The Innovators Dilemma looks at how upstart technologies eventually displace existing technology in the market. This is a very interesting book, but it is very statistical in nature. The insights from this book are useful to people responsible for making decisions regarding technology as well as investors trying to spot the next wave of products in a market.
At the heart of The Innovator's Dilemma is how a successful company with established products keeps from being pushed aside by newer, cheaper products that will, over time, get better and become a serious threat. Christensen writes that even the best-managed companies, in spite of their attention to customers and continual investment in new technology, are susceptible to failure no matter what the industry, be it hard drives or consumer retailing. Succinct and clearly written, The Innovator's Dilemma is an important book that belongs on every manager's bookshelf. Highly recommended. --Harry C. Edwards
How to Leverage "The Innovator's Dilemma" in Your Small Software Company
Christensen's study of disruptive innovators and advice to companies positioned to become disruptive innovators provides encourgaging guidance to independent software vendors (ISVs). In "The Innovators Dilemma", Harvard professor Clayton M. Christensen studies several industries to discover why companies that are doing all the right things loose their leadership positions or fail altogether. Christensen's focus is on "disruptive technologies" and the innovators that create them and introduce them to the market.
Micro ISVs should understand Christensen's discovery of characteristics of disruptive technologies. The micro ISV model closely follows the descriptions of successful, disruptive innovators in The Innovator's Dilemma
Review these and see if your small software company has an opportunity to become a disruptor. (Note that Christensen uses the term "technology" not in the sense of "Information Technology" but as a general term meaning the state of any industry. His study covered industries as differing as excavation equipment, motorcycles, disk drives, and steel).
Characteristics of Disruptive Technologies
And Where Your ISV Fits
"1. The Weakness of Disruptive Technologies Are Their Strengths". Christensen profiles companies such as Conner Peripherals that created small disk drives. The established marketplace at the time did not value the limited storage capacity of the drives so Conner Peripherals created a market in portable computers. By seeking and encouraging a market that made physical size more important than storage capability, Conner Peripherals changed the basis of competition.
Christensen goes on to say though that the challenge is not one of technology. In the cases he studied, he found that firms with successful disruptive technologies won because of a marketing focus not at technology focus. In his words, they were able to "build or find a market where product competition occurred along dimensions that favored the disruptive attributes of the product."
"2. Disruptive Technologies are Typically Simpler, Cheaper, and More Reliable and Convenient than Established Technologies". Quoting: "Because established companies are so prone to push for high-performance, high-profit products and markets, they find it very difficult not to overload their first disruptive products with features and functionality." Christensen goes on to study the success that Intuit found with Quicken. Scott Cook, founder of Intuit, followed just this model when introducing Quicken as a simpler alternative to the complex accounting programs most individuals and small businesses had available.
These observations of successful innovators should be an encouraging guide to micro ISVs. You have the opportunity to turn our perceived weaknesses into strengths and to focus on being the simpler, cheaper and more reliable and convenient offering to take on competitors in your segment.
To lead your company there, Christensen discovered four "principles of disruptive technology".
Principles of Disruptive Technology
And How Your ISV Can Leverage These Principles
"1. Companies Depend on Customers and Investors for Resources" You must not be customer driven to a fault. This seemingly contrarian advice bears itself out in the study of several different industries. Most companies listen to their biggest customers and develop their products along the lines of what those customers say they want. These companies find themselves unable to respond to disruptive technologies or to think of a future beyond the customers' current self-expressed needs. Companies spend resources trying to please their current customers and loose sight of potential new markets and changes in what capabilities the market values and what capabilities are really leveraged vs. simply stated desires.
Your ISV is not constrained by large, mainstream customers - in fact you may not even have customers yet. Your ISV is not constrained by large institutional investors more concerned about this quarter's growth rate than establishing a foundation for the future.
To break this dependency on customers and investors for company direction, Christensen recommends managers form small, autonomous, breakaway teams that are not constrained by what their mainstream customers want. These small teams then find new markets and a new world of capability-value for which the larger organization is not aligned.
Your ISV is a small, autonomous team out of the box.
"2. Small Markets Don't Solve the Growth Needs of Large Companies". Your small ISV can be successful addressing new markets that are under the radar of large companies.
"3. Markets that Don't Exist Can't be Analyzed". Established companies have effective market research and planning organizations and processes. Yet these organizations and processes are not effective ways to discover new markets.
Christen presents the case study of Honda's entry into the American motorcycle market in the 50's and 60's. Honda found success discovering a small-bike (50cc) market that the big makers (Harley, BMW) did not pursue. By offering a reliable, fun product, Honda identified a market segment and a value proposition that other makers later tried to emulate. By then Honda had an established dealer network and low cost production capability while Harley dealers wanted to keep focus on high margin large bikes. While large bikes provided high margin, they turned out to produce low growth rates. The small bike market had a much larger growth rate.
Your small ISV can be much more effective at discovering new markets and taking advantage of their fast growth rates.
"4. An Organization's Capabilities Define its Disabilities". We touched on some of this earlier. Companies often become successful on the basis of their processes and values. By definition though, processes and values do not change rapidly so a company defines itself by these and also defines what it will or cannot do by these capabilities.
As a new ISV, you have the opportunity to create new capabilities. Ensure that your processes and values server your desired target or goal and do not unnecessarily constrain you from leveraging capabilities that you do have.
"5. Technology Supply May Not Equal Market Demand". Christensen presents examples of industries where technology capabilities exceed what the market really wants leaving a "vacuum" in the lower price points.
Your new ISV can fill this vacuum.
Summary
1. Study Clayton Christensen's The Innovator's Dilemma for guidance on seeking opportunities and evaluating strengths of your new ISV.
2. Do not be sucked into competition based on length of product's feature-lists. The features that customers value change quickly. It is more important to be able to meet the most important features well than to have the absolute greatest number of features.
3. Discover and tackle the vacuums left by established competitors.
4. Prefer large growth rate opportunities to large margin opportunities.
Agree? Disagree? Comment and let me know.
For innovators and followers alike...
No surprises here - this is an excellent book.
The subject matter is the essence of innovation (at least in the Western world), as long as it is not for the sake of innovation but for the purposes of commercialization. Concepts like leadership vs. followership, disruptive technologies, S-curves and value networks, set a framework for complex analysis of entire industries.
Much of the discussion is fairly straightforward: the need to match resource allocation to the nature of the innovations, and the gap created by the rates of change of technology and its needs, for instance. When coupled with powerful concepts like the reasons behind organizations' failure to attend to disruptive innovations, and the fallacies loyalty to customers bring, the pages read like a treatise on what make some companies great or lousy innovators.
The only criticism I could draw is some repetiveness - but I would not hold that against the author: the underlying themes are too closely interconnected.
Potential limitations of what make a firm' sussessful
Big firms are often beaten by new companies riding on the wave of new technology (referred as disruptive technology) than the existing competitors banking on incremental improvements in sustaining technologies. Why this happens and how can large organizations be made more capable of identifying and leveraging disruptive technologies are the two key challenges that the author, a research fellow from Harvard aims to address in part one and two of this book. Author uses insights from the detailed analysis of the hard disk drive industry, and also examples from the computers, retail, pharamaceutical and automobile industries.
The key reason for the great company's inability to identify, develop and leverage disruptive technologies lies in its decision making mechanism. Managers in successful companies focus on achieving the organizational growth and profitability needs through working better on satisfying the needs of existing important customers through improvement in existing technologies, making more efficient use of resources and designing and fine-tuning processes to make them more suitable to address repetitive tasks in most cost effective manner. In such a scenario, managers would view every technology through the prism of its relevance to existing customer needs and its ability to satisfy organizational growth and profitability requirements. The disruptive technologies which may have strengths in functionalities not valued higher by the existing customers, or may have initially smaller profit margins and market size tend to get ignored or dismissed by the Managers of successful firms in a very rational financial decision making process. These disruptive technologies often get attention, focus and ownership from start-ups or smaller forms and with time grow enough to challenge the mainstream incumbent firms. Quite often, it becomes too late for the big firms to respond to the threat then.
So, what is the way out? Here author proposes a framework for analyzing the capabilities of organization to work on any disruptive technology. Organization can be viewed as comprising Resources (people, technology, products, equipment etc.), Processes (mainly organizational processes of coordination, integration, communication and decision making) and values (criteria used to make selection among choices). Big firms are able to adopt and ;leverage sustaining technological developments more effectively than disruptive ones as the sustaining technologies exhibit greater for towards prevailing organizational RPV profile. Disruptive technologies would conflict with mainstream values (say profitability hurdle rate) and may not get necessary attention, support or resources.
There are three options available with big firms, try create isolated inlands working on disruptive technologies within the existing firm(with limited chances of success), wait and watch and buy smaller firms as the disruptive technology start showing promise (at higher cost and may not be available as well) or create (spinout or acquire) smaller firm to work on opportunity. Author tends to support the last option.
"When a threatening disruptive technology requires a different cost structure in order to be profitable and competitive, or when the current size of the opportunity is insignificant relative to the growth needs of the mainstream organization, then and only then is a spin out organization a required part of the solution". Match the size of the organization to the size of the market- so that everyone views the endeavor as crucial to the growth and profitability of the organization. Johnson and Johnson used this strategy very effectively to launch products if disruptive technologies (say disposable contact lens, endoscopic surgical equipment) through very small companies acquired for this purpose.
Besides the RPV framework to help organization address disruptive technological opportunities, author also presents certain principles in dealing with disruptive innovations, such as "markets that don't exist can not be analyzed".
This book is both thought provoking and resourceful. It not only sensitizes to the limitations of traditional decision making process in addressing disruptive technological interventions but also provides some preliminary guidelines/ framework on how to overcome these limitations.