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Why do companies fail? Or more importantly, why do good companies fail? And by good, I mean the kind that many other managers and academics praise, admire or generally try and emulate.

There can be a range of reasons why companies stumble - from tired bureaucracy, poor planning, inadequate skills or resources, to just plain bad luck. What is potentially more interesting are why well managed companies fail - ones that listen to their customers and to the market, invest aggressively in innovation and new technology, make astute resourcing decisions, but still lost their market dominance.

One of the most famous books to address this failure is the Innovators Dilemma by Clayton Christensen.

The Innovators Dilemma is an enormously influential business book, a kind of bible for some of the most influential managers of recent years. Steve Jobs famously listed it as one of the few business books he trusted. Jeff Bezos highlights it as a must have in his own reading list. The startup community also practice a lot of the concepts, evolving these to fit the growth of disruptive technologies and ideas.

Defining Failure

Unaccountable failure can happen in any and every type of industry. The first exempt put forward in the book is Sears.

Sears Roebuck was regarded for decades as one of the most astutely managed retailers in the world. At its peak, it accounted for more that 2 percent of all retail sales in the US, and it pioneered several innovations critical to retailing today (supply chain management, store brands, catalogue retailing, and credit card sales).

From a 1964 excerpt from Fortune:

"How did Sears do it? In a way, the most arresting aspect of its story is that there was no gimmick. Sears opened no big bag of tricks, shot off no skyrockets. Instead, it looked as though everybody in this organization simply did the right thing, easily and naturally. And their cumulative effect was to create an extraordinary powerhouse of a company".

Thirty years later, and Sears had a very different perception in the marketplace. They almost completely missed the advent of discount retailing and home centers, to the point where the very viability of its retailing operations were being questioned. Even more troubling, the very time in the 1960's when they were being praised was the time when Sears was slowly being stripped of its core franchise through these discount retails growth.

Other examples support this. IBM dominated the mainframe market, but completely missed the emergence of technologically simpler minicomputers. DEC created the minicomputer marketplace, was joined by Data General, Prime, Wang and Hewlett-Packard, but they all completely missed the personal computer market.

(As a note, the disk drive industry is primarily used as a case study throughout the book, due to the speed at which innovations happened. It provides a rich set of data to review and study).

In all of these and many other cases, the very decisions that led to the decline and failure of the company were being made at the time they were widely regarded as the best and most astutely managed companies in the world.

From the book:

"Maybe they were successful because of good luck and fortuitous timing, rather than good management. Maybe they finally fell on hard times because their good fortune ran out. Maybe. An alternative explanation, however, is that these failed firms were as well-run as one could expect a firm managed by mortals to be - but that there is something about the way decisions get made in successful organizations that sows the seeds of eventual failure.

…

It shows that in the cases of well-managed firms such as those cited above, good management was the most powerful reason they failed to stay atop their industries. Precisely 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 allotted investment capital to innovations that promised the best returns, they lost their positions of leadership.

…

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 that substantial markets."

Sustaining versus Disruptive Technologies

The fundamental key to the proposition of the book is the distinction between what is termed sustaining innovations versus disruptive ones.

Most new technologies developed by businesses foster improved product performance. These are called sustaining technologies, and are defined as the following:

"What all sustaining technologies have in common is that they improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued. Most technological advances in a given industry are sustaining in character."

Sustaining innovations are therefore driven by:

Listening to customers
Investing in the technologies that give customers what they want based on this listening
Seeking higher margins
Targeting larger mass marketed than small ones.

Sustaining technologies, no matter how radical rarely precipitate the failure of firms. What tends to cause failure is a technology of a different type - disruptive technology. As outlined by Christensen:

"Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently, more convenient to use".

Disruptive innovations are therefore driven by:

They are simpler, cheaper and lower performing
They generally promise lower margins, not higher profits
Leading firms customers generally can't use them and don't want them
They are first made profitable and commercialized in emerging or insignificant markets

Where disruptive technologies take over is when their developers improve the products performance, eventually taking over the older markets.

Principles of Disruptive Technology

The core concepts and solutions to the Innovators Dilemma in relation to disruptive technology are defined as the following:

Products that do not appear to be useful to our customers today may squarely address their needs tomorrow.
Managing innovation in an organisation mirrors the resource allocation process. Innovation proposals that get the attention they need succeed, and those given lower priority or are starved for attention will do the opposite. Staff need the wisdom and intuition to make there factoring in disruption.
Successful companies are practiced in taking sustaining technologies to market, and giving their customers better or more versions of what they say they want. This doesn't work with disruptive technology. This means disruptive innovation needs to be treated as a marketing challenge, not a technological one.
Organisational capabilities are formed within value networks. These are built from historical experience. The new markets enabled by disruptive technologies may require very different capabilities than existing value networks.
The information required to make decisive investments in the face of disruptive technology does not exist. It need to be created through fast, inexpensive and flexible forays into the market and the product. Failure and iterative learning are key mechanics of this search for success.
Disruptive innovations hold a significant first-mover advantage into the new market. Being the leader is important. Sustaining innovation very often does not, and can be viewed as the opposite.
There are powerful barriers to entry and mobility that differ significantly from the types historically focused on by economists. Because disruptive technologies rarely make sense during the years when investing in them is of most importance, conventional managerial wisdom at established firms can constitute an entry and mobility barrier. This barrier can however be overcome by understanding where the conflicts are.

Summary

Ultimately, ensuring successfully navigating a disruptive innovation threat involves managing downward mobility. This most often seems to be achieved by creating a spinoff organisation or skunkworks to create a new value network and the attention required to create small wins. This can then lead to bigger resource allocation, and establishing the product as a viable option for future investment (and intimately dominance).

For me the biggest item of interest was in the idea that the customer is not always right (and often in fact they can mislead an organisation in instances of disruptive technological change). Steve Jobs was a big proponent of this idea after the failure of the Newton, you can definitely see this learning being applied to future product development in the company under his leadership.

The book is loaded with some great case studies and examples, and although quite dense in information, makes a strong case for the theory and is worth a solid read.

This post continues my series on Mental Models.

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