Sunday, August 19, 2012

The Innovator's Dilemma: Chapter 3

Companies are susceptible to losing their customers as a result of disruptive technologies. In The Innovator's Dilemma, Christensen demonstrates that companies are overtaken despite doing everything right - listening to customers and investing in the highest-return projects. By studying the disruptive process, Christensen shows how companies can defend themselves from disruptive technologies.

The author takes the reader on a deep dive of the mechanical excavation industry. This is no high-tech industry; changes in technology are relatively slow. Nevertheless, they do occur, and the pattern differences between sustaining and disruptive technologies are evident once again.

The incumbents appeared to have no problem adopting technologies that were needed by its existing customers (referred to as "sustaining technologies"). And that's exactly the problem. Disruptive technologies are not required by existing customers until it is too late. As a result, doing everything right by listening to one's customers, is what kills incumbents.

The disruptive technology in this case was a switch from cable-operated to hydraulic products. For many years, hydraulics were not strong enough to deal with the needs of the existing customers of excavation equipment. As such, even though incumbents were current on the technology, they could not get their customers to buy it.

What the hydraulic entrants did, however, is satisfy new customers. These customers did not need the strength the large customers (e.g. mining excavators) needed. They represented smaller, less-appealing customer groups such as piping contractors and single-home builders. Gradually, over many years, hydraulic technology did evolve such that eventually these entrants were able to move upmarket and steal share of the most profitable customers from incumbents. By then it was too late for incumbents to react; they no longer had the expertise/scale/processes to compete.

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