The Innovator's Dilemma: When New Technologies Cause Great Firms to Fall

by Clayton M. Christensen, Don Leslie (Narrated by), Highbridge Audio (Other)

Overview

Great companies can fail-not because they do anything wrong, but because they do everything right. Meeting customers' current needs leads firms to reject breakthrough innovations-"disruptive technologies" that create the products and opportunities of the future.Radical thinking . . . and a wake-up call. Citing examples from many industries (computers, retailing, pharmaceuticals, automobiles, steel), Clayton M. Christensen explains how to avoid a similar fate. He presents strategies for determining when not to listen to customers, when to pursue small markets at the expense of larger ones, and other ways to ensure long-term growth and profit. This award-winning book shows managers the changes that may be coming-and how to respond for success.

Product Details

ISBN-13:	9781565114159
Publisher:	HighBridge Company
Publication date:	06/13/2001
Edition description:	Abridged, 2 CDs
Pages:	140
Product dimensions:	6.40(w) x 5.30(h) x 1.10(d)

About the Author

Clayton M. Christensen is the Kim B. Clark Professor of Business Administration at the Harvard Business School. He is the author of many books, including several New York Times bestsellers. Christensen is the co-founder of Innosight, Rose Park Advisors, and the Christensen Institute, a non-profit think tank.

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Read an Excerpt

Chapter 1: How Can Great Firms Fail? Insights from the Hard Disk Drive Industry

When I began my search for an answer to the puzzle of why the best firms can fail, a friend offered some sage advice. "Those who study genetics avoid studying humans," he noted. "Because 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."

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. 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's best firms. Simply put, when the best firmssucceeded, they did so because they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers' next-generation needs. But, paradoxically, when the best firms subsequently failed, it was for the same reasons—they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers' next-generation needs. This is one of the innovator's 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 "keeping close to your customers" is good advice—and when it is not. The robustness of this framework could only be explored by researching the industry's 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's 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's surface. Disk drives can use the positive and negative domains on the disk as a binary numeric system—1 and 0—to "write" 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.

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.

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—all of which were relatively large, diversified corporations such as Diablo, Ampex, Memorex, EMM, and Control Data—all except IBM's 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's 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..sup.3]) in 1978 to 1.4 [in..sup.3] by 1993—a 35 percent annual rate of reduction.

Figure 1.3 shows that the slope of the industry's experience curve (which correlates the cumulative number of terabytes (one thousand gigabytes) of disk storage capacity shipped in the industry's history to the constant-dollar price per megabyte of memory) was 53 percent—meaning 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 Technology Change

My investigation into why leading firms found it so difficult to stay atop the disk drive industry led me to develop the "technology mudslide hypothesis": 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've got to stay on top of it, and if you ever once stop to catch your breath, you get buried.

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. 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. 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's leaders. Technologies of the first sort sustained the industry's 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's dominant firms always led in developing and adopting these technologies. By contrast, innovations of the second sort disrupted or redefined performance trajectories—and consistently resulted in the failure of the industry's leading firms.

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.

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 heads and disks; the third marks the improvements in density achievable with the latest head technology, magneto-resistive heads...

Table of Contents

Introduction
Chapter 1: How Can Great Firms Fail? Insights from the Hard Disk Drive Industry
Chapter 2: Value Networks and the Impetus to Innovate
Chapter 3: Disruptive Technological Change in the Mechanical Excavator Industry
Chapter 4: What Goes Up, Can't Go Down
Chapter 5: Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them
Chapter 6: Match the Size of the Organization to the Size of the Market
Chapter 7: Discovering New and Emerging Markets
Chapter 8: Performance Provided, Market Demand, and the Product Life Cycle
Chapter 9: Managing Disruptive Technological Change: A Case Study
Chapter 10: The Dilemmas of Innovation: A Summary
Index