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The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change)

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The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change)

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What this implies at a deeper level is that many of what are now widely accepted principles of good management are, in fact, only situationally appropriate. 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 than substantial, markets.

the logical, competent decisions of management that are critical to the success of their companies are also the reasons why they lose their positions of leadership.

Disruptive technologies bring to a market a very different value proposition than had been available previously. 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.

They give customers more than they need or ultimately are willing to pay for. And more importantly, it means that disruptive technologies that may underperform today, relative to what users in the market demand, may be fully performance-competitive in that same market tomorrow.

First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms’ most profitable customers generally don’t want, and indeed initially can’t use, products based on disruptive technologies.

With few exceptions, the only instances in which mainstream firms have successfully established a timely position in a disruptive technology were those in which the firms’ managers set up an autonomous organization charged with building a new and independent business around the disruptive technology.

Creating an independent organization, with a cost structure honed to achieve profitability at the low margins characteristic of most disruptive technologies, is the only viable way for established firms to harness this principle.

But while a 8 million in revenues to grow at 20 percent in the subsequent year, a 800 million in new sales. No new markets are that large. As a consequence, the larger and more successful an organization becomes, the weaker the argument that emerging markets can remain useful engines for growth.

It is in disruptive innovations, where we know least about the market, that there are such strong first-mover advantages. This is the innovator’s dilemma.

Companies whose investment processes demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies. They demand market data when none exists and make judgments based upon financial projections when neither revenues or costs can, in fact, be known. Using planning and marketing techniques that were developed to manage sustaining technologies in the very different context of disruptive ones is an exercise in flapping wings.

An organization’s capabilities reside in two places. The first is in its processes—the methods by which people have learned to transform inputs of labor, energy, materials, information, cash, and technology into outputs of higher value. The second is in the organization’s values, which are the criteria that managers and employees in the organization use when making prioritization decisions.

When the performance of two or more competing products has improved beyond what the market demands, customers can no longer base their choice upon which is the higher performing product. The basis of product choice often evolves from functionality to reliability, then to convenience, and, ultimately, to price.

In their efforts to stay ahead by developing competitively superior products, many companies don’t realize the speed at which they are moving up-market, over-satisfying the needs of their original customers as they race the competition toward higher-performance, higher-margin markets. In doing so, they create a vacuum at lower price points into which competitors employing disruptive technologies can enter.

When a measurable trajectory of improvement has been established, determining whether a new technology is likely to improve a product’s performance relative to earlier products is an unambiguous question.

The fear of cannibalizing sales of existing products is often cited as a reason why established firms delay the introduction of new technologies.

The organization’s structure and the way its groups learn to work together can then affect the way it can and cannot design new products.

The concept of the value network—the context within which a firm identifies and responds to customers’ needs, solves problems, procures input, reacts to competitors, and strives for profit—is

The technology S-curve forms the centerpiece of thinking about technology strategy. It suggests that the magnitude of a product’s performance improvement in a given time period or due to a given amount of engineering effort is likely to differ as technologies mature.

Good managers do what makes sense, and what makes sense is primarily shaped by their value network.

What matters instead is whether the disruptive technology is improving from below along a trajectory that will ultimately intersect with what the market needs.

Value networks strongly define and delimit what companies within them can and cannot do.

The boundaries of a value network are determined by a unique definition of product performance—a rank-ordering of the importance of various performance attributes differing markedly from that employed in other systems-of-use in a broadly defined industry. Value networks are also defined by particular cost structures inherent in addressing customers’ needs within the network.

Conversely, incumbent firms are likely to lag in the development of technologies—even those in which the technology involved is intrinsically simple—that only address customers’ needs in emerging value networks. Disruptive innovations are complex because their value and application are uncertain, according to the criteria used by incumbent firms.

  1. Established firms’ decisions to ignore technologies that do not address their customers’ needs become fatal when two distinct trajectories interact. The first defines the performance demanded over time within a given value network, and the second traces the performance that technologists are able to provide within a given technological paradigm.

In these instances, although this “attacker’s advantage” is associated with a disruptive technology change, the essence of the attacker’s advantage is in the ease with which entrants, relative to incumbents, can identify and make strategic commitments to attack and develop emerging market applications, or value networks. At its core, therefore, the issue may be the relative flexibility of successful established firms versus entrant firms to change strategies and cost structures, not technologies.

In general, the successful entrants accepted the capabilities of hydraulics technology in the 1940s and 1950s as a given and cultivated new market applications in which the technology, as it existed, could create value. And as a general rule, the established firms saw the situation the other way around: They took the market’s needs as the given. They consequently sought to adapt or improve the technology in ways that would allow them to market the new technology to their existing customers as a sustaining improvement. The established firms steadfastly focused their innovative investments on their customers.

Once both technologies were good enough in the basic capabilities demanded, therefore, the basis of product choice in the market shifted to reliability.

They did not fail because they lacked information about hydraulics or how to use it; indeed, the best of them used it as soon as it could help their customers. They did not fail because management was sleepy or arrogant. They failed because hydraulics didn’t make sense—until it was too late.

The patterns of success and failure we see among firms faced with sustaining and disruptive technology change are a natural or systematic result of good managerial decisions. That is, in fact, why disruptive technologies confront innovators with such a dilemma. Working harder, being smarter, investing more aggressively, and listening more astutely to customers are all solutions to the problems posed by new sustaining technologies. But these paradigms of sound management are useless—even counterproductive, in many instances—when dealing with disruptive technology.

I have since reflected on why the head of this company would insist so stubbornly that there was no market for 1.8-inch drives, even while there was, and why my student would say the big drive makers didn’t sell these drives, even though they were trying.

For an organization to accomplish a task as complex as launching a new product, logic, energy, and impetus must all coalesce behind the effort. Hence, it is not just the customers of an established firm that hold it captive to their needs. Established firms are also captive to the financial structure and organizational culture inherent in the value network in which they compete—a captivity that can block any rationale for timely investment in the next wave of disruptive technology.

Three factors—the promise of upmarket margins, the simultaneous upmarket movement of many of a company’s customers, and the difficulty of cutting costs to move downmarket profitably—together create powerful barriers to downward mobility. In the internal debates about resource allocation for new product development, therefore, proposals to pursue disruptive technologies generally lose out to proposals to move upmarket. In fact, cultivating a systematic approach to weeding out new product development initiatives that would likely lower profits is one of the most important achievements of any well-managed company.

An important part of this story is that, throughout the 1980s, as they were ceding the bar and beam business to the minimills, the integrated steel makers experienced dramatically improving profit. Not only were these firms attacking cost, they were forsaking their lowest-margin products and focusing increasingly on high-quality rolled sheet steel, where quality-sensitive manufacturers of cans, cars, and appliances paid premium prices for metallurgically consistent steel with defect-free surfaces.

Sound managerial decisions are at the very root of their impending fall from industry leadership.

The reason is that good management itself was the root cause. Managers played the game the way it was supposed to be played. The very decision-making and resource-allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening carefully to customers; tracking competitors’ actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technological change.

Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish these things also to do something like nurturing disruptive technologies—to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets—is akin to flapping one’s arms with wings strapped to them in an attempt to fly. Such expectations involve fighting some fundamental tendencies about the way successful organizations work and about how their performance is evaluated.

Resource dependence: Customers effectively control the patterns of resource allocation in well-run companies. Small markets don’t solve the growth needs of large companies. The ultimate uses or applications for disruptive technologies are unknowable in advance. Failure is an intrinsic step toward success. Organizations have capabilities that exist independently of the capabilities of the people who work within them. Organizations’ capabilities reside in their processes and their values—and the very processes and values that constitute their core capabilities within the current business model also define their disabilities when confronted with disruption. Technology supply may not equal market demand. The attributes that make disruptive technologies unattractive in established markets often are the very ones that constitute their greatest value in emerging markets.

Clearly, customers wield enormous power in directing a firm’s investments. What, then, should managers do when faced with a disruptive technology that the company’s customers explicitly do not want? One option is to convince everyone in the firm that the company should pursue it anyway, that it has long-term strategic importance despite rejection by the customers who pay the bills and despite lower profitability than the upmarket alternatives. The other option would be to create an independent organization and embed it among emerging customers that do need the technology. Which works best?

So how do non-executive participants make their resource allocation decisions? They decide which projects they will propose to senior management and which they will give priority to, based upon their understanding of what types of customers and products are most profitable to the company.

By embedding independent organizations within an entirely different value network, where they were dependent upon the appropriate set of customers for survival, those managers harnessed the powerful forces of resource dependence. The CEO of Micro-polis fought them, but he won a rare and costly victory.

In trying to enter the desktop personal computing business from within its mainstream organization, DEC was forced to straddle the two different cost structures intrinsic to two different value networks. It simply couldn’t hack away enough overhead cost to be competitive in low-end personal computers because it needed those costs to remain competitive in its higher-performance products.

Yet IBM’s success in the first five years of the personal computing industry stands in stark contrast to the failure of the other leading mainframe and minicomputer makers to catch the disruptive desktop computing wave. How did IBM do it? It created an autonomous organization in Florida, far away from its New York state headquarters, that was free to procure components from any source, to sell through its own channels, and to forge a cost structure appropriate to the technological and competitive requirements of the personal computing market.

It seems to be very difficult to manage the peaceful, unambiguous coexistence of two cost structures, and two models for how to make money, within a single company.

The managers charged with improving the performance of Woolworth’s variety stores were also charged with building “the largest chain of discount houses in America.”

that leadership is more crucial in coping with disruptive technologies than with sustaining ones, and that small, emerging markets cannot solve the near-term growth and profit requirements of large companies.

The evidence from the disk drive industry shows that creating new markets is significantly less risky and more rewarding than entering established markets against entrenched competition.

As we shall see, the most straightforward way of confronting this difficulty is to implant projects aimed at commercializing disruptive technologies in organizations small enough to get excited about small-market opportunities, and to do so on a regular basis even while the mainstream company is growing.

What mattered appears not to have been its organizational form, but whether it was a leader in introducing disruptive products and creating the markets in which they were sold. 6

Firms that sought growth by entering small, emerging markets logged twenty times the revenues of the firms pursuing growth in larger markets.

When companies stop growing, they begin losing many of their most promising future leaders, who see less opportunity for advancement.

This problem is particularly vexing for big companies confronting disruptive technologies. Disruptive technologies facilitate the emergence of new markets, and there are no $800 million emerging markets. But it is precisely when emerging markets are small—when they are least attractive to large companies in search of big chunks of new revenue—that entry into them is so critical.

Try to affect the growth rate of the emerging market, so that it becomes big enough, fast enough, to make a meaningful dent on the trajectory of profit and revenue growth of a large company. Wait until the market has emerged and become better defined, and then enter after it “has become large enough to be interesting.” Place responsibility to commercialize disruptive technologies in organizations small enough that their performance will be meaningfully affected by the revenues, profits, and small orders flowing from the disruptive business in its earliest years. As the following case studies show, the first two approaches are fraught with problems. The third has its share of drawbacks too, but offers more evidence of promise.

disruptive technologies often enable something to be done that previously had been deemed impossible. Because of this, when they initially emerge, neither manufacturers nor customers know how or why the products will be used, and hence do not know what specific features of the product will and will not ultimately be valued.

Because emerging markets are small by definition, the organizations competing in them must be able to become profitable at small scale. This is crucial because organizations or projects that are perceived as being profitable and successful can continue to attract financial and human resources both from their corporate parents and from capital markets. Initiatives perceived as failures have a difficult time attracting either.

Small markets cannot satisfy the near-term growth requirements of big organizations.

From the beginning of the OEM disk drive industry, product development had proceeded in three sequential steps. First you designed the drive; then you made it; and then you sold it. We changed all that. We first sell the drives; then we design them; and then we build them.

Projects make sense to people if they address the needs of important customers, if they positively impact the organization’s needs for profit and growth, and if participating in the project enhances the career opportunities of talented employees.

Executives can give an enormous boost to a project’s probability of success, therefore, when they ensure that it is being executed in an environment in which everyone involved views the endeavor as crucial to the organization’s future growth and profitability. Under these conditions, when the inevitable disappointments, unforeseen problems, and schedule slippages occur, the organization will be more likely to find ways to muster whatever is required to solve the problem.

large companies should seek to embed the project in an organization that is small enough to be motivated by the opportunity offered by a disruptive technology in its early years. This can be done either by spinning out an independent organization or by acquiring an appropriately small company.

Johnson & Johnson’s strategy is to launch products of disruptive technologies through very small companies acquired for that purpose.

Each of these factors argues for a policy of implanting projects to commercialize disruptive innovations in small organizations that will view the projects as being on their critical path to growth and success, rather than as being distractions from the main business of the company.

Markets that do not exist cannot be analyzed: Suppliers and customers must discover them together. Not only are the market applications for disruptive technologies unknown at the time of their development, they are unknowable. The strategies and plans that managers formulate for confronting disruptive technological change, therefore, should be plans for learning and discovery rather than plans for execution.

Intel developed the original microprocessor under a contract development arrangement with a Japanese calculator manufacturer. When the project was over, Intel’s engineering team persuaded company executives to purchase the microprocessor patent from the calculator maker, which owned it under the terms of its contract with Intel. Intel had no explicit strategy for building a market for this new microprocessor; the company simply sold the chip to whoever seemed to be able to use it.

Amid all the uncertainty surrounding disruptive technologies, managers can always count on one anchor: Experts’ forecasts will always be wrong. It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be. An important corollary is that, because markets for disruptive technologies are unpredictable, companies’ initial strategies for entering these markets will generally be wrong.

There is a big difference between the failure of an idea and the failure of a firm. Many of the ideas prevailing at Intel about where the disruptive microprocessor could be used were wrong; fortunately, Intel had not expended all of its resources implementing wrong-headed marketing plans while the right market direction was still unknowable.

Research has shown, in fact, that the vast majority of successful new business ventures abandoned their original business strategies when they began implementing their initial plans and learned what would and would not work in the market. 9 The dominant difference between successful ventures and failed ones, generally, is not the astuteness of their original strategy. Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources (or having the relationships with trusting backers or investors) so that new business initiatives get a second or third stab at getting it right. Those that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.

Careful planning, followed by aggressive execution, is the right formula for success in sustaining technology.

But in disruptive situations, action must be taken before careful plans are made. Because much less can be known about what markets need or how large they can become, plans must serve a very different purpose: They must be plans for learning rather than plans for implementation.

Such discoveries often come by watching how people use products, rather than by listening to what they say.

I have come to call this approach to discovering the emerging markets for disruptive technologies agnostic marketing, by which I mean marketing under an explicit assumption that no one—not us, not our customers—can know whether, how, or in what quantities a disruptive product can or will be used before they have experience using it.

Indeed, the hallmark of a great manager is the ability to identify the right person for the right job, and to train his or her employees so that they have the capabilities to succeed at the jobs they are given.

This is because organizations themselves, independent of the people and other resources in them, have capabilities. To succeed consistently, good managers need to be skilled not just in choosing, training, and motivating the right people for the right job, but in choosing, building, and preparing the right organization for the job as well.

Three classes of factors affect what an organization can and cannot do: its resources, its processes, and its values.

Resources include people, equipment, technology, product designs, brands, information, cash, and relationships with suppliers, distributors, and customers. Resources are usually things, or assets—they can be hired and fired, bought and sold, depreciated or enhanced.

Organizations create value as employees transform inputs of resources— people, equipment, technology, product designs, brands, information, energy, and cash—into products and services of greater worth. The patterns of interaction, coordination, communication, and decision-making through which they accomplish these transformations are processes.

One of the dilemmas of management is that, by their very nature, processes are established so that employees perform recurrent tasks in a consistent way, time after time. To ensure consistency, they are meant not to change—or if they must change, to change through tightly controlled procedures. This means that the very mechanisms through which organizations create value are intrinsically inimical to change.

The values of an organization are the criteria by which decisions about priorities are made.

An organization’s values are the standards by which employees make prioritization decisions—by which they judge whether an order is attractive or unattractive; whether a customer is more important or less important; whether an idea for a new product is attractive or marginal; and so on.

A key metric of good management, in fact, is whether such clear and consistent values have permeated the organization.

Clear, consistent, and broadly understood values, however, also define what an organization cannot do. A company’s values, by necessity, must reflect its cost structure or its business model, because these define the rules its employees must follow in order for the company to make money.

Because a company’s stock price represents the discounted present value of its projected earnings stream, most managers typically feel compelled not just to maintain growth, but to maintain a constant rate of growth. In order for a 10 million in new business the next year. For a 10 billion in new business the next year. The size of market opportunity that will solve each of these companies’ needs for growth is very different. As noted in chapter 6, an opportunity that excites a small organization isn’t big enough to be interesting to a very large one. One of the bittersweet rewards of success is, in fact, that as companies become large, they literally lose the capability to enter small emerging markets.

Managers who face the need to change or innovate, therefore, need to do more than assign the right resources to the problem. They need to be sure that the organization in which those resources will be working is itself capable of succeeding—and in making that assessment, managers must scrutinize whether the organization’s processes and values fit the problem.

In fact, one reason that many soaring young companies flame out after they go public based upon a hot initial product is that whereas their initial success was grounded in resources— the founding group of engineers—they fail to create processes that can create a sequence of hot products.

If a manager determined that an employee was incapable of succeeding at a task, he or she would either find someone else to do the job or carefully train the employee to be able to succeed. Training often works, because individuals can become skilled at multiple tasks.

Assembling a beefed-up set of resources as a means of changing what an existing organization can do is relatively straightforward. People with new skills can be hired, technology can be licensed, capital can be raised, and product lines, brands, and information can be acquired. Too often, however, resources such as these are then plugged into fundamentally unchanged processes—and little change results.

Processes and values define how resources—many of which can be bought and sold, hired and fired—are combined to create value.

New team boundaries enable or facilitate new patterns of working together that ultimately can coalesce as new processes—new capabilities for transforming inputs into outputs.

When disruptive change appears on the horizon, managers need to assemble the capabilities to confront the change before it has affected the mainstream business. In other words, they need an organization that is geared toward the new challenge before the old one, whose processes are tuned to the existing business model, has reached a crisis that demands fundamental change.

And the processes by which a company would experimentally and intuitively feel its way into emerging markets would constitute suicide if employed in a well-defined existing business. If a company needs to do both types of tasks simultaneously, then it needs two very different processes. And it is very difficult for a single organizational unit to employ fundamentally different, opposing processes.

A separate organization is required when the mainstream organization’s values would render it incapable of focusing resources on the innovation project. Large organizations cannot be expected to allocate freely the critical financial and human resources needed to build a strong position in small, emerging markets.

How separate does the effort need to be? The primary requirement is that the project cannot be forced to compete with projects in the mainstream organization for resources. Because values are the criteria by which prioritization decisions are made, projects that are inconsistent with a company’s mainstream values will naturally be accorded lowest priority. Whether the independent organization is physically separate is less important than is its independence from the normal resource allocation process.

Its customers wanted the product, and it strengthened the company’s integral business model. There was, therefore, no need to spin the project out into a completely different organization.

Functional and lightweight teams are appropriate vehicles for exploiting established capabilities, whereas heavyweight teams are tools for creating new ones. Spin-out organizations, similarly, are tools for forging new values.

What I hope this framework adds to managers’ thinking, however, is that the very capabilities of their organizations also define their disabilities. A little time spent soul-searching for honest answers to this issue will pay off handsomely. Are the processes by which work habitually gets done in the organization appropriate for this new problem? And will the values of the organization cause this initiative to get high priority, or to languish?

A product becomes a commodity within a specific market segment when the repeated changes in the basis of competition, as described above, completely play themselves out, that is, when market needs on each attribute or dimension of performance have been fully satisfied by more than one available product.

“Those stupid guys are just treating our product like it was a commodity. Can’t they see how much better our product is than the competition’s?” It may, in fact, be the case that the product offerings of competitors in a market continue to be differentiated from each other. But differentiation loses its meaning when the features and functionality have exceeded what the market demands.

buying hierarchy by its creators, Windermere Associates of San Francisco, California,

functionality, reliability, convenience, and price.

First, the attributes that make disruptive products worthless in mainstream markets typically become their strongest selling points in emerging markets; and second, disruptive products tend to be simpler, cheaper, and more reliable and convenient than established products.

In the instances studied in this book, established firms confronted with disruptive technology typically viewed their primary development challenge as a technological one: to improve the disruptive technology enough that it suits known markets. In contrast, the firms that were most successful in commercializing a disruptive technology were those framing their primary development challenge as a marketing one: to build or find a market where product competition occurred along dimensions that favored the disruptive attributes of the product.

If history is any guide, companies that keep disruptive technologies bottled up in their labs, working to improve them until they suit mainstream markets, will not be nearly as successful as firms that find markets that embrace the attributes of disruptive technologies as they initially stand.

When performance oversupply has occurred and a disruptive technology attacks the underbelly of a mainstream market, the disruptive technology often succeeds both because it satisfies the market’s need for functionality, in terms of the buying hierarchy, and because it is simpler, cheaper, and more reliable and convenient than mainstream products.

Apple committed a similar error in stretching the functionality of its Newton, instead of initially targeting simplicity and reliability.

By watching for small hints of where the product might be difficult or confusing to use, the developers direct their energies toward a progressively simpler, more convenient product that provides adequate, rather than superior, functionality.

In other words, Cook decided that the makers of accounting software for small businesses had overshot the functionality required by that market, thus creating an opportunity for a disruptive software technology that provided adequate, not superior functionality and was simple and more convenient to use.

Once again, this was a differentiated product to which the market did not accord a price premium because the performance it provided exceeded what the market demanded.

Indeed, the power and influence of leading customers is a major reason why companies’ product development trajectories overshoot the demands of mainstream markets.

I would direct my marketers to focus on uncovering somewhere a group of buyers who have an undiscovered need for a vehicle that accelerates relatively slowly and can’t be driven farther than 100 miles!

The only useful information about the market will be what I create through expeditions into the market, through testing and probing, trial and error, by selling real products to real people who pay real money.

The third point is that my business plan must be a plan for learning, not one for executing a preconceived strategy. Although I will do my best to hit the right market with the right product and the right strategy the first time out, there is a high probability that a better direction will emerge as the business heads toward its initial target. I must therefore plan to be wrong and to learn what is right as fast as possible. 9 I cannot spend all of my resources or all of my organizational credibility on an all-or-nothing first-time bet, as Apple did with its Newton or Hewlett-Packard did with its Kittyhawk. I need to conserve resources to get it right on the second or third try.

Mainstream customers can never use a disruptive technology at its outset.

Second, because no one knows the ultimate market for the product or how it will ultimately be used, we must design a product platform in which feature, function, and styling changes can be made quickly and at low cost.

Third, we must hit a low price point. Disruptive technologies typically have a lower sticker price per unit than products that are used in the mainstream, even though their cost in use is often higher. What enabled the use of disk drives in desktop computers was not just their smaller size; it was their low unit price, which fit within the overall price points that personal computer makers needed to hit. The price per megabyte of the smaller disk drives was always higher than for the larger drives. Similarly, in excavators the price per excavator was lower for the early hydraulic models than for the established cable-actuated ones, but their total cost per cubic yard of earth moved per hour was much higher. Accordingly, our electric vehicle must have a lower sticker price than the prevailing price for gasoline-powered cars, even if the operating cost per mile driven is higher. Customers have a long track record of paying price premiums for convenience.

Historically, disruptive technologies involve no new technologies; rather, they consist of components built around proven technologies and put together in a novel product architecture that offers the customer a set of attributes never before available.

The reason disruptive technologies and new distribution channels frequently go hand-in-hand is, in fact, an economic one. Retailers and distributors tend to have very clear formulas for making money, as the histories of Kresge and Woolworth in chapter 4 showed. Some make money by selling low volumes of big-ticket products at high margins; others make money by selling large volumes at razor-thin margins that cover minimal operating overheads; still others make their money servicing products already sold. Just as disruptive technologies don’t fit the models of established firms for improving profits, they often don’t fit the models of their distributors, either.

In an independent organization, my best employees would be able to focus on electric vehicles without being repeatedly withdrawn from the project to solve pressing problems for customers who pay the present bills. Demands from our own customers, on the other hand, would help us to focus on and lend impetus and excitement to our program.

Finally, I don’t want my organization to have pockets that are too deep. While I don’t want my people to feel pressure to generate significant profit for the mainstream company (this would force us into a fruitless search for an instant large market), I want them to feel constant pressure to find some way—some set of customers somewhere—to make our small organization cash-positive as fast as possible. We need a strong motivation to accelerate through the trials and errors inherent in cultivating a new market.

Disruptive technology should be framed as a marketing challenge, not a technological one.

Failure and interative learning are, therefore, intrinsic to the search for success with a disruptive technology. Successful organizations, which ought not and cannot tolerate failure in sustaining innovations, find it difficult simultaneously to tolerate failure in disruptive ones.

Perhaps the most powerful protection that small entrant firms enjoy as they build the emerging markets for disruptive technologies is that they are doing something that it simply does not make sense for the established leaders to do.

Because disruptive technologies rarely make sense during the years when investing in them is most important, conventional managerial wisdom at established firms constitutes an entry and mobility barrier that entrepreneurs and investors can bank on. It is powerful and pervasive.

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