The Innovator's Dilemma
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The Innovator's Dilemma

When New Technologies Cause Great Firms to Fail

Clayton M. Christensen

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eBook - ePub

The Innovator's Dilemma

When New Technologies Cause Great Firms to Fail

Clayton M. Christensen

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About This Book

Named one of 100 Leadership & Success Books to Read in a Lifetime by Amazon Editors A Wall Street Journal and Businessweek bestseller. Named by Fast Company as one of the most influential leadership books in its Leadership Hall of Fame. An innovation classic. From Steve Jobs to Jeff Bezos, Clay Christensen’s work continues to underpin today’s most innovative leaders and organizations. The bestselling classic on disruptive innovation, by renowned author Clayton M. Christensen.His work is cited by the world’s best-known thought leaders, from Steve Jobs to Malcolm Gladwell. In this classic bestseller‚ÄĒone of the most influential business books of all time‚ÄĒinnovation expert Clayton Christensen shows how even the most outstanding companies can do everything right‚ÄĒyet still lose market leadership.Christensen explains why most companies miss out on new waves of innovation. No matter the industry, he says, a successful company with established products will get pushed aside unless managers know how and when to abandon traditional business practices.Offering both successes and failures from leading companies as a guide, The Innovator’s Dilemma gives you a set of rules for capitalizing on the phenomenon of disruptive innovation.Sharp, cogent, and provocative‚ÄĒand consistently noted as one of the most valuable business ideas of all time‚ÄĒ The Innovator’s Dilemma is the book no manager, leader, or entrepreneur should be without.

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Part One

CHAPTER ONE

How Can Great Firms Fail? Insights from the Hard Disk Drive Industry

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When I began my search for an answer to the puzzle of why the best firms can fail, a friend offered some sage advice. ‚ÄúThose who study genetics avoid studying humans,‚ÄĚ he noted. ‚ÄúBecause new generations come along only every thirty years or so, it takes a long time to understand the cause and effect of any changes. Instead, they study fruit flies, because they are conceived, born, mature, and die all within a single day. If you want to understand why something happens in business, study the disk drive industry. Those companies are the closest things to fruit flies that the business world will ever see.‚ÄĚ
Indeed, nowhere in the history of business has there been an industry like disk drives, where changes in technology, market structure, global scope, and vertical integration have been so pervasive, rapid, and unrelenting. While this pace and complexity might be a nightmare for managers, my friend was right about its being fertile ground for research. Few industries offer researchers the same opportunities for developing theories about how different types of change cause certain types of firms to succeed or fail or for testing those theories as the industry repeats its cycles of change.
This chapter summarizes the history of the disk drive industry in all its complexity. Some readers will be interested in it for the sake of history itself. 1 But the value of understanding this history is that out of its complexity emerge a few stunningly simple and consistent factors that have repeatedly determined the success and failure of the industry‚Äôs best firms. Simply put, when the best firms succeeded, they did so because they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers‚Äô next-generation needs. But, paradoxically, when the best firms subsequently failed, it was for the same reasons‚ÄĒthey listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers‚Äô next-generation needs. This is one of the innovator‚Äôs dilemmas: Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake.
The history of the disk drive industry provides a framework for understanding when ‚Äúkeeping close to your customers‚ÄĚ is good advice‚ÄĒand when it is not. The robustness of this framework could only be explored by researching the industry‚Äôs history in careful detail. Some of that detail is recounted here, and elsewhere in this book, in the hope that readers who are immersed in the detail of their own industries will be better able to recognize how similar patterns have affected their own fortunes and those of their competitors.

HOW DISK DRIVES WORK

Disk drives write and read information that computers use. They comprise read-write heads mounted at the end of an arm that swings over the surface of a rotating disk in much the same way that a phonograph needle and arm reach over a record; aluminum or glass disks coated with magnetic material; at least two electric motors, a spin motor that drives the rotation of the disks and an actuator motor that moves the head to the desired position over the disk; and a variety of electronic circuits that control the drive’s operation and its interface with the computer. See Figure 1.1 for an illustration of a typical disk drive.
The read-write head is a tiny electromagnet whose polarity changes whenever the direction of the electrical current running through it changes. Because opposite magnetic poles attract, when the polarity of the head becomes positive, the polarity of the area on the disk beneath the head switches to negative, and vice versa. By rapidly changing the direction of current flowing through the head‚Äôs electromagnet as the disk spins beneath the head, a sequence of positively and negatively oriented magnetic domains are created in concentric tracks on the disk‚Äôs surface. Disk drives can use the positive and negative domains on the disk as a binary numeric system‚ÄĒ1 and 0‚ÄĒto ‚Äúwrite‚ÄĚ information onto disks. Drives read information from disks in essentially the opposite process: Changes in the magnetic flux fields on the disk surface induce changes in the micro current flowing through the head.
Figure 1.1 Primary Components of a Typical Disk Drive
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EMERGENCE OF THE EARLIEST DISK DRIVES

A team of researchers at IBM’s San Jose research laboratories developed the first disk drive between 1952 and 1956. Named RAMAC (for Random Access Method for Accounting and Control), this drive was the size of a large refrigerator, incorporated fifty twenty-four-inch disks, and could store 5 megabytes (MB) of information (see Figure 1.2). Most of the fundamental architectural concepts and component technologies that defined today’s dominant disk drive design were also developed at IBM. These include its removable packs of rigid disks (introduced in 1961); the floppy disk drive (1971); and the Winchester architecture (1973). All had a powerful, defining influence on the way engineers in the rest of the industry defined what disk drives were and what they could do.
Figure 1.2 The First Disk Drive, Developed by IBM
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Source: Courtesy of International Business Machines Corporation.
As IBM produced drives to meet its own needs, an independent disk drive industry emerged serving two distinct markets. A few firms developed the plug-compatible market (PCM) in the 1960s, selling souped-up copies of IBM drives directly to IBM customers at discount prices. Although most of IBM’s competitors in computers (for example, Control Data, Burroughs, and Univac) were integrated vertically into the manufacture of their own disk drives, the emergence in the 1970s of smaller, nonintegrated computer makers such as Nixdorf, Wang, and Prime spawned an original equipment market (OEM) for disk drives as well. By 1976 about $1 billion worth of disk drives were produced, of which captive production accounted for 50 percent and PCM and OEM for about 25 percent each.
The next dozen years unfolded a remarkable story of rapid growth, market turbulence, and technology-driven performance improvements. The value of drives produced rose to about $18 billion by 1995. By the mid-1980s the PCM market had become insignificant, while OEM output grew to represent about three-fourths of world production. Of the seventeen firms populating the industry in 1976‚ÄĒall of which were relatively large, diversified corporations such as Diablo, Ampex, Memorex, EMM, and Control Data‚ÄĒall except IBM‚Äôs disk drive operation had failed or had been acquired by 1995. During this period an additional 129 firms entered the industry, and 109 of those also failed. Aside from IBM, Fujitsu, Hitachi, and NEC, all of the producers remaining by 1996 had entered the industry as start-ups after 1976.
Some have attributed the high mortality rate among the integrated firms that created the industry to its nearly unfathomable pace of technological change. Indeed, the pace of change has been breathtaking. The number of megabits (Mb) of information that the industry‚Äôs engineers have been able to pack into a square inch of disk surface has increased by 35 percent per year, on average, from 50 Kb in 1967 to 1.7 Mb in 1973, 12 Mb in 1981, and 1100 Mb by 1995. The physical size of the drives was reduced at a similar pace: The smallest available 20 MB drive shrank from 800 cubic inches (in. 3 ) in 1978 to 1.4 in. 3 by 1993‚ÄĒa 35 percent annual rate of reduction.
Figure 1.3 shows that the slope of the industry‚Äôs experience curve (which correlates the cumulative number of terabytes (one thousand gigabytes) of disk storage capacity shipped in the industry‚Äôs history to the constant-dollar price per megabyte of memory) was 53 percent‚ÄĒmeaning that with each doubling of cumulative terabytes shipped, cost per megabyte fell to 53 percent of its former level. This is a much steeper rate of price decline than the 70 percent slope observed in the markets for most other microelectronics products. The price per megabyte has declined at about 5 percent per quarter for more than twenty years.

THE IMPACT OF TECHNOLOGICAL CHANGE

My investigation into why leading firms found it so difficult to stay atop the disk drive industry led me to develop the ‚Äútechnology mudslide hypothesis‚ÄĚ: Coping with the relentless onslaught of technology change was akin to trying to climb a mudslide raging down a hill. You have to scramble with everything you‚Äôve got to stay on top of it, and if you ever once stop to catch your breath, you get buried.
Figure 1.3 Disk Drive Price Experience Curve
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Source: Data are from various issues of Disk/Trend Report.
To test this hypothesis, I assembled and analyzed a database consisting of the technical and performance specifications of every model of disk drive introduced by every company in the world disk drive industry for each of the years between 1975 and 1994. 2 This database enabled me to identify the firms that led in introducing each new technology; to trace how new technologies were diffused through the industry over time; to see which firms led and which lagged; and to measure the impact each technological innovation had on capacity, speed, and other parameters of disk drive performance. By carefully reconstructing the history of each technological change in the industry, the changes that catapulted entrants to success or that precipitated the failure of established leaders could be identified.
This study led me to a very different view of technology change than the work of prior scholars on this question had led me to expect. Essentially, it revealed that neither the pace nor the difficulty of technological change lay at the root of the leading firms’ failures. The technology mudslide hypothesis was wrong.
The manufacturers of most products have established a trajectory of performance improvement over time. 3 Intel, for example, pushed the speed of its microprocessors ahead by about 20 percent per year, from its 8 megahertz (MHz) 8088 processor in 1979 to its 133 MHz Pentium chip in 1994. Eli Lilly and Company improved the purity of its insulin from 50,000 impure parts per million (ppm) in 1925 to 10 ppm in 1980, a 14 percent annual rate of improvement. When a measurable trajectory of improvement has been established, determining whether a new technology is likely to improve a product’s performance relative to earlier products is an unambiguous question.
But in other cases, the impact of technological change is quite different. For instance, is a notebook computer better than a mainframe? This is an ambiguous question because the notebook computer established a completely new performance trajectory, with a definition of performance that differs substantially from the way mainframe performance is measured. Notebooks, as a consequence, are generally sold for very different uses.
This study of technological change over the history of the disk drive industry revealed two types of technology change, each with very different effects on the industry‚Äôs leaders. Technologies of the first sort sustained the industry‚Äôs rate of improvement in product performance (total capacity and recording density were the two most common measures) and ranged in difficulty from incremental to radical. The industry‚Äôs dominant firms always led in developing and adopting these technologies. By contrast, innovations of the second sort disrupted or redefined performance trajectories‚ÄĒand consistently resulted in the failure of the industry‚Äôs leading firms. 4
The remainder of this chapter illustrates the distinction between sustaining and disruptive technologies by describing prominent examples of each and summarizing the role these played in the industry’s development. This discussion focuses on differences in how established firms came to lead or lag in developing and adopting new technologies, compared with entrant firms. To arrive at these examples, each new technology in the industry was examined. In analyzing which firms led and lagged at each of these points of change, I defined established firms to be those that had been established in the industry prior to the advent of the technology in question, practicing the prior technology. I defined entrant firms as those that were new to the industry at that point of technology change. Hence, a given firm would be considered an entrant at one specific point in the industry’s history, for example, at the emergence of the 8-inch drive. Yet the same firm would be considered an established firm when technologies that emerged subsequent to the firm’s entry were studied.

SUSTAINING TECHNOLOGICAL CHANGES

In the history of the disk drive industry, most technology changes have sustained or reinforced established trajectories of product performance improvement. Figure 1.4, which compares the average recording density of drives that employed successive generations of head and disk technologies, maps an example of this. The first curve plots the density of drives that used conventional particulate oxide disk technology and ferrite head technology; the second charts the average density of drives that used new-technology thin-film h...

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Citation styles for The Innovator's Dilemma
APA 6 Citation
Christensen, C. (2015). The Innovator’s Dilemma ([edition unavailable]). Harvard Business Review Press. Retrieved from https://www.perlego.com/book/837172/the-innovators-dilemma-when-new-technologies-cause-great-firms-to-fail-pdf (Original work published 2015)
Chicago Citation
Christensen, Clayton. (2015) 2015. The Innovator’s Dilemma. [Edition unavailable]. Harvard Business Review Press. https://www.perlego.com/book/837172/the-innovators-dilemma-when-new-technologies-cause-great-firms-to-fail-pdf.
Harvard Citation
Christensen, C. (2015) The Innovator’s Dilemma. [edition unavailable]. Harvard Business Review Press. Available at: https://www.perlego.com/book/837172/the-innovators-dilemma-when-new-technologies-cause-great-firms-to-fail-pdf (Accessed: 14 October 2022).
MLA 7 Citation
Christensen, Clayton. The Innovator’s Dilemma. [edition unavailable]. Harvard Business Review Press, 2015. Web. 14 Oct. 2022.