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Understanding the Innovator's Dilemma

10.15.2011
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Stephen Forte applies the Innovator's Dilemma wrongly to Apple:

In a nutshell, the Innovator’s Dilemma says the following (I am paraphrasing): when you invent something, first you are trying to penetrate a new market and convince people to buy your invention. At this stage you will do anything to get noticed. After a while, your invention becomes mainstream. Your profits predictable. Your investors complacent. Then a new disruptive technology is starting to show up here and there. You ask your customers (who are all mainstream consumers or businesses) what they want and you build that for them. Pretty soon, you go out of business (or drastically lose share) because the new disruptive technology overtook you. You failed because you made good management decisions (focusing on profits, listening to customers, etc), hence the dilemma. Henry Ford is credited with saying: “If I listened to my customers, I’d have built a faster horse.”

Apple constantly churned and churned out new products, defining new categories. The pace of innovation was breathtaking, as soon as a new iPhone was released, there were rumors of a newer and faster one. Some would say that Apple was going to cannibalize their older products with the new, but they forged ahead anyway, with the profits to show for it. Apple embraced the disruptive technologies, not fought them.

This is a misunderstanding of how the Innovator’s Dilemma works. Existing marketplace leaders do value the “newer and faster” products because they have the potential to be more profitable than their existing products. The iPhone 4 was in every way better than the iPhone 3. There is no dilemma here. The iPhone 3 is phased out slowly and the iPhone 4 is marketed. Every new Mac, iPod, iPad, etc. is better than its previous revision. This is not cannibalization. It is the natural state of affairs. Take your existing product and make it better.

The technical term for this is “Sustaining Innovation” (not sure if this was first coined by Clayton M. Christensen). Sustaining innovations do not create a new market. They may be revolutionary and fundamentally different, but they use the same values as the previous market leading product. For example, every new iteration of an iPhone improves upon the same values, i.e., simplicity, aesthetics, functionality and speed. Even the first version of the iPhone improved upon the values of existing smartphones.

The Innovator’s Dilemma, on the other hand, is about disruptive technology. A disruptive product may be worse than the existing market leader. An example is e-readers displacing books. In the initial stages, e-readers offered no slam-dunk advantages over regular books. They were very expensive, slow and clunky. But slowly they have evolved to be very sophisticated devices. For example, your modern e-reader is much lighter than a book, you don’t have to worry about charging it for a month, you can have several hundred books in your bag, and you can even browse the Internet on it.

Or take Microsoft’s dilemma with Microsoft Office as a shrink-wrap product and as a web application. The desktop product is far more powerful and profitable than the web-based one. Logically, Microsoft management is doing the right thing by concentrating on the product that most existing customers like. But the problem is that in the future, the drawbacks of web office products will disappear and the desktop Microsoft Office will have to compete with Google Docs, which had a huge start in the web application space.

Everything costs time and money. And neither is unlimited. Management has to choose between conflicting priorities. When making such a choice, a good management decision would be to spend effort and dollars on something that is likely to bring more revenue at lower risk. Disruptive technology, almost by definition, is risky because the rewards are unproven and there are known disadvantages. Secondly, for every disruptive technology that becomes a success, there are many that don’t. In retrospect, it is easy to see where a company made a management mistake. At the time the decision is made, this is not so evident.

Going back to Apple, coming out with newer versions of a product is not disruptive. And even the first version of every product was primarily an improvement on what existed in that market. There were MP3 players before, but the first iPod was way better than them all. There were smartphones before, but nothing compared to the first iPhone. People seem to forget that Palm devices were very popular until Apple blew the competition away. Tablets too. Back in 2004, I used a Toshiba tablet that had a keyboard and allowed taking handwritten notes. But the iPad made tablets mainstream.

A possible example of a disruptive technology is the Google Chromebook. In many respects, it is inferior to the products it is competing with. There are no native apps. Everything runs inside a browser. Many people have questioned this strategy. What Google is betting on is that someday, programmers will stop writing applications that have to be installed and will run everything from the cloud. If so, Chromebooks are in a good place to take advantage of that because Google would have spent years perfecting every aspect around the vision.

Microsoft, with Windows 8 and Metro Apps, on the other hand, has put its feet firmly in both camps. Microsoft believes that people will continue to install applications for the foreseeable future, but is getting prepared for a future where that is no longer the case. This seems to be a risk-free approach no matter how the coin falls, but does requires significant investment and in fact involves heavy technical risk. Reading the Windows 8 blog, it seems that they are pulling it off, but the proof will be in the production releases.

 

From http://www.thoughtclusters.com/2011/10/understanding-the-innovators-dilemma/

Published at DZone with permission of Krishna Kumar, author and DZone MVB.

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