Understanding Innovator’s Dilemma is the key to understanding modern business

Clayton Christensen, the author of Innovator’s Dilemma, died last week. It’s time to consider his legacy and why Christensen’s ideas are so important in understanding the modern business and investment landscape

Article updated: 30 January 2020 3:00pm Author: Michael Baxter


No time. When Apple released the iPhone, the mobile phone rivals had no time to adjust. Kodak had no time to adjust to the new world of digital photography and phones doubling up as cameras. Blockbusters was afforded no time to adjust to the threat posed by Netflix. That’s one of the lessons of Innovator’s Dilemma, when a new way of doing things emerges, or a new brilliant technology bursts onto the scene, established companies, even apparently invincible companies, have no time to react.

Innovator’s Dilemma, authored by the late Harvard Professor Clayton Christensen, was published in 1997. Intel co-founder Andy Grove said it was the best book he had read in ten years. That was the same year that the first Harry Potter book was published, maybe Innovator’s Dilemma was to books in business what the JK Rowling series was to children’s books.

But in a way, I would say that Innovator’s Dilemma had more in common with Darwin’s Origin of Species than a scarred wizard. Darwin came along with what was actually a quite simple theory, (although it’s remarkable how often it’s misunderstood) which transformed our understanding of who we are. Innovator’s Dilemma transformed our idea of what a company must do to survive, long-term.

Because Innovator’s Dilemma presented such a radical view of business, many reacted in dismay — it was not a popular theory.

To explain

Innovator’s Dilemma is an attempt to model how companies in a market dominant position can lose their position of strength.

At first, Christensen looked at what he called the mudslide hypothesis — companies clinging to their position of strength, against a slippery cliff face. His analysis led him to reject this particular hypothesis; instead Innovator’s Dilemma was born. He took a specific example — the disc drive industry. The industry changed over time from 12-inch for mainframe computers, 8-inch for mini computers, 5.25 inches for desktops, 3.5 inches for laptops.

With each switch in the industry, the market leaders, with the exception of IBM, lost their position of pre-eminence, in many cases going bust.

It seems that the companies in question did all the things business gurus said that they should do. They surveyed the market, listened to customers, considered new technologies and canvassed the views of existing customers on these new technologies.

The trouble is, the customers didn’t know what they would want in a few years’ time. As Henry Ford is supposed to have said: “If you ask people what they want they say faster horses.”

Or as Clayton Christensen said: “The popular slogan ‘stay close to your customers’ appears not always to be robust advice.”

In the case of the disc drive market, customers might have taken one look at 5.25 inch drives for desktops and said: “Don’t touch, they are little more than toys.”

Often it was the marketers who gave this advice, the techies, the engineers often had a much better grasp of where things were going.

I myself was on the wrong side of this in the early 1990s when I worked at a computer hardware company, and one of the techies wanted us to embrace this new-fangled thing called the internet. Believe me, the internet was rubbish then, it took a techie to imagine how it might develop.

The story book of company failures is packed with examples of companies that fell victim to Innovator’s Dilemma. We see it right now with cars, as upstart Tesla with its niche idea for an electric car sees its valuation pass $100bn — more of that next week.

Or there is the tale of Encyclopaedia Britannica, wedded to the idea of paper books, losing out to Microsoft with its ‘toy’ called Encarta (Microsoft tried to partner Encyclopaedia Britannica, but was laughed away). But then years later, Encarta was disrupted by Wikipedia, and an online version of Encyclopaedia Britannica made a comeback.

So what are the lessons of Innovator’s Dilemma?

  • Listen to your customer’s customers
  • Try and consider ways your business might be disrupted
  • Listen to the techies and engineers and those who have a good handle on where technology is going
  • Adopt an agile and lean approach, so you can change, or pivot, quickly
  • Experiment, don’t be afraid to fail in small ways
  • Partner start-ups with a view to understanding changing trends.

As for investors

Be willing to completely re-think long held views about a market, industry or technology. Understand the implications of exponential change in technologies, such as Moore’s Law, — meaning that over a 15-year period computers became 1,000 times more powerful — genome sequencing or the falling cost of renewables.

Technology is changing fast. In the words of a book I have coming out shortly, it is accelerating at an accelerating rate — a term called jerk, my book is called Living in the Age of the Jerk.

Understand that technology will create fantastic successes, and understand that companies that don’t embrace technology and learn the lesson of Innovator’s Dilemma will go bust.

That is the lesson Clayton Christensen who sadly died recently taught the world.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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