Summary Corporate Entrepreneurship
2020 –2021
MSc. Strategic Management
Tilburg University
,Innovator’s Dilemma
Large firms are missing the boat
Typologies of technological change:
• Old vs. new (Cooper and Schendel, 1976)
• Competence-enhancing vs. Competence-destroying (Tushman and Anderson, 1986)
• Incremental vs. radical (Utterback, 1994)
• Sustaining vs. disruptive (Christensen and Bower, 1996)
It is especially the latter types of change that large established firms have difficulties coping
with. Firms do usually not have difficulties with small changes and competence-enhancing
ones.
Why does this happen? The Success Syndrome:
Fit Success Size and Age Inertia:
- Structural
- Cultural
Success in Failure
stable when
markets market shift
Imagine that you deliver boxes with products to students. If you like my product, if the delivery
experience is good, it is not too expensive, there is a fit. In other words: If what I offer matches
what you want, there is a fit. If there is a fit, there is usually also success. What happens next,
my firm is becoming bigger and older. As a firm becomes older, this can be a constraint
(Inertia). You need to put structures in place when you get more employees (some levers of
managers). Structural Inertia means rigidity making it difficult to make decisions because there
are structures in place that don’t make it as easy as it used to be. Cultural inertia means that
companies can be very overconfidently that what they do is good. Cultural inertia entails a
resistance to change unless change is already occurring. Change is perceived differently
across groups as a function of how well the groups already match the current dominant culture.
Is Inertia always bad?
Inertia may result from accountability and reliability.
How to protect the traditional successful business and to engage in radical innovation at the
same time?
Paper: The Innovator’s Dilemma: When new technologies cause great firms to fail
(Christensen)
According to Clayton Christensen, failure to adapt to disruptive innovation is not the result of
bad management, but a result of good management.
Key question in this article: “Why do well managed companies often fail in spite of doing the
right thing – i.e., meet their customer needs?”
1
,Why are companies with good management fail?
According to the paper, because these firms listened to their customers, invested aggressively
in new technologies that would provide their customers more and better products of the sort
they wanted, and because they carefully studied market trends and systematically allocated
investment capital to innovations that promised the best returns, they lost their positions of
leadership.
- Large companies depend on their existing customers and investors for resources. They
listen closely to these customers and investors and kill ideas for which there is little
need.
What this implies at a deeper level is that many of what are now widely accepted principles of
good management are, in fact, only situationally appropriate. There are times at which it is
right not to listen to customers, right to invest in developing lower-performance products that
promise lower margins, and right to aggressively pursue small, rather than substantial,
markets.
What is the “Innovator’s dilemma”?
- The logical, competent decisions of management that are critical to the success of their
companies are also the reason why they lose their positions of leadership.
Figure 1: The impact of Sustaining and Disruptive Technological Change
Figure 1 shows the observation that technologies can progress faster than market demand.
This means that in the efforts of firms to provide better products than their competitors and
earn higher prices and margins, suppliers often “overshoot” their market: they give customers
more than they need or ultimately are willing to pay for. And more importantly, it means that
disruptive technologies that may underperform today (C), relative to what users in the market
demand, may be fully performance-competitive in that same market tomorrow.
There are two dash lines in the figure above.
- Performance demanded at the high end of the market
• For example: If you are making bikes and you are targeting professional
cyclists, you will want to have bikes that are as light as possible, carbon bikes
with all the fanciest technologies, kind of the highest specifications that are
demanded by the market.
- Performance demanded at the low end of the market
2
, • This line refers to kind of what the lowest spectrum of customers wants. For
example: Your grandma wants a bike but does not really care about fancy
features. She only wants a working, cheap bike.
An important aspect is that the slope of the Product Performance lines mentioned above is not
as steep as the slope at which the technology goes up. That is one of the reasons why the
Innovator’s dilemma takes place.
A: Existing firm. A technology that you are currently offering. Your product performance. Meet
customer requirements at the low end of the market.
B: If you keep adding to your technology, at some point you will reach what is even the most
expensive or rich customers are willing to pay for. You reach the ‘Performance demanded
at the high end of the market’. After that point in time, you start overshooting. You start
adding extra features that people don’t really care about.
C: Disruptive innovations typically start at lower levels of product performance. The technology
is maybe not completely ready yet. If you are at this point, the customers don’t want your
product, because it doesn’t give them what they want, it does not reach the Performance
demanded at the low end of the market.
D: At this point, the company is serving the market. They are competing. They meet
customer demands at the low end of the market.
E: Serve the high-end of the market.
Why is it that established firms are not able to spot disruptive innovations? Three main reasons:
Disruptive technologies typically have (at least initially):
1. Lower profit margins (Disruptive products are simpler and cheaper; they generally
promise lower margins, not greater profits)
2. Small markets (Disruptive technologies typically are first commercialized in emerging
or insignificant markets)
3. No reliable market statistics
Christensen: How is disruptive-sustaining different from radical-incremental?
- Incremental vs. radical change: Size of the change
• Incremental = change in small steps
• Radical = change in big steps
- Sustaining vs. disruptive: How does it relate to your current business?
• Sustaining enhances the performance of your current business (You are
moving up on the line you are already on)
• Disruptive destroys your current business. Disruptive technologies bring to a
market a very different value proposition than had been available previously.
- Examples:
• Incremental, sustaining: e.g., new razor, going from three to four blades (Small
change)
• Incremental, disruptive: e.g., Ford’s model T: production-line process for care
manufacturing
• Radical, sustaining: e.g., Air fryer
• Radical, disruptive: e.g., Digital photography
Why do firms not invest in disruptive technologies?
1. Companies depend on customers and investors
• Theory of resource dependence. While managers think they control the flow of
resources in their firms, in the end it is really customers and investors who
dictate how money will be spent because companies with investment patterns
that don’t satisfy their customers and investors don’t survive.
3
2020 –2021
MSc. Strategic Management
Tilburg University
,Innovator’s Dilemma
Large firms are missing the boat
Typologies of technological change:
• Old vs. new (Cooper and Schendel, 1976)
• Competence-enhancing vs. Competence-destroying (Tushman and Anderson, 1986)
• Incremental vs. radical (Utterback, 1994)
• Sustaining vs. disruptive (Christensen and Bower, 1996)
It is especially the latter types of change that large established firms have difficulties coping
with. Firms do usually not have difficulties with small changes and competence-enhancing
ones.
Why does this happen? The Success Syndrome:
Fit Success Size and Age Inertia:
- Structural
- Cultural
Success in Failure
stable when
markets market shift
Imagine that you deliver boxes with products to students. If you like my product, if the delivery
experience is good, it is not too expensive, there is a fit. In other words: If what I offer matches
what you want, there is a fit. If there is a fit, there is usually also success. What happens next,
my firm is becoming bigger and older. As a firm becomes older, this can be a constraint
(Inertia). You need to put structures in place when you get more employees (some levers of
managers). Structural Inertia means rigidity making it difficult to make decisions because there
are structures in place that don’t make it as easy as it used to be. Cultural inertia means that
companies can be very overconfidently that what they do is good. Cultural inertia entails a
resistance to change unless change is already occurring. Change is perceived differently
across groups as a function of how well the groups already match the current dominant culture.
Is Inertia always bad?
Inertia may result from accountability and reliability.
How to protect the traditional successful business and to engage in radical innovation at the
same time?
Paper: The Innovator’s Dilemma: When new technologies cause great firms to fail
(Christensen)
According to Clayton Christensen, failure to adapt to disruptive innovation is not the result of
bad management, but a result of good management.
Key question in this article: “Why do well managed companies often fail in spite of doing the
right thing – i.e., meet their customer needs?”
1
,Why are companies with good management fail?
According to the paper, because these firms listened to their customers, invested aggressively
in new technologies that would provide their customers more and better products of the sort
they wanted, and because they carefully studied market trends and systematically allocated
investment capital to innovations that promised the best returns, they lost their positions of
leadership.
- Large companies depend on their existing customers and investors for resources. They
listen closely to these customers and investors and kill ideas for which there is little
need.
What this implies at a deeper level is that many of what are now widely accepted principles of
good management are, in fact, only situationally appropriate. There are times at which it is
right not to listen to customers, right to invest in developing lower-performance products that
promise lower margins, and right to aggressively pursue small, rather than substantial,
markets.
What is the “Innovator’s dilemma”?
- The logical, competent decisions of management that are critical to the success of their
companies are also the reason why they lose their positions of leadership.
Figure 1: The impact of Sustaining and Disruptive Technological Change
Figure 1 shows the observation that technologies can progress faster than market demand.
This means that in the efforts of firms to provide better products than their competitors and
earn higher prices and margins, suppliers often “overshoot” their market: they give customers
more than they need or ultimately are willing to pay for. And more importantly, it means that
disruptive technologies that may underperform today (C), relative to what users in the market
demand, may be fully performance-competitive in that same market tomorrow.
There are two dash lines in the figure above.
- Performance demanded at the high end of the market
• For example: If you are making bikes and you are targeting professional
cyclists, you will want to have bikes that are as light as possible, carbon bikes
with all the fanciest technologies, kind of the highest specifications that are
demanded by the market.
- Performance demanded at the low end of the market
2
, • This line refers to kind of what the lowest spectrum of customers wants. For
example: Your grandma wants a bike but does not really care about fancy
features. She only wants a working, cheap bike.
An important aspect is that the slope of the Product Performance lines mentioned above is not
as steep as the slope at which the technology goes up. That is one of the reasons why the
Innovator’s dilemma takes place.
A: Existing firm. A technology that you are currently offering. Your product performance. Meet
customer requirements at the low end of the market.
B: If you keep adding to your technology, at some point you will reach what is even the most
expensive or rich customers are willing to pay for. You reach the ‘Performance demanded
at the high end of the market’. After that point in time, you start overshooting. You start
adding extra features that people don’t really care about.
C: Disruptive innovations typically start at lower levels of product performance. The technology
is maybe not completely ready yet. If you are at this point, the customers don’t want your
product, because it doesn’t give them what they want, it does not reach the Performance
demanded at the low end of the market.
D: At this point, the company is serving the market. They are competing. They meet
customer demands at the low end of the market.
E: Serve the high-end of the market.
Why is it that established firms are not able to spot disruptive innovations? Three main reasons:
Disruptive technologies typically have (at least initially):
1. Lower profit margins (Disruptive products are simpler and cheaper; they generally
promise lower margins, not greater profits)
2. Small markets (Disruptive technologies typically are first commercialized in emerging
or insignificant markets)
3. No reliable market statistics
Christensen: How is disruptive-sustaining different from radical-incremental?
- Incremental vs. radical change: Size of the change
• Incremental = change in small steps
• Radical = change in big steps
- Sustaining vs. disruptive: How does it relate to your current business?
• Sustaining enhances the performance of your current business (You are
moving up on the line you are already on)
• Disruptive destroys your current business. Disruptive technologies bring to a
market a very different value proposition than had been available previously.
- Examples:
• Incremental, sustaining: e.g., new razor, going from three to four blades (Small
change)
• Incremental, disruptive: e.g., Ford’s model T: production-line process for care
manufacturing
• Radical, sustaining: e.g., Air fryer
• Radical, disruptive: e.g., Digital photography
Why do firms not invest in disruptive technologies?
1. Companies depend on customers and investors
• Theory of resource dependence. While managers think they control the flow of
resources in their firms, in the end it is really customers and investors who
dictate how money will be spent because companies with investment patterns
that don’t satisfy their customers and investors don’t survive.
3
