"THE INNOVATOR'S DILEMMA:" Why Dominant Firms Fail
Make a list of the most innovative, dominant companies of the 20th century. Would Sears be on it? How about AOL? What about General Electric? These three superstars would have to be included on any list of the most successful companies of the last century.
But where are they today?
AOL was combined with Yahoo, renamed “Oath” and just sold by Verizon for a fraction of the value it once had. General Electric lost tons of value and is now being broken up into three smaller companies. And Sears? It’s is a corpse of a company- “dead man walking.”
These three companies were the Amazons, the Apples and the Teslas of their time. So, what happened to them and what does that tell us about what could happen to today’s dominant firms?
There’s a book that answers this question called The Innovator’s Dilemma by Clayton Christensen. It was written in 1997 (Mr. Christensen died in 2020), but the concepts are timeless.
The central idea is that markets are buffeted by “disruptive technologies” (a term coined by Christensen). And these technologies disrupt existing markets and cause the major players in them to fail if they don’t innovate radically (and they rarely do). These same disruptive technologies enable certain start-ups to thrive as they build businesses around the new technologies. For example, General Electric built its business around the new technology of electricity; AOL dominated the early internet; and Sears owned the catalog sales niche that grew into a vast retail market.
So, the incumbents fail and the start-ups thrive.
This is still happening and the rise of Amazon, Apple and Tesla, and others, trace this arc. But the question is: why don’t dominant players innovate themselves into an impregnable market position? After all, they’re ones with the wealth, the power, the brilliant staff and the first-mover advantage. The Innovator’s Dilemma answers this question. Here’s the short answer:
Dominant companies faced with disruptive technologies fail to pursue business in those emerging markets because the markets are small and unprofitable at first. Plus, by doing so they would risk cannibalizing sales from their existing products.
Here’s an example. In the year 2000, Sears had sales of over $40 billion. In that same year, Amazon had sales of less than $3 billion, mostly selling books. At that time Sears had the resources to buy Amazon or at least compete with it aggressively but it didn’t. It ignored what became the biggest growth area in retail. And I doubt executives at Sears even considered Amazon a threat or an opportunity for the future of their business. Meanwhile, Amazon grew stronger by changing the market in its favor while major players like Sears didn’t even try to compete with it. While Sears was playing football, Amazon played quidditch which was fine until everybody suddenly grabbed a broom.
But don’t take my word for it; read the book yourself. Clayton Christensen is one of those rare business writers who is certifiably brilliant. He taught at Harvard Business School and was named the World’s Most Influential Business Management Thinker in 2011 and 2013.
Now, back to why I’m thinking about this right now. It’s because I have a client who is part of a large and successful organization that is now declining due to disruptive technologies. This client is leading an effort inside his organization to innovate radically in a way that could create a bridge to the future. But he’s facing the exact headwinds, inside his organization, that Christensen describes: Lack of support for entering an emerging market that’s small, and fear of cannibalizing sales from the core product line.
Even if you’re not at an Apple or a General Electric, this book is helpful for any firm that’s trying to innovate its way toward continued relevance. And for my client, I hope the wisdom of this book can guide his efforts, or at least reassure him that he’s not the first to tread this difficult path.