The Innovator’s Dilemma – Why Successful Companies struggle with Disruptive Innovation
Why is it easy to disrupt large and successful corporations and how to avoid being disrupted?
Understand why successful companies struggle with disruptive innovation and what the “Innovator’s Dilemma” is. This article will give you tips and trick on how do deal with this dilemma.
The Innovator’s Dilemma, as coined by Clayton Christensen in his book of the same name, is a concept that examines why successful companies struggle with disruptive innovation. It explores how established organizations are challenged when confronted with new technologies and business models that can potentially replace their existing products or services. The concept has become widely accepted since its introduction and has been proven to predict market trends and outcomes accurately.
At the heart of the Innovator’s Dilemma is that large established companies often overlook emerging markets due to their focus on maintaining current customers and revenue streams. This leads them to miss opportunities for growth as new startups enter the market with more innovative solutions and disrupt existing players. As a result, these incumbents face disruption from within as they struggle to keep up with changing customer needs while protecting their existing businesses from external competition.
Quick Refresher: Disruptive Innovation
Disruptive innovation refers to a new technology or business model that challenges an existing market by offering more convenience, efficiency, and/or lower cost than current offerings. This type of innovation often begins in emerging markets with small customers or a customer segment that could not benefit from the old offering (too expensive, too exclusive, etc.). It then gradually moves into the larger markets as the product or service improves and gains acceptance, as well as wide spread-use or the customers see the advantage compared to the old offer.
Article about Types of Innovation: Innovation Explained – Definition, Types and Meaning of Innovation
Article about Disruptive Innovation: Disruptive Innovation – Intro, Definition and Meaning of being disruptive
The Dilemma of Innovation for Corporates
The Innovator’s Dilemma is a concept that examines why successful companies struggle when faced with disruptive innovation. It is often the result of short-term focus, entrenched beliefs and behaviors, and fear of failure, which can contribute to the dilemma of innovating in existing markets while protecting current businesses from external competition.
As new startups or competitors enter the market with innovative solutions and disrupt existing players, established companies often struggle to keep up with changing customer needs while protecting their existing businesses. This trend follows what is known as an “S-curve” trajectory where innovation starts slow, gains traction then plateaus in terms of market traction or revenues. When a new technology enters a market, it usually starts lower than an existing technology with the potential for disruption by offering lower prices (Bottom Up Disruption) or entering into new niches previously not served by the old solution.
This is where The Innovator’s Dilemma kicks in as incumbents reach a certain size, wherein disrupting their business model makes their cash cow largely obsolete. At this stage, they face a mix of challenges, such as unlearning existing processes and adapting to newer technologies/offerings, even though there may be no guarantee that these will lead to long-term success. Companies must weigh the risks of differentiating themselves from the competition and investing in new markets or technologies.
Reasons for the Innovators’ Dilemma
Over the years, I could see many different reasons for the innovators’ dilemma firsthand. The most obvious ones were a lack of foresight and a “big corporate culture.” But here are some other reasons why more prominent corporations are having such a hard time with changing and adapting:
- Management Incentives: Traditional management incentives, such as bonuses or stock options, are often tied to the performance of existing businesses, which can discourage investment in new and uncertain initiatives, and this can even kill disruptive ideas before they appear.
- Organizational Culture: A rigid and risk-averse corporate culture can make it difficult for companies to embrace new ideas and technologies, especially when they build silos and incentives within these silos.
- Short-term focus: Most companies prioritize short-term financial performance over long-term investments in new technologies or business models. This also has to do with the following topic – the shareholders.
- Shareholder Pressure: Especially publicly traded companies may face pressure from shareholders to deliver consistent (short-term) financial performance, making it challenging to invest in disruptive technologies that could be beneficial in the long run but would sacrifice short-term financial performance.
- Inertia: A sentence I always love “We have always done it like that” – Companies that have been successful with a particular business model or technology/innovation may find it difficult to change, even in the face of disruptive innovation or new market dynamics.
- Lack of Innovation Capabilities: When the culture and bad management come together, companies often don’t build up the necessary skills, expertise, or resources to innovate effectively.
- Internal Resistance to Change: This might be a combination of many points mentioned before, but it is a unique challenge. Employees may resist change, particularly if it threatens their job security or existing business processes where they are “specialists.”
- Misalignment of Goals: Good strategic planning needs long-term goals that might not align with disruptive changes. Additionally, different departments or business units within a company may have conflicting goals, making it difficult to align.
- Limited Customer Insight: Companies may lack a deep understanding of their customers, often ignoring competitors and disruptive changes in the market until it’s too late. I also frequently observed that customer feedback was gathered but then “covered” in management reports. So the further the information got, the less likely it was that this feedback would reach top management.
- Technological Complexity: Another crucial point is the overall complexity of technologies. Complexity can make it difficult for companies to quickly and effectively adopt innovations as it is unclear to most stakeholders or overwhelming them.
Examples of Innovators’ Dilemma
The problem of the innovator’s Dilemma has already been observed in many examples in different industries (It doesn’t just have to be High-Tech and Internet-Companies). But we see a pattern: Usually, it was about killing the own “darling” for something new.
- Kodak: Despite inventing the digital camera, Kodak failed to capitalize on its innovation and eventually fell behind when competitors like Canon and Nikon emerged, offering better quality products at lower prices. This was because Kodak didn’t want to sacrifice their core business as digital cameras didn’t need development, film, the extensive partner network or other “film development” services.
- Blockbuster Video: When Netflix began offering movie streaming services, it was slow to react, leading to its decline as customers shifted away from physical rentals to digital streaming options. They didn’t want to sacrifice their extensive offline store network to embrace streaming.
- Nokia: The company’s inability to keep up with Apple’s iPhone releases caused it to lose significantly a significant portion of its market share in the smartphone industry, as it believed that its phones were irreplaceable.
- Toys R Us: Following Amazon’s rise as an online retailer, it struggled due to its slow adoption of e-commerce capabilities and customer loyalty programs which were already being used by rivals such as Walmart and Target. Toys R Us was focused on saving their offline-retail business and therefore missing out on the opportunities of e-commerce.
The Innovator’s Dilemma is primarily a cultural problem and upper management problem. Many steps need to be taken to build a successful long-term strategy and company culture that enable the disruption of the own business model. Because Innovation will always happen, the only option is to be innovative and take away your own business or look when someone else is taking away your business.
- Create a Long-Term agile vision: Make sure your vision is set to the right target. Don’t focus on specifics, technologies, or particular business models but on solutions and embrace change in every way.
- Be flexible: Companies need to build organizations that can quickly respond to changing conditions by encouraging flexibility.
- Encourage experimentation: Encourages experimentation by providing resources and creating a culture supporting risk-taking and innovation.
- Identify toxic culture: It is crucial to identify and eliminate toxic cultures that can inhibit innovation.
- Develop customer insights: Every company should strive to gain deep insight into their customers, competitors, and the market to identify new opportunities and disruptive changes early on. But also ensure that upper management is informed and gets “unmasked” information. Jeff Bezos had the right words for it “Become a customer fanatic.”
- Embrace open innovation: Encouraging open innovation can help the company leverage the expertise and ideas of external parties. Make sure to have the culture to give people enough time and resources (See the SET-Model for a simplified version to understand this)
- Encourage intrapreneurship: Encouraging employees to think like entrepreneurs can help the company foster a culture of innovation. By allowing them to become intrapreneurs, you can quickly leverage their potential before they start their own business and potentially become your disruptor or competitor.
- Foster partnerships and collaborations: Collaborating with startups, academic institutions, or other organizations can help the company tap into new ideas and technologies. With successful M&A, this can be transferred into profitable new businesses and help the corporation grow.
- Continuously monitor the market and technology trends: Next to partnerships, staying informed about market and technology trends can help the company identify disruptive technologies and business models early on and prepare for them. This can be done by observing competitors and their partnership efforts but also through strategic market insights.
- Sometimes – Create a separate business unit: Establishing a particular business unit with a distinct strategy and structure can help the company experiment with new technologies and business models without disrupting its existing operations. This can be beneficial but isn’t always the best solution as it creates a fight between “existing and new.” So it is more advisable to get the whole organization more agile and innovative rather than to give some the freedom to work on something new while the other part feels “stuck and left behind.”
For almost every company, the innovators’ dilemma is a big problem. But especially large and successful corporations need to understand the innovator’s dilemma and take proactive steps to overcome it. Companies should strive for an agile and flexible long-term vision, be flexible in their operations and support of innovation, encourage constant experimentation and risk-taking, identify toxic cultures that can inhibit innovation, develop customer insights, embrace open innovation, foster intrapreneurship initiatives, build partnerships and collaborations with external parties and continuously monitor market trends.
All this might sound much, but it is critical to managing these vital elements correctly. Size alone doesn’t help if someone comes and disrupts your business. It is a combination of awareness and good governance to ensure that your company can innovate quickly and adapt quickly.
Be aware, be agile, and don’t let yourself get disrupted!