Saturday, August 25, 2012

The Innovator's Dilemma: Chapter 4

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.

Part of the reason companies are so vulnerable to disruption is that they are constantly moving upmarket, such that they don't adequately serve lower value networks. This makes them susceptible to technologies that thrive in lower value networks which can then improve to meet the needs of higher value networks. In this chapter, Christensen discusses why it is that firms cannot move downmarket as easily as they move upmarket.

Incumbents have certain cost structures. When evaluating which projects get the go ahead, the most profitable projects are always chosen. This is, of course, a very rational decision, but this natural process of resource allocation pushes companies to meet the needs of higher end markets at the expense of serving the needs of lower end markets. This allows companies with lower cost structures free reign in certain markets.

Expertise and scale is then built-up in these lower-cost companies. As the disruptive technologies improve, eventually the technologies are able to meet the needs of the incumbent's customers. But the incumbents are no longer the experts in the disruptive technologies, having neglected them in their moves upmarket.

Christensen shows how this process worked with a detailed example in the minimill steel market.

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