The Innovator's Dilemma

The theory of resource dependence states that while managers may think they control the flow of resources in their firms, in the end it is really customers and investors who dictate how money will be spent because companies with investment patterns that don't satisfy their customers and investors don't survive.

The highest-performing companies, in fact, are those that are the best at this — they have well-developed systems for killing ideas that their customers don't want. As a result, these companies find it very difficult to invest adequate resources in disruptive technologies — lower-margin opportunities that their customers don't want — until their customers want them. And by then it's too late.

Disruptive technologies typically enable new markets to emerge. To maintain their share prices and create internal opportunities for employees to extend the scope of their responsibilities, successful companies need to continue to grow.

But while a $40 million company needs to find just $8 million to grow at 20 percent in the subsequent year, a $4 billion company needs to find $800 million in new sales. No new markets are that large. As a consequence, the larger and more successful an organization becomes, the weaker the argument that emerging markets can remain useful engines for growth.

Many large companies adopt a strategy of waiting until new markets are "large enough to be interesting". But evidence shows why this is not often a successful strategy.

Those large established firms that have successfully seized strong positions in new markets enabled by disruptive technologies have done so by giving responsibility to commercialize the disruptive technology to an organization whose size matched the size of the targeted market.

Sound market research and good planning followed by execution according to plan are hallmarks of good management. When applied to sustaining technological innovation, these practices are invaluable; they are the primary reason why established firms led in every single instance of sustaining innovation in the history of the disk drive industry.

Such reasoned approaches are feasible in dealing with sustaining technology because the size and growth rates of the markets are generally known, trajectories of technological progress have been established, and the needs of leading customers have usually been well articulated. Because the vast majority of innovations are sustaining in character, most executives have learned to manage innovation in a sustaining context, where analysis and planning were feasible.

In dealing with disruptive technologies leading to new markets, however, market researchers and business planners have consistently dismal records. In fact, based upon the evidence from the disk drive, motorcycle, and microprocessors industries, the only thing we may know for sure when we read experts' forecasts about how large emerging markets will become is that they are wrong.

It is 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 process demands 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 judgements based upon financial projections when neither revenues or cost 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.

When managers tackle an innovation problem, they instinctively work to assign capable people to the job. But once they've found the right people, too many managers then assume that the organization in which they'll work will also be capable of succeeding at the task. And that is dangerous — because organizations have capabilities that exist independently of the people who work within them.

An employee of IBM, for example, can quite readily change the way he or she works, in order to work successfully in a small start-up company. But processes and values are not flexible. A process that is effective at managing the design of a minicomputer, for example, would be ineffective at managing the design of a desktop personal computer.

Similarly, values that cause employees to prioritize projects to develop high-margin products, cannot simultaneously accord priority to low-margin products. The very process and values that constitute an organization's capabilities in one context, define its disabilities in another context.