Why do successful companies fail? This is the point of the book.

Thesis of the book: sometimes the principles of “good management” should not be followed.

Why good management can lead to failure

Christensen draws a distinction between sustaining technologies and distruptive ones. Sustaining technologies offer marginal improvements in features/convenience of existing products, along the lines that existing customers value.

(i) Distinction between disruptive technologies vs sustaining ones

Disruptive ones: innovations that perhaps result in worse performance (at least in the near term) but they offer features that a few fringe (generally new) customers value. These distruptive technologies typically tend to be cheaper, simpler, and more convenient to use. You could say something is disruptive if you carve off a nice market, but have the capabilities to enter the mainstream market (e.g. off road bikes), transistors.

(ii) Market Needs vs Technological Improvements such that they exceed those needs

Mainframes have increased in their performance. But who needs mainframes these days for those high performance specs? Meanwhile, disruptive technologies might better meet those data processing needs.

(iii) It does not make sense for established companies to invest in disruptive technologies

• (a) disruptive technologies are simpler/cheaper, with low margins, and not greater profits.
• (b) they occur in currently insignificant markets,
• (c) leading firm’s customers do not want, and cannot use disruptive technologies.

In other words, you cannot listen to existing customers, to build a case for disruptive technologies, until it’s too late. In other words, customers don’t know what they want till they have it in their hands, and by then, it is too late.

The 5 principles of disruptive technologies

How managers can manage in the face of disruptive technologies.

(a) Principle 1: Companies Depend on Customers and Investors for Resources

If your current customers don’t want something - vs. new customers - then it is unlikely for managers to invest in that thing, until it is too late. New technologies tend to be low margin. Christensen’s solution to this is for management to identify disruptive technologies and to set up autonomous companies to prosecute these ideas. The only problem I see with this approach is managers might not be cluey enough to follow things up: they might get complacent in their current role, and might not see the forest because the trees are in the way. The inspiration for the disruptive technologies must come from somewhere.

(b) Small Markets Don’t solve the Growth Needs of Large Companies

Hence, the big organisations don’t invest in it. As stated above, the way out is for a new smaller organisation to be created with a direct mandate to invest in the smaller technologies.

(c) Markets that Don’t Exist Can’t Be Analyzed

Largely based on the same theme as above. You cannot ask an existing customer about something they don’t know they want, and something which they don’t want. As disruptive technologies improve, you may soon find your existing customers wanting that disruptive technology over your existing solution.

Christensen’s solution is that you don’t make investment decisions based on existing markets - you use an approach called “discovery-based planning”. Basically, to assume the forecasts are wrong, rather than right.

(d) Principle #4: An Organization’s Capabilities Define Its Disabilities

What Christensen seems to be saying here is that different problems must be approached in different ways to be succesful. The processes involved in high-end products might not work when making cheap products. He suggests some solutions in chapter 8.

(e) Principle #5: Technology Supply May Not Equal Market Demand

Your sustaining technology may improve to such an extent that customers may not want all those benefits. When that is the case, something simpler, or more cost effective will better suit their needs. That’s where the disruptive technologies come into play.

The only way to solve this problem is to make sure that your products meet customer demands. Another way to solve this problem is to keep costs down, as low as possible, and to also reduce your revenue to something as low as possible. You will be forced to eke out gains by improving efficiency, or meeting new needs rather than by artificially increase profitability simply by raising prices.

How can great firms fail

• Example: 8 inch disk drives were standard. But a smaller and cheaper drive came in, less fully featured than the mainstream. They catered to the PC market, which as also less fully featured.

Held Captive by Existing Customers

• Existing customers who wanted 14 inch drives did not want the 8-inch ones. Existing manufacturers listened to them. When the 8-inch drives became good enough, they kinda took over.

• Another interesting phenomenon: Seagate (the engineering team) themselves develeoped a 3.5 inch drive. But marketing/executives said people don’t want smaller and more expensive (per MB) drives….but they were looking at things from their existing customer base - and this is a big mistake! Don’t presume to know what the market is: only the market will know whether something will work or not, according to their own application(s). In this case, a new market emerged: people wanted 3.5 inch drives who were not Seagate’s existing customer base.

Conclusion to chapter 1:

• Existing firms seem to want to keep on their existing trajectory with existing clients. i.e. to make marginal improvements in their technologies. They are not thinking in terms of new markets, new customers, new applications - who would be happy with a slimmed down version of a product - or small markets. But as with most things – they start small - then grow to sizable operations which may compete with your existing market.

Chapter 2: Value Networks and the Impetus to Innovate

My Opinion

• Poor incentives for the people who know the industry (e.g. employees): Most of these companies are driven top-down. Management makes the decisions. They are not shareholders. If something cocks up, then it’s no loss to them. Someone outside management, in a different organisation all together comes up with a scheme to cut someone’s lunch.

• Usually it seems that a related technology in a niche market opens up, which is significantly cheaper than the existing technology. While cheaper, its features might be limited, and are usually ignored by incumbents; but things are rarely static. Technologies improve, and markets grow, and the incumbents soon find themselves on the outside of the party.

It is my opinion, that the only way to combat this is to develop new products and new markets within an existing industry, by people who know the industry, or should know the industry: by people who know and experience the pain of customers, and can device creative solutions to solve those pain points. The creativity is the key component here: you cannot expect a customer to know what they want: they often don’t. Even when you show them, sometimes they will not realise something that is obvious.

One way to encourage incumbents is to incentivise staff, in-house (and externally) with generous equity to develop new products and markets. It is better that cannibalisation happens internally, rather than externally. Christensen suggests that the best way to do this is via a new autonomous company dedicated to that new product/market.