Review of The Innovator’s Dilemma

by

John D. Trudel, published in Consulting to Management

This book has extreme significance, and not just for firms that consider themselves to be working with technology. Though the book attained business best-seller status, it is not one of the super-hyped, bite-sized, prescriptive books that catch media attention and start fads. If you missed it, you should correct that error.

The author is a Harvard professor whose research papers in technology management are greatly respected. Insiders will recognize the theme of this book – technological disruption yields competitive advantage, yet is typically missed by incumbents – as it drives most new venture success stories. Indeed, this book is now required reading at firms like Intel and disruption is the fourth (out of five) "Engines of Prosperity" that formed the topic of my own recent book.

This book is the latest and the best in Harvard’s "Management of Innovation and Change Series." It has value for those setting business strategy and attempting to create value from new products and businesses. It provides a wakeup call to managers at traditional firms.

For many years, we in high tech have pondered a strange paradox: Why is it that the leading firms of one era (e.g., mainframes or transistors) are so seldom the leaders of the next (e.g., PCs or semiconductors)? There have been many books (including my own) that gave anecdotal examples of this phenomena, but no one had a compelling theory of why this is so. Until now.

This book examines the business failures of excellent companies, the kinds of firms that managers have been trained to admire and emulate, the kinds of companies respected for their abilities to innovate and execute. While companies stumble for many reasons – bureaucracy, arrogance, tired executive blood, poor planning, short investment horizons, inadequate skills and resources, and even bad luck – that is not what this book is about. This book is about well-managed companies that have their competitive antennae up, that listen to their customers, invest aggressively in new technologies, and yet still lose market dominance.

Yes, I know what you are thinking, "That doesn’t apply to us." Don’t be too sure. Despite folklore, such failures are found everywhere, not just in high tech. Such seemingly unaccountable failures happen in fast moving industries, and in those that move slow. They happen in industries based on electronics, and in those based on chemical or mechanical technology. They happen in manufacturing, and in service industries. I can assure you that this book applies to your industry.

The cases of failures studied include Sears (retailing), IBM (mainframes), DEC (minicomputers), Xerox (copiers), the whole steel industry, Bucyrus Erie (earthmoving equipment), and on and on.

I confess that the high tech cases are the most compelling. That is for the same reason that those who study genetics avoid studying humans. Instead they study things like fruit flies. If you think about it, the reason becomes obvious. Human generations only come along every thirty years, but fruit flies are conceived, born, mature, and die in a single day. Similarly, high tech moves faster and thus provides better case studies.

Four seemingly simple (but actually profound) principals underpin the book, and each is the subject of a chapter or more:

1. Companies depend on Customers and Investors for resources.

2. Small markets don’t meet the growth needs of large companies.

3. Markets that don’t exist can’t be analyzed.

4. Technology supply may not equal market demand.

While these principals may seem obvious, their implications are profound. For example, the book notes that the conventional solutions to companies’ problems – planning better, working harder, becoming more customer driven, and taking a longer-term perspective – all exacerbate the problems when firms are faced with disruptive change.

Think about trying to sell such "heresy" to your sales manager or V.P. of marketing. "Sorry, Harry, the worst thing you can do is to listen too much to your customers." Still, the cases in the book prove that that premise is sometimes true, when your industry is faced with disruptive change. Customers don’t ask for new things like cell phones, CDs, or digital photography, instead they ask for refined versions of what they have been getting.

It is very hard for established firms to deal with disruption. To consider Principal One, the point is made that while managers may think they control the flow of resources in their firms, in reality, they do not. At the end of the day, firms whose investment patterns don’t satisfy their customers and their investors do not survive.

"So what?" you say. "That’s obvious." Perhaps so, but the implications are profound. You see, the best-managed companies have well-developed systems for killing ideas that their customer’s don’t want.

As a result, these companies find it very difficult (often impossible) to invest adequate resources in disruptive technologies – lower margin opportunities that their customers do not want – until their customers do want them. And by then it is too late.

To examine another such paradox, consider Principal Three, my personal favorite, "Markets that don’t exist can’t be analyzed." Ever since business discovered MBAs, the center of the universe has been finance. Unfortunately, that model doesn’t work well for knowledge-based business. Indeed, the issues of dysfunctional financial criteria and inappropriate metrics were two of the seven management challenges we posed in my last book.

These issues beg for non-traditional viewpoints. Still, the notion that financial analysis may not help is likely to be as upsetting to your CFO as the "heresy" of the preceding paragraphs was to your sales and marketing managers.

The dot-com phenomena – where companies without profits (or even prospects of profits) obtain high valuations – delights investors and those lucky enough to have stock options, but it upsets business traditionalists. Can’t you almost see the bean counters lighting candles and praying for a market correction? Sure you can.

Such is the dilemma of the new era of business, and this book comes as close as possible to proving the new realities. It also does a good job of explaining why things are becoming this way and presents some options for action.

Right now, I’d tend to divide the business world into four groups of roughly equal size and resources. The first two, Groups A and B, reject the new reality. The second two, Groups C and D, accept it but have opposite strategies.

Group A is unaware, too busy with business-as-usual to worry about the book’s topics. Group B is in denial. They’ve noticed this new age business stuff and the Internet, but think that it doesn’t apply to them, at least not yet. Both groups are operationally focused and shrinking as margins thin and firms are merged. I doubt the book will appeal to them.

Group C accepts the new precepts and embraces change. It includes Venture Capitalists and those bailing out of mature firms to join the dot-coms. Group D consists of strong firms that see the emerging future, but view it as undesirable. Examples include the record industry and its cartel, the RIAA, who litigate to block Internet-based music distribution, and the phone companies, who lobby to block high-bandwidth local service because it would destroy their lucrative long distance business model. Group C is growing faster, but Group D is the richest.

Those in Groups C and D will find this book essential, and all professional consultants to management should read it. We live in interesting times and this book helps explain them.

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