innovators-dilemma

The Innovator’s Dilemma, by Clayton Christensen, was one of those books that I understood intellectually when I first read it but struggled to explain others through concrete examples.

Apple was my default position. It was a company that continuously re-invented itself (at the expense of it’s current product line). Yet beyond Apple I didn’t really have many great examples.

That is until I listened to this podcast from Peter Day’s World of Business of the BBC that I really began to understand the power of this model.

Here are some summarized notes from this excellent podcast.

Toyota and GM

The way in which Toyota made its entry into the North American car market (at the expense of GM) is a classic example of the Innovator’s Dilemma.

Toyota, when they entered North America and Europe, they didn’t enter our market with Lexus’s. They came in with rusty little subcompacts – the Corolla. And from that little subcompact they went to the Tercel, Camry, Avalon, ForRunner, Sequoia, then a Lexus at the high-end of the market.

And as the American car companies looked at Toyota coming from the bottom, they said: ‘You know, if we just get out of the lowest profit part of the business, when we add up the remaining numbers our profitability improves.’ And because Toyota had a cost advantage their profitable improved as they got in.

toyota-camry

And then as Toyota got in up to the next larger car, General Motors and Ford would look at that and say: ‘You know, if we got out of the compact cars, our profitability would improve by lopping of the lowest profit cars and Toyota profits improved as they got in. And then as Toyota moved up to the next level, it always was more profitable to get out of the lowest profit products.

And so they just retreated, to the very high-end, making really big cars, for really big people. And Toyota just pushed them right up market and it turns out that that’s the mechanism that causes successful companies to fail.

No one at GM made the singular decision: ‘Let’s kill the company.’ Yet in the pursuit of profit, and by doing very logical things that felt good at the time, they ended up doing precisely that.

In the pursuit of profit, they moved up market and were then pushed out those underneath.

Intel vs Cyrix & AMD

Intel did the same thing. They were going to die. Cyrix and AMD were eating them in the lower ship market. They could have moved up (like GM and Ford did) but they didn’t. Instead they created the Celeron processor and didn’t give up the low profit market.

Andy Grove also talk Clayton Christensen an important lesson.

First is, when God created the world, he positioned man to look into the future. But data is only about the past. And if we teach managers to be data driven, fact based, and analytical, we can only make action when the game is over.

You have to have a theory or model in your mind to look into the future. In Intel’s case, the theory started to make sense.

Grove got this. He was driven to do things. Wrote the book Only the Paranoid Survive.

Higher Education

We see the future through the rearview mirror of the past. Harvard business school so exalted the case study is a really good example of the prison of seeing the future through the past. Case studies don’t equip you for the kind of changing world we seem to have moved into with technology.

In America, the cost of higher education is inflating at a rate faster than health care. It’s costs so much money to pay for higher education that online learning is very powerfully disrupting the traditional university. Established universities can’t see what to do. The way you address that in the private world is you setup a separate business unit. So what it would entail for Oxford or Cambridge is they need to setup a separate business unit, teach it online, and it won’t be very good. Just like Toyota came at the bottom of the market but online learning is increasing in it’s quality and it’s effectiveness very rapidly. Universities have to think how they can play in that world in a completely different business model. The future will be very different from our past.

But in a lot of ways how you measure things is really important. The average student at an online university is 36 years old. A student who have a family at home. They work, they support a family. The last thing in the world they would like to do is to go to a campus lecture at 8pm. The reason why they are enrolled is they actually don’t care to get a certification or degree. They need a job.Or they need a better job. And so they take what they need to take in order to get that job done. And so if you measure online learning by the metrics by which we measure the universities, we would view that as a very low quality level of experience. From their point-of-view it can actually be a very high quality level of experience because they are trying to get something very different out of their higher education.

So these are just a few example of the Innovator’s Dilemma in practice. Reach for these at your next cocktail parties when the topic of how companies can destroy themselves by ‘doing the right thing’.

More examples

Here are some more examples of companies who are seemingly disrupting themselves before others can do it:

Amazon

Makes money from selling books. Creates a device (the Kindle) which sells fewer physical books, but spawns the birth of the e-reader.

Needs hardened plumbing and infrastructure to support massive scale of it’s website. Creates a service selling scalability and services to others (AmazonS3).