Chapter 8: Part 4 – The innovator’s dilemma

Even without considering management decisions. Imagine if you were the product manager of this company at the time. If you have the opportunity to choose one project between two projects. The “sustaining innovation” product development project can make your year-end performance look good and even bring a lot of performance bonuses. While the “disruptive innovation” project is highly innovative but also means that there may be more technical risks. Even if successful this project’s revenue contribution to the company is small which means your bonus won’t be particularly pleasing. On the contrary if it fails which is actually quite likely not only will the bonus be lost but it may even mean losing your job. If you can choose which project would you choose?

Even if your product manager still wants to complete such a project product development isn’t a one-person job. When faced with the same choice how many of the best technical personnel designers marketers and other key roles in the company are also willing to make the same choice with your product manager? Without the help of excellent talent how much chance of success does this project have?

So it’s clear. It’s not that large companies haven’t come up with “disruptive innovation” ideas internally but once these ideas are generated the company’s internal management system including “strategy” “product portfolio management” “performance evaluation system” etc. will kill these ideas like a sharp knife. The better and more tightly managed the company’s management system is the faster this knife will cut!

On the other hand those small companies “positioning” theory has already told us that they don’t have much chance in mature product markets. Therefore they can only bet on “disruptive innovation” products that big companies don’t care about. But these small markets that big companies don’t care about at all allow these small companies to grow and eventually disrupt big companies’ mature markets.
This is why PCs disrupted servers smartphones disrupted computers and Android disrupted iPhone’s market share. Christensen’s theory explains that this is not reincarnation or curse but rather companies that adopt a “sustaining innovation” model their own management puts them in an “innovator’s dilemma.”

Therefore after Christensen’s theory was proposed these large companies finally knew why they were always being disrupted so they changed their management model. They separated “sustaining innovation” products from “disruptive innovation” products using different review processes and assessment indicators. Traditional portfolio management methods were replaced by new management models such as the “Three Horizon Model.” These methods first used by Google treat “product portfolio management” as an investment. They divide their business into three horizons with existing business on the first horizon emerging high-growth businesses on the second horizon and incubation of “disruptive innovation” products on the third horizon.

Most importantly they began to systematically invest 10% of their resources in “disruptive innovation” products i.e. on the third horizon. This changed the traditional disadvantage of large enterprises putting “sustaining innovation” and “disruptive innovation” products on the same track to compete. It ensured that “disruptive innovation” products could have sufficient resources to start and would not be strangled in their early development.

But this is by no means good news for small and medium-sized innovative enterprises – when large enterprises master the secret of “disruptive innovation” small and medium-sized innovative enterprises will no longer have a chance to overtake on corners. This means that today’s startups have little chance of becoming the next Microsoft or Apple. Of course many entrepreneurs soon realized that while it was sad to become part of a head enterprise it wasn’t necessarily a bad thing.

These head enterprises have separated their “disruptive innovation” projects from their original “sustaining innovation” projects. They even allow these innovative teams to exist in internal and external entrepreneurship forms giving them independent management processes and assessment systems allowing them to have independent cultures. By working with these head enterprises startup teams can also use many resources from large platforms such as brand capital etc. This is a win-win combination.

So today a large number of startup companies have become “unicorns.” And companies like Alibaba Tencent have evolved into large venture capital firms. Investment portfolio management for a large number of startups has replaced traditional corporate internal product portfolio management. The business model of large enterprises has fundamentally changed. And these earth-shaking changes in the business world actually stem from Christensen’s ideas and a book he wrote in 1997.

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