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 or investing in disruptive innovations. Established companies’ management face strong pressure to focus on their existing, profitable customer base instead of unproven markets. Meanwhile, disruptive innovations often start in these smaller, less profitable market segments, which established firms tend to ignore. Over time, the successful innovations emerge, improve, and expand, eventually threatening the incumbents’ core business.
I’ll walkthrough the Innovator’s Dilemma, and then hone in on the theory’s applicability in a field that’s close to my passions: Biotechnology. I’ll walk through the Innovator’s Dilemma, then show why biotech offers an interesting twist on the theory.
Why this concept is powerful
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 five years later and Meta has shut down the VR metaverse. 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 do not 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 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.
In software or consumer tech, companies can lean on network effects for a long time, and a single successful platform can carry them for decades. In biotechnology, that cushion is weaker but I would argue that this weaker cushion better positions them to confront this dilemma.
Biotechnology
The biotech companies like Novo Nordisk and Eli Lilly are hence fascinating to me, because they are by nature targeted to overcome the inertia from the Innovator’s Dilemma. They need to race against patent expiry to develop a new pipeline of drugs, which would serve to fund the next round of innovation.
For instance, even though Eli Lilly and Novo Nordisk had lucrative insulin franchises, they continued to divert resources into GLP‑1 drugs for obesity. These drugs now drive a large share of their growth, showing how firms in biotech cannot rely on a single category even when it is still profitable
There are three hypotheses I have:
- Patents set a limit on how long biotech companies can lean on one innovation
- Biotech is acknowledged to be risky, so companies and their investors are already expected to take risks in the unknown
- The high R&D costs mean that new startups need to seek larger company support in order to bring their innovations forward, resulting in partnerships or acquisitions
Patents: Since the monopoly companies have over their patents only last for a limited period of time, biotech companies need to keep innovating to maintain their revenue streams. Unlike non-regulatory moats, such as network effects, switching costs, or infrastructure domination, that can potentially persist indefinitely, pharmaceutical companies have to constantly improve existing products or develop new ones.
Risk-tolerance: There are likely fewer investors that will revolt against a drop in short-term profits simply because of R&D. That is why many biotechs raise from funds that are focused on biotech as a vertical, since these funds understand the nature of the business and how lumpy revenues can be.
Acquisitions: One method for overcoming the innovator’s dilemma is to buy the startups that show traction. When Whatsapp threatened to displace Facebook, the latter simply acquired the former. However, biotechnology is subject to a lot more complex rules and regulations, mandating expensive tests to be conducted for public health’s sake. A small upstart may have found a breakthrough, but will often require larger capital support and expertise in bringing that breakthrough to the market. For instance, although BioNTech developed a COVID vaccine, they partnered with Pfizer to develop the vaccine and bring it to market.
The Innovator’s Dilemma remains a useful lens for thinking about how companies evolve, but biotech shows that the dilemma is not uniform across industries. Patent clocks, clinical risk and regulation force drug makers to accept more uncertainty and invest earlier in unproven ideas. At the same time, they still face shareholder pressure, and they still use familiar tools such as acquisitions and partnerships, as seen in the BioNTech and Pfizer collaboration on the COVID vaccine.
Looking at firms like Novo Nordisk and Eli Lilly, it seems that constant reinvention is not a strategic choice but a structural requirement. The theory helps explain their behaviour, yet biotech also stretches it, showing how business models, science and regulation shape how the dilemma plays out in practice.