The Reading Room

The Innovator’s Dilemma: When new technologies cause great firms to fail
Clayton M Christensen
Published: 1997
This book seeks to answer the question, why do some well-managed, successful companies fail, and often when they are at the top of the game?
Although the author’s thesis is over twenty years old, I was fascinated to understand his thinking since many management teams of today’s leading businesses may be falling into the same trap as their predecessors.
The central theme of this book is the author’s analysis, understanding and conclusions as to why some highly regarded and successful companies ultimately fail. At first glance Clayton Christensen observes no pattern to explain this reversal in fortune, before concluding a common theme does in fact emerge.
Thus, Christensen expounds the belief that there is something “about the way that decisions are made” in successful organisations that sow the seeds of eventual failure.
To test his theory Christensen digs into the hard disk drive industry. This is a data rich business which over the years has experienced the development of companies and technologies that emerged, matured and declined, in quick time. Common to this sector’s rapid evolution was the failure by the incumbent to manage disruptive newcomers betting on change.
This caught my attention immediately. As a professional investor grappling to understand the implications of the digital revolution on today’s successful companies, were there lessons here I could pick up to help me in my struggle?
So why do companies often underestimate the disruptor at their peril?
One of the answers lies in the incumbent’s tendency to misread the market. For although the disruptor’s product offered attractive new features, smaller perhaps and easier to use, in the initial stages its performance failed to stack up, as feedback by sales teams and customer surveys.
The lack of initial customer interest, combined with higher upfront costs and possibly some hubris, increased the opportunity for new players to fill the void.
Interestingly many of the new innovator companies were formed by disgruntled employees of the established players, using market experience, persistence, and better tech to scope for a new market to dominate. Working off a low base, small incremental volumes move the needle and encourage further entrepreneurial activity. In the case of the hard disk, drives moved from 8-inch drives to 5.5inch to still smaller 3.5-inch enabling the market to shift from mini frame computers to desktops, laptops and now notebooks.
Christensen then goes on to test the applicability of his theory to other industries.
A similar story plays out in the excavator industry. In the beginning hydraulic excavators were shunned owing to inferior load carrying capacity. Likewise, examples are presented for integrated steel plants, which eventually floundered in the face of mini mill technology. More recently the discount retailers’ model has thrived over that of the department store which now feels outdated. The same goes for the ink jet printer over the DeskJet. All make fascinating reading, and inspire me to think more deeply about what this means for my portfolio and how I might best approach management in order to gauge their disruption risk.
In the latter part of the book, the author suggests sensible ways for incumbent managers to deal with the challenge of fending off the disruptor.
As there is no clear market and its characteristic keeps changing as new users emerge, he suggests creating a new entity, with its own processes, has flexibility and gets it fair share of resource.
Chirstensen suggests the best way for the incumbents to manage this risk is to create an autonomous entity within the incumbent organisation with the financial support and creative freedom to compete as a disruptor without the Company forgoing financial control.
There is much in the book which is instantly relatable to the current challenges faced by digital disruption. It is an engaging and thought provoking read for any business manager or professional investor looking to learn from the mistakes of the past.
Gaurav Narain
January 2022
The information contained above and in other entries in the Ocean Dial Book Review Series is intended for general information and entertainment purposes only, and should not be relied upon in making, or refraining from making, any investment decisions. No information provided herein should or can be taken to constitute any form of advice or recommendation as to the merits of any investment decision. You should take independent advice from a suitably qualified investment adviser before making any investment decisions.
Boom and Bust: A Global History of Financial Bubbles
Published: 2020, Cambridge University Press
The avoidance of buying into the peak of booms and selling at the bottom of a bust is one of key skills of any investor. But what causes them? This book attempts to answer that question by a close analysis of historical market manias.
The Election That Changed India
Published: 2014
The 2014 Indian general election has been regarded as the most important in Indian history since 1977, following Indira Gandhi’s imposed state of emergency in 1975.
It starts in 2012, when Narendra Modi won the Gujarat state elections for a third time, but quickly set sights on the bigger prize, then covers the scandals that crippled UPA-II (United Progressive Alliance, the ruling coalition), before moving to the strategies of team Modi, and the extraordinary missteps of Rahul Gandhi.
Between the Devil and the Deep Blue Sea
Published: 2021
Between the Devil and the Deep Blue Sea is a narrative of tragedy, extreme hardship, and bravery. Using first-hand accounts taken from the survivors, Freeman tells the story of 3 cargo ships and their crews kidnapped by Somali pirates and held hostage for five years, and in some cases longer.