatively, is just waiting to be developed to kill the proprietary, relatively expensive product. Consider Sony for example. Everything from Beta Max to Blue Ray, they pushed their proprietary technology and generated high gross margins – for a while. Now they suffer while companies in South Korea such as Samsung, have offered reasonable generic alternatives at much lower prices. When Apple invented the iPhone, every aspect of its functionality was Apple-proprietary. What did Samsung do in response? They studied every single consumer complaint about the Apple iPhone and developed phones that solve for these complaints: 1) Not a lot of choices, 2) Inflexible, 3) Not many colors, sizes 4) Too expensive, 5) No choice of phone service providers (originally), 6) Small screen size, and today Samsung’s smartphone market exceeds that of Apple.

The aspects of business focus have really not changed. It is not about innovation, it is about offering the customer something they desire that they’re not currently getting with the incumbents. Kingston Technology, where I worked for eight years, bought solid-state memory chips, placed them in USB enclosures, memory modules, SD cards or Solid Sate drives, tested the final products and shipped to 125 different nations. They had no intellectual property of their own, no patents, and no research and development investment. Yet they have been profitable every year since they began in 1987 and today generate over $6 billion in annual revenue. The company has no debt, with growth achieved organically, and the two owners are each worth $4 billion according to Forbes.

No innovation during this time? Oh contrare. Semiconductor die shrinks were common. DRAM memory was buttressed by Flash memory. Technology was changing rapidly. But the owners continued to find niches where the semiconductor firms were weak, distribution being just one of the niches. And they grew DRAM market share above 50% so that their ability to command low semiconductor materials costs was far greater than their competitors could achieve. Innovation and technological change should have killed them off, but that didn’t happen.

The buggy whip industry didn’t perish because it didn’t innovate. Capital flows into industries and companies that can most efficiently generate the highest returns on investment. Along the way new technologies simply become enablers. Enablers for faster delivery, better quality, new products and services, and completely fresh ways of pursuing and prosecuting market opportunities. Ten years from now half of the jobs haven’t even been defined yet. Will the innovation that is to come cause companies to perish? Not at all. Companies will perish for the same reasons they’ve always perished: Hubris blinds the eyes of the management so that they cannot see what is coming at them. The IBM PC market never saw Compaq coming, with its portability offer. And Compaq never saw Dell coming, with its online configuration and delivery model. And Dell never saw the variety of tablets, laptops and PC’s consumers want to touch and feel. There is no “innovator’s dilemma.” There are only good leaders who are uniquely tuned in and humble enough to take calculated risks and change their business models as their environment changes. ~r

 

 

 

 

References

 

Christensen, C. (2012). The Innovator’s Dilemma. 1997. Harvard Business School Press, Boston, MA.

Christensen, C. M., & Overdorf, M. (2000). Meeting the challenge of disruptive change. Harvard Business Review, 78(2), 66-77.

Schumpeter, J. A. (1939). Business cycles (Vol. 1, pp. 161-74). New York: McGraw-Hill.

Lepore, J. (2014). The Disruption Machine: What the gospel of innovation gets wrong. The New Yorker.

Raynor, M. E. (2011). Disruption theory as a predictor of innovation success/failure. Strategy & Leadership, 39(4), 27-30.

Wessel, M., & Christensen, C. M. (2012). Surviving disruption. Harvard Business Review, 90(12), 56-64.

 

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