The Innovator’s Dilemma is a concept popularised by Harvard Business School professor Clayton Christensen. The dilemma refers to the challenges that established companies face when they have to decide between focusing on improving their existing products and services, which are often profitable, or investing in disruptive innovations that may have uncertain returns and could potentially cannibalise their current business.
The core of the Innovator’s Dilemma is this: Established companies have strong incentives to focus on their existing, profitable customer base. This focus makes rational sense in the short term but can lead to long-term failure. Meanwhile, disruptive innovations often start in smaller, less profitable market segments, which established firms tend to ignore. Over time, these innovations improve and expand, eventually threatening the incumbents’ core business.
The beauty of this theory is that despite large companies knowing of its existence – this is taught in most reputable business schools – they can’t help but fall into this trap. This paradox underscores the difficulty of implementing theoretical knowledge in practical business situations.
After all, it’s easy to draw a line from Kodak’s refusal to engage in digital photography to their downfall. What is worth bearing in mind is the sheer number of potential new innovations that confront a management team. Meta changed their name entirely from Facebook to symbolise their commitment to the Metaverse in 2021. Fast forward two years later and the metaverse is seen as a thing of the past, a sham no one wants to talk about how they invested in, along with NFTs and Web3. It is only with hindsight that we see which new ideas are genuine disruptors and which fizzle out.
CEOs of public companies hence have to tread with caution. They must balance long-term innovation with short-term results to satisfy shareholders. Making the wrong bet on a disruptive technology can lead to their removal. This creates a strong incentive to focus on incremental improvements to existing products, even if it leaves the company vulnerable to disruption in the long term.
One of the key ways to escape this trap is to engage in spinoffs or acquisitions. Spinoffs result in a limited quantity of resources placed in a startup to pursue solutions for the underserved market. If companies don’t have the patience or resources to make, they can buy these capabilities. Google has done both, purchasing companies such as smart gadget maker Nest and building out moonshots such as Waze and self-driving cars. These are not without risks – Nest has not fully integrated into Google’s ecosystem, with some devices still requiring the Nest App to control. Google has also had to axe numerous moonshots after interest rates hiked and cash became expensive.
The Innovator’s Dilemma remains a powerful framework for understanding business evolution. It explains why market leaders often fail in the face of disruptive change and provides insights into how companies might avoid this fate. However, the challenge lies in applying these insights in an uncertain business environment. Success requires a delicate balance between exploiting current strengths and exploring future possibilities, a balance that even the most well-informed companies struggle to maintain.
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