What it is: “The Innovator’s Dilemma” is a book that explains why big companies eventually fail despite doing everything right.
The common belief on why leading companies fail to adapt to change is because the company executives are arrogant or incompetent. While some companies have failed due to executive fumbling, “The Innovator’s Dilemma” suggests that the main reason companies fail is through their very nature of how they work.
Every company has resources, processes, and values. Resources defines physical items, such as people and equipment, that a company can use to pursue any project.
Processes define how a company works. Values define how a company makes decisions. In most companies, their values determine how they make money. Typically, large companies want to pursue markets that offer the greatest profits with the least amount of risk.
That means large companies typically focus on growing their existing business while ignoring anything else because everything else often conflicts with the company’s values. Think of Blockbuster Video focusing on renting DVDs in stores. At the time, the short-term focus meant wringing the most profits out of their retail stores and that often meant selling snacks at the checkout desk. People often rented a handful of movies every Friday night and bought candy and popcorn at the same time.
So the idea of renting DVDs by mail (like Netflix) didn’t make sense to a company like Blockbuster Video. After all, they couldn’t make much money sending DVDs by mail and they couldn’t sell customers additional snacks. Because the initial profit potential was low at the time, Blockbuster Video chose to ignore it until it became so big that it eventually killed them altogether.
Borders Books made the same mistake. They stayed focused on selling books in retail stores. When approached by a handful of customers about selling books over the Internet, Border Books thought the profits from online book selling were too low, and at the time they were right. That’s why Border Books directed people to shop on Amazon instead.
In the short-term, this strategy made sense to focus on retail book selling because that generated the most profits while online book selling did not. However, like Blockbuster Video, Border Books found that the market they initially ignored soon grew so fast that it killed their retail stores.
“The Innovator’s Dilemma” explains this failure. The resources, processes, and values of a company are all geared towards making the most money possible right away, which makes sense in a stable market. A company’s resources, processes, and values will always ignore tiny markets where only small profits can be made because for a large company, pursuing small profits is a waste of time.
Remember, Walmart initially focused on rural areas that other retailers like K-Mart were ignoring. That’s because K-Mart saw rural areas as too small to worry about. What happens eventually is that tiny markets soon grow to kill the bigger markets.
In the computer industry, you can see this when mainframe computers ruled the market. Then minicomputers appeared. While they were never as powerful as mainframes, they were less expensive and good enough for the companies that needed computing power but couldn’t afford a mainframe.
Then as PCs appeared, mainframe and minicomputer users scoffed at PCs as toys. Yet individuals and small businesses snapped up PCs because they met their needs, even if it didn’t meet the needs of traditional mainframe and minicomputer users. A big company like Digital Equipment Corporation (DEC) made money selling minicomputers to companies. To them, the profits from PCs were too small to worry about, so they ignored the PC market until it was too late.
Companies are optimized to pursue greater profits in bigger markets and ignore tiny markets that promise little profit. As an executive, would you rather promote a project that promises to return millions of dollars? Or a project that might not even return a few thousand dollars? From an executive’s point of view (self-preservation), it only makes sense to pursue the bigger markets that offer the most profits, yet that virtually guarantees that big companies will always miss tiny markets that have the potential to eventually grow and destroy the big markets.
Just as PCs decimated the minicomputer market, so are mobile computers killing traditional PCs. At all times, conservative executives rightly point out that the bigger markets earn more profits and their current products are superior, and they’re right. The problem is that they always overlook underserved markets.
Just as small companies could afford minicomputers but could never afford mainframes, so could small businesses afford PCs but could never afford minicomputers. Likewise, many companies can afford PCs but many individuals cannot, so less expensive smartphones and tablets make more sense.
While minicomputers were superior to the first PCs, PCs rapidly grew in power until they eclipsed minicomputers. Given a choice between a more expensive and less capable minicomputer, or a less expensive and more capable PC, is it any wonder that the PC killed the minicomputer?
Right now PCs are still more powerful than smartphones and tablets, but it doesn’t really matter. There comes a point where power and features become irrelevant. Nobody doubts that Windows is more powerful than Android or iOS. The problem is that how many people need that power? Even worse for Windows is that Android and iOS are far easier to use and run on computers you can put in your pocket so you can take them anywhere.
That gives Android and iOS devices more versatility that a Windows PC can’t offer despite being more powerful. You can pull out a smartphone and check when a bus or train will arrive. Nobody will carry a Windows laptop around to perform that same task.
You can pull out a smartphone or tablet to give you driving directions. Nobody is going to do that with a Windows laptop. That’s why technical features eventually become irrelevant because more power doesn’t equal more uses. Eventually products become so powerful that the differences between that power becomes meaningless.
At one time, each new generation of PCs meant you could do more with your computer. That meant people eagerly bought new PCs every few years. Nowadays, will running Excel on a Windows XP PC be any different than running Excel on a Windows 8 PC? Not really, so despite the superior technical features of a typical Windows 8 PC, there’s little reason to upgrade since you won’t get drastically superior performance.
Products tend to go through four stages:
Initially, people flock to a product because of its functionality. Initially dozens of companies sold word processors and each competed by offering more features than the others. Eventually features became less important than reliability. WordPerfect dominated the word processor market at one time because they offered toll-free technical support. Now only did WordPerfect offer features, but they gave users the security of reliability.
Eventually companies selling word processors started to fade. WordPerfect lost their lead to Microsoft Word because Word (as part of Microsoft Office) made it convenient to standardize around Microsoft Office. There’s little difference in features between Word and WordPerfect these days. It’s just that it’s more convenient to share documents in Word.
Microsoft Word offers way too many features that most people don’t need, so rather than pay for Word, individuals are finding less expensive, and less featured word processors good enough. That’s why Google Docs and Apple’s Pages are gaining users. Neither Google Docs nor Apple Pages can compete with Microsoft Word in terms of features. Instead, they compete by being free and being good enough.
Microsoft had to give away Microsoft Office on Android and iOS for free as a way to get more people to sign up for a subscription service. At one time, almost everyone bought Microsoft Word to do word processing because that was the most convenient choice. Nowadays, people focusing on price have plenty of free alternatives that do the job. They may never work as well as Word, but that no longer matters any more. What does matter is that it works well enough, which means one less customer for Microsoft Word.
“The Innovator’s Dilemma” is a fascinating book that clearly shows how big companies in all industries fail because their entire process, values, and resources are geared towards generating more profits from their current market while ignoring tiny profits in potentially disruptive markets.
If you want to start a company in any industry, first look to see where that industry is. Competing head to head against a big company is a sure recipe for disaster. Even IBM’s OS/2 operating system couldn’t compete with Microsoft Windows.
Where every big company is vulnerable is in tiny markets with competing products that are actually inferior to current products. PCs were initially inferior to minicomputers. However, PCs met the needs of a tiny market that needed just enough features to do budgeting and word processing.
You don’t want to compete with giant companies. You want to focus on the tiny markets giant companies are ignoring and focus on inferior products that satisfy an unmet market. That’s where the explosive growth always lies.
The steady growth always lies in mature markets, but those mature markets eventually die. Big companies are designed to satisfy mature markets. Little companies are nimble enough to tackle tiny, seemingly unprofitable markets. Just ask Blockbuster Video and Borders Books how well their markets fared against Netflix and Amazon.
Now ask yourself where the growth in computers lie? With companies clinging to products that are technically superior but with irrelevant features to the majority of people? Or with companies selling technically inferior products that meet the unmet needs of more people?