This is the first of a two-part article adapted by Barbara Tey
from The Innovator's Dilemma written by Clayton Christensen.

IT is not uncommon to read of large corporations that stumble
due to bureaucracy, arrogance, poor planning, short-term
investment horizons, inadequate skills and resources or just
sheer bad luck. But it may come as a surprise to know that even
great companies with exemplary abilities to innovate and execute
can fail in spite of doing everything 'right'.

After studying the cases of leading companies in the IT,
retailing, pharmaceutical, automobile and steel industries,
Professor Clayton Christensen of Harvard Business School
concludes that many outstanding companies fail to stay at the
top when confronted with certain market and technological
change.

Amid such change, companies which excessively focus on current
important customers may actually hinder themselves from creating
new markets and finding new customers for innovative products of
the future. This has happened to prominent corporations such as
Digital, IBM, Sears and Xerox.

As such, Christensen presents a "failure framework" to help
managers discern when it is appropriate not to listen to their
customers and when companies should start investing in
developing new, lower-performance products at the expense of
seemingly better and more lucrative products.

The failure framework

First of all, Christensen distinguishes between sustaining
technologies and disruptive technologies. The former refers to
technologies - whether discontinuous (radical) or incremental -
that foster improved product performance of established products
according to the criteria of mainstream customers in
traditionally major markets.

On the other hand, disruptive technologies are emerging
technologies that lead to the innovation of products which
underperform established products in mainstream markets, at
least in the near-term.

Disruptive technologies offer a very different value proposition
from what had been previously available, with lower prices,
simpler features, smaller size and greater convenience.
Initially, these products may appeal to only a limited customer
base but eventually, the market expands rapidly to overtake
traditional market segments. Examples include personal
computers, discount retail outlets and small off-road
motorcycles by Honda, Kawasaki and Yamaha.

Secondly, technologies can progress faster than market demand.
This is evident in cases where suppliers provide better products
and charge higher prices to get higher margins but in the end,
the customers do not need or want these products.

Such a phenomenon is known as "overshooting" the market. In
contrast, disruptive technologies may lead to products that
underperform or cater for the "undershoot" customers today but
are fully performance-competitive in the same market tomorrow.

The third and final element of Christensen's failure framework
analyses why established companies do not aggressively invest in
disruptive technologies but instead consider it to be an
irrational financial decision.

This is mainly because disruptive products offer lower margins
instead of greater profits. In addition, disruptive technologies
initially emerge in insignificant markets and the companies'
largest or most profitable customers generally do not want or
use those disruptive products. So how can established companies
avoid being a casualty of disruptive technological innovation?

The four principles of disruptive innovation

It is only when managers understand the four principles of
disruptive innovation that they can accommodate or harness these
forces to their advantage instead of fighting against them and
be overpowered.

The first principle states that it is the customers and
investors instead of managers who dictate how resources will be
invested in companies.

As such, companies with investment patterns that do not satisfy
their customers and investors fail to survive. Hence, these
companies become adept at snuffing ideas that their customers
reject.

Consequently, these companies hesitate to invest adequately in
disruptive technologies until the customers want them, which by
then would be too late.

As it is difficult for a company whose cost structure is honed
to compete in high-end markets to be profitable in low-end
markets as well, Christensen suggests that the only viable way
to harness this disruptive innovation principle is to create an
independent organisation with a cost structure tailored to
achieve profitability at low margins around the disruptive
technology.

According to Christensen's second principle of disruptive
innovation, small markets do not solve the growth needs of large
companies.

Therefore, companies which initially entered small emerging
markets and then progressively grew larger, find it increasingly
more difficult to enter even newer small markets that are
destined to be tomorrow's large markets.

Some companies in such a situation wait until the new markets
grow large enough to be worthwhile but case studies show that
this is not often a successful strategy. Ultimately, it is small
organisations that can most easily respond to the opportunities
for growth in a small market.

The third principle asserts that markets that have not yet
existed before cannot be analysed.

While good management practices such as sound market research
and planning are valuable under normal circumstances, they are
often irrelevant in disruptive technological innovation.

Even expert forecasts can be wrong where disruptive products and
innovation are concerned. Furthermore, in sustaining innovation,
technology leaders and technology followers perform quite
equally well whereas in disruptive innovation, there are clear,
strong first-mover advantages. Yet it is these disruptive
markets that we know least about, giving rise to what
Christensen calls the "innovator's dilemma".

Confronted with disruptive technologies, established companies
which normally require quantification of market size and
financial returns before entering a market either become
paralysed or make wrong decisions.

To address the above, Christensen offers a different approach to
strategy and planning known as "discovery-driven" planning.

This approach acknowledges that the right markets and right
strategy for exploiting them cannot be known in advance, so
managers assume that forecasts are wrong rather than right and
hence, the strategy they have chosen to pursue may likewise be
wrong. This approach will be discussed in greater detail in Part
2 of this series.

Last but not least, the fourth principle recognises that
technology supply may not equal market demand.

Often, we find that the pace of technological progress in
products exceeds the rate of performance improvement that
mainstream customers demand or can absorb.

When the performance of two or more competing products has
improved beyond what the market expects, customers no longer
base their choice upon which is the higher performing product.

The basis of choice often evolves from functionality to
reliability, then to convenience and ultimately, to price.

As companies strive to remain ahead by developing competitively
superior products, many do not realise the speed at which they
move up-market, overshooting the needs of their original
customers while racing towards higher-performance, higher-margin
markets.

In doing so, they create a vacuum at lower price points where
competitors adopting disruptive technologies can enter.

As such, only companies that carefully measure trends in how
mainstream customers use products can successfully catch the
points at which the basis of competition will change within the
markets they serve.

Prof Clayton Christensen will be in Kuala Lumpur in August to
share with you more about disruptive technological innovations.
For more information, contact MIM Customer Service at 03-2164
4611, e-mail enquiries@mim.edu or visit www.mim.edu