Avoiding and Solving the Innovator’s Dilemma

by Robert S. Siegel on January 18, 2010

Have you heard of the Innovator’s Dilemma?

The innovator’s dilemma is the predicament faced by many companies today, as described in the book, “The Innovator’s Dilemma” by Harvard Professor Clayton Christensen.   (2 minute video here). Christensen’s work in this area is one of the most important, if not the most important, contributions to innovation in our time.

The innovator’s dilemma is a situation under which industry leading companies either fail to see or are unable to successfully respond to technological innovations that ultimately disrupt their market.  The dilemma occurs when well managed, customer focused companies fail to adopt new products and services that address some, not all, of the same customer needs as their existing products, but at lower prices.  This failure occurs because the new products are so technologically distinct from the company’s current products that their customers don’t perceive a need for these often substandard solutions.

For example… Company A builds the highest quality, most technologically advanced mouse traps and owns the largest share of the market. Company B (the competition) decides that instead of building a better mouse trap they will build a low priced Mouse Deterrent.  The overall affect for the customer is the same; fewer mice.  Company A’s customers don’t indicate a need for a product similar to the Deterrent. The Traps that they are buying are catching the mice, automatically keeping a tally of the mice caught, sending out a monthly report on the number mice caught (complete with year-over-year comparisons, trend analysis), and automatically disposing of the dead mice.  The customers are able to get all of the features that they need (and more than they really need) from the existing Traps.  All seems to be good at Company A.

There’s more. The Mouse Deterrent does not ‘trap’ mice, so customers won’t know whether or not the product is working.  Current customers of Company A’s mouse traps are unfamiliar with this new Deterrent technology and how it relates to their needs, or if it even meets their needs.  They don’t have the time, budget, or risk tolerance to investigate the product.  And, without the features that the Company A product offers, like reporting and dead mice disposal, they can’t envision any value in the Deterrent.

Company A is a well managed company with financially sound decision making tools in place. It is an industry leader in mouse trap technology focused on meeting customer needs.

Company A is about to face the innovator’s dilemma.

The problem, according to Christensen, is that product innovation takes two trajectories.  The first trajectory is up; the result of ongoing performance improvement.  This trajectory can outpace the needs of more simple users. This creates opportunities for a second trajectory based on disruptive innovations.  Disruptive innovations are products and services that solve a customer’s need in a different way than they are currently being solved, typically at a significantly lower cost, and initially only for a market segment that is deemed too small by the incumbent company (Company A in our example) to address.

In our better mouse trap example, the lower cost Mouse Deterrent only appeals to a small segment of customers at first.  Company B is a small and nimble company with lower overhead and lower gross margin requirements than Company A.  As their customer base grows they will continuously improve the Mouse Deterrent so that it meets more and more customer needs.

Right now, the market size combined with internal financial data show that Company A should not compete directly with Company B and their Mouse Deterrent because the financial opportunity is too small, or may not materialize at all. However, that situation can change.

Let’s say the Mouse Deterrent has been on the market for more than a year, improvements have continuously rolled out, and some small businesses are using the product successfully. Now, let’s say the economy becomes a bit tight (not too hard to imagine these days). The Mouse Deterrent may become a disruptor to the Trap market and all the Trap makers. According to Christensen, when this happens, Company A will slide from a leadership position to the middle of the industry pack.

So how does The Ideative Process help us to solve the Innovator’s Dilemma?

The Ideative Process involves four activities, Inundate, Deviate, Enhance, and Assemble (for more detail on this see Need creativity?  Ideative is better creativity).  The activities of Inundate, Deviate, and Enhance encourage people to develop depth within their Ideative subject and breadth in the world beyond that subject.  Ideative people need to understand their subject thoroughly in order to grasp the full potential of what can be, and they need to understand the world beyond their subject as a catalyst to their thinking.  In combination, these activities form a potent antidote to the Innovator’s Dilemma by giving the Ideative person the insight into the potential Disruptor’s world and the vision to see the Disruptor’s opportunities relative to their own solutions.

Christensen’s subsequent book, The Innovator’s Solution, states that managers and executives at established companies need to identify the signals of potential disruption before their company is hurt by the disruption. These signals of oncoming disruptions are certainly available – companies have the ability to spot them and adapt.  As my colleague, Michael Vorp, points out, disruptive technologies are disruptive to markets but not disruptive within their respective technological need categories.  Christensen uses the cellular telephone industry in “Solution” as an example of a market that was disrupted. The telecommunications industry has changed dramatically as both my colleague Michael and I know from a combined 30 years experience in the industry.

The technological need category is the ability for two people to talk to one another across a distance. Historically, that has meant calling one another on a landline based phone. For years the landline phone technology has been on the first trajectory with much advancement. However, today, a significant and growing number of households are no longer connected to the traditional landline telephone networks. Consumers are choosing to rely on their cellular network instead. This change has certainly been disruptive to the “landline phone” market but hardly the technological need category. People are still talking to one another over distances. They are just doing it without being tethered to a stationary phone.

Was the landline phone industry disrupted?  Yes.  Blindsided?  No.  Not only was it possible to see this disruption coming,* the landline phone companies were acutely aware of what was happening. Unfortunately, many millions of dollars were lost while the landline telecoms tried to avoid the reality of the changed customer requirements (mobility = most important; voice quality = less important).

In our example of the Mouse Deterrent, you, being an Ideative person working for Company A, learned about the Mouse Deterrent as a general part of your Inundation into the mouse trap industry.  And, as a general part of your Inundation, you were among the first to buy the new product and try it, along with the other competitive and potentially competitive products you explore regularly.  You were not terribly impressed with this first version of the Mouse Deterrent because of the limited set of features and low reliability which did not meet what your customers were demanding from your products.

Still…..

Because you Deviate From Your routines by Routinely Breaking your Routines, you also know that many of the new wave of start-up companies don’t have the funds to purchase extras, like top quality mouse traps.  You also know that deterrent technology like that used for the Mouse Deterrent continues to improve, from mouse deterrents to the new teenager deterrents (this is real!).

You saw the potential for the Mouse Deterrent long ago, because you use The Ideative Process.  You saw a different future than non-Ideative people.  You saw the potential threat from the Mouse Deterrent and you built that threat into your long term forecast.  That led to a better, more accurate forecast and a very different business case, one that allowed some investment to counter the threat from the Deterrent.  You followed the Deterrent, and understood that the Deterrent proved that there is a customer segment that has a need for this product.  This information enabled you to show the incremental value of expanding to an underserved segment by entering the Deterrent market. Now, Company A has the option to expand its Deterrent product line or even purchase Company B. Either way, if the market changes and Deterrent technology becomes the favored means to deal with mice, Company A is positioned to take advantage of that change.

Instead of being caught behind a Disruptive Technology, you used the Mouse Deterrent to learn about the technology and the market.  The Mouse Deterrent, in effect, became the equivalent of a test market for Company A’s Mouse Trap branded deterrent.

Build a better mouse trap and the world will….not face the Innovator’s Dilemma, thanks to The Ideative Process.

*The cell phone’s history begins in 1843 with Michael Faraday’s studies of the ability of space to conduct electrical signals.  The Detroit police department began using mobile radios in 1921 and in 1945 the first the first mobile-radio-telephone service is established in St. Louis.  The service did not work well at all but in 1949 the FCC established channels for Radio Common Carriers beginning the linkage of radio to the telephone. According to TechFaq.com, the first The first official mobile phone was used in Sweden by the Swedish police in 1946.  On October 13, 1983 – The first commercial cellular system begins operating in Chicago.  I write this at the very end of 2009.  Two days ago I switched my traditional landline phone to AT&T Uverse (no promotional benefit received here), a combination of fiber optic and IP telephony that also provides my internet and television.
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{ 3 comments… read them below or add one }

Chris January 19, 2010 at 8:14 am

This reminds me of of a couple things.
1. Sun Tzu would heartily agree with you about viewing your company and its products through the eyes of a competitor.

2. There’s also a school of thought called “Good Enough.” Wired did a piece about the Flip camcorder with this in mind. It’s a cheap small camcorder without bells and whistles and for most users it is is all they really need. Some food for thought…
http://www.wired.com/gadgets/miscellaneous/magazine/17-09/ff_goodenough

There’s nothing wrong with having a product line to fill the niches you identify. Just make sure to fill those niches better than anyone else.

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Easy January 20, 2010 at 9:05 pm

Robert,
I really enjoyed your decription of Company A’s mouse trap features – poetic elegance! It captures the reality of high-tech firms that focus entirely on the top of the market pyramid – so called Tier 1.

The challenge boils down to maintaining an entrpreneurial mindset inside large companies – a practical oxymoron. Your readers will at least have an awareness of their “blindside”.

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Jafet Ramirez January 21, 2010 at 6:23 am

Bob,

Thank you for keeping me up to date in the Ideative Process. In this week´s Businessweek (Jan 25, 2010) there is a very interesting article on Innovation by Roger Martin and Jennifer Riel. While I will not go over the whole article here, it states that an innovative concept is usually killed with two words: Prove it. It explains that such an ending can be explained since the impulse of the subject of an innovative idea is to ask for proof from either / or two directions: deductive (the application of a widely held rule) and inductive (developing a new rule from a wide range of data). We can easily see how innovation can be suspended in full, or at best, slowed significantly under these predicaments. They suggest “abduction” as a the solution; “the process of creatively assembling the disparate experiences and bits of data that seem relevant in order to make an inference – a logical leap – to the best possible conclusion.” The article provides some examples and additional points to support their claim. In my mind there are many ways to spark innovation within an organization, the best I have seen to date is to establish a clear direction to reach a goal and stimulate creativity to achieve it. It is ironic that in the same BW edition, Apple’s decision making driver is described as: “Because Steve says so”.

Jafet Ramirez
LuZan, Inc.
http://www.MulticulturalMarketingConsulting.com

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