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The Innovator's Dilemma and The Innovator's Solution
Reviewed by Robert Birnbaum
The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail
Clayton M. Christensen. Boston: Harvard Graduate School of Business Press, 1997.
The Innovator's Solution: Creating and Sustaining Successful Growth
Clayton M. Christensen and Michael E. Raynor. Boston: Harvard Graduate Business School Press, 2003.
The subtitles of these two complementary books tell the story. The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail presents an original and thoughtful analysis of how the introduction of new technologies may cause great business firms to lose market dominance, and sometimes even to go belly up. The Innovator's Solution: Creating and Sustaining Successful Growth suggests how the same innovations instead can be managed in ways that establish new opportunities for profit and growth. While neither book gives more than peripheral attention to higher education, one might argue, recognizing the increasing significance of technology to our institutions, and concerned about the future well-being—indeed, the survival—of colleges and universities, that their lessons are important for academia. On the other hand, businesses and academic enterprises may be so fundamentally different that experiences in one arena have little relevance for the other.
The arguments in these two books are theory-based, subtle, and supported by extensive case-study evidence. This summary may not do them justice, and readers intrigued by them should review the books for further clarification. The major concept of The Innovator's Dilemma is that changes in technology, defined as the processes through which organizations transform inputs of resources into outputs of greater value, can be of two kinds: "sustaining" or "disruptive." The distinction is illustrated by an analysis of computer hard drives. In the mid-1970s, hard drives were disks fourteen inches in diameter. Major manufacturers continuously made improvements in disk performance. These improvements were sustaining technologies, consistent with the desire of mainframe computer users for increased disk capacity. Around 1980, several firms developed eight-inch drives that were smaller but had less capacity. This new technology was ignored by mainframe users, for whom smaller size was not important, because the diminished capacity of the disks decreased product performance. Eight-inch drives were a disruptive technology, not considered useful by mainstream customers, and initially desirable only to an emerging minicomputer market with profit margins too small to interest leading manufacturers. However, the capacity of eight-inch drives rapidly improved to a point at which they became competitive with fourteen-inch disks. Although the companies that ma-nufactured fourteen-inch disk drives all had the capability to produce eight-inch disks, most did not do so. All of these manufacturing companies ultimately failed.
The Innovator's Dilemma argues that this pattern has occurred with many other technologies. The Innovator's Solution expands the concept and proposes a host of additional examples in which established firms were the leaders in developing sustaining technologies that improved product performance. However, these firms paid little attention to newer disruptive technologies, which did not meet the needs of existing customers and appealed only to the least profitable segments of the market. It was with such disruptive technologies that the potential for future growth lay, but the values and processes of established firms prevented them from recognizing this. For this reason, very few major corporations led in developing disruptive technologies, and established firms ultimately lost out to entrant firms that became the leaders both in developing new technologies and in creating profitable markets for them.
What accounts for the failure of industry leaders to capitalize on new technologies? Certainly not lack of knowledge—indeed, many disruptive technologies were invented by established firms, although not subsequently developed by them. And certainly not ineffective leadership, since the major companies discussed in the books, along with their leaders, were universally admired for their productivity and sound management. Instead, the key is in the concept of "value networks." As businesses use technology to grow and prosper in their environments, they develop interlocking networks of suppliers, customers, and management systems that share and support the same values. Sustaining innovations are reinforced by the sales interests of traditional suppliers, by the desires of traditional customers for greater productivity, and by the rational decisions of managers who see product improvement as enabling them to move up market where established users are willing to pay higher prices for high performance, and where greater profit margins are available. Consistent with the resource dependence model of organizations, which argues that organizations are affected more by the availability of resources than by the actions of their managers, the established industry leader ensures a stable supply of raw materials by forming partnerships with suppliers, of a stable customer base by meeting or exceeding customers' needs, and of a stable income by maximizing profits. Everyone wins! The internal procedures of industry, suppliers, and customers become fine-tuned to support the technology.
But the situation changes dramatically when a new technology is introduced. Strength becomes weakness, and the same factors that initially drive a company's success become responsible for its ultimate failure. Adopting new technologies would require traditional suppliers to engage in expensive retooling, would produce products not initially seen as useful by major customers, and would appeal only to a segment of down-market users more concerned with low cost than with quality. The profit margins derived from serving this group would be so low that the cost of entering this new, small market could not be fiscally justified. Industry, customers, and suppliers resist. The company's very strengths—the abilities to develop reliable suppliers, listen to the needs of customers, and maximize profits—which formerly served it so well, now become barriers to change and the agents of its demise.
The dilemma is this: the structures, processes, and values that support the development and enhancement of an organization's core technologies at the same time prevent it from exploiting new technologies. "The very processes and values that constitute an organization's capabilities in one context define its disabilities in another context," Christensen writes. He suggests that organizations can resolve this dilemma only by developing alternative structures that can operate in small, down-scale markets with comparatively smaller profit margins, and that can make autonomous decisions independent of the main organization.
To illustrate the ubiquity of the emergence of disruptive technologies, The Innovator's Dilemma provides a list of fields, including communications, financial services, retailing, aviation, and medicine, in which established technologies are now threatened. The list is expanded in The Innovator's Solution to include several examples of disruptive strategies in higher education, such as community colleges, nontraditional law schools, and academic programs offered on weekends or over the Internet for working professionals. An additional example of a disruptive technology related to higher education, cited but not discussed in The Innovator's Dilemma, juxtaposes "classroom and campus-based instruction" (a sustaining technology that I shall call "traditional education") with "distance education, typically enabled by the Internet" (a disruptive technology that I shall call "virtual education"). I will use this example to focus on the potential applications of these books to academia.
The possibility that traditional education may be challenged, or even, eventually, replaced by virtual education cannot be dismissed. Virtual enrollments are growing, particularly in the proprietary sector, and many established public and independent institutions have made significant investments in distance education technology. Author Peter Drucker's well-known prediction that within a generation virtual education will reduce universities to relics can be seen as a logical consequence of extending The Innovator's Dilemma's model to higher education. The growth of virtual education fits several aspects of the model. Both The Innovator's Dilemma and The Innovator's Solution note that disruptive technologies are frequently cheaper, simpler, smaller, and more convenient to use than original technologies, characteristics that give them a competitive advantage when their performance comes to match that of the original technologies. Virtual education can certainly claim to be simpler and more convenient than traditional education. Comparisons of cost and of effectiveness, on the other hand, have yet to be resolved. It is still unclear whether virtual education is really less expensive, and attempts to assess comprehensively the effectiveness of educational programs have been unavailing.
For those who believe that theories of structure, management, and leadership can generally be applied to organizations of all types, virtual education's challenge to traditional education can be seen as a warning. Just as leading minicomputer makers such as DEC and Wang perished in the 1990s because they failed to enter the personal computer market developed by start-up firms, so might traditional academic institutions fail unless they become major players in the new virtual education market. Moreover, institutions cannot be saved mere-ly through better management or leadership. As The Innovator's Dilemma points out, it was precisely the rationality of good management that led to the failure of successful firms: "the usual answers to companies' problems—planning better, working harder, becoming more customer-driven, and taking a longer term perspective—all exacerbate— the problem. Sound execution, speed-to-market, total quality management, and process reengineering are similarly ineffective." It is not the case that leading businesses did not adopt disruptive technologies because their leaders were "conservative, backward-looking, risk-averse, and incompetent." These commonly asserted reasons for explaining why new technologies aren't adopted in business are no better founded than the similar complaints often made about higher education.
The new educational technology is particularly powerful because it opens the door to commodification. The Innovator's Dilemma argues that "a product becomes a commodity within a specific market segment . . . when market needs on each attribute or dimension of performance have been fully satisfied by more than one available product." Students who select a course because they wish to understand certain materials at a recognized level of competence are purchasing a product; not any course offered by any instruction will do. On the other hand, students whose only concern is to collect credits on a transcript, and who are indifferent to the course content or the level of proficiency they achieve, are purchasing a commodity. This would suggest that when virtual education is able to meet the market's desire for functionality, its other attributes may make it a formidable competitor of traditional education. Functionality, of course, is defined differently by different market segments, and in those that define it as "credentialling," virtual education may already be a formidable competitor. Some institutions, particularly in the proprietary sector, have accepted virtual education as their technology. Their goal is to give customers the commodity they want (credentials) in as convenient a manner as possible, and market growth may be an appropriate measure of their success. If this is what mainstream consumers of higher education are really after, traditional colleges and universities may find themselves increasingly subject to the same competitive discipline of the marketplace that doomed the makers of fourteen-inch computer hard drives.
But, as The Innovator's Dilemma notes, different market segments may have different notions of the attributes that must be satisfied before products may be considered equivalent. Academic institutions, and the clientele they serve, are very diverse. Even for the market segment that emphasizes employability, the comparatively low cost of local public two- and four-year institutions may offset the apparent advantages of simplicity and convenience offered by virtual education. And virtual education may not offer certain attributes of traditional education deemed critical by other market segments, such as prestige and opportunity for personal interaction.
Do colleges and universities have to choose between a virtual or a traditional focus? It might appear as if they should be able to retain their traditional campus-based processes while at the same time expanding their virtual programs, thus reaping the benefits of both. However, the model presented in these two books suggests that while traditional institutions may be able to operate small virtual programs, they will truly be able to exploit the technology only if they manage it through separate and independent governance structures that are not constrained by the value networks of the parent organization. For traditional colleges and universities, these value networks include not just suppliers and clients, but also concepts, such as academic freedom, shared authority, knowledge creation, and liberal learning, that are woven into the institutional fabric through tradition and the socialization of their participants. These values are not consistent with the limitations imposed by the requirements of virtual education. All organizational structures facilitate some processes and impede others; no structure can maximize all desirable values. DEC, for example, could never enter the personal computing business because its commitment to minicomputers forced it to "straddle the two different cost structures intrinsic to two different value networks." The logical conclusion of applying the theses of The Innovator's Dilemma and The Innovator's Solution to higher education may be that virtual education can thrive in traditional colleges and universities only if it operates outside their normal management and value frameworks, with the consequent risk of losing institutional control.
Why is it that a business can transform the technology it employs and still remain a business, while a college cannot? Part of the answer may lie in the different ways in which businesses and colleges define "success." The success of businesses is based on dominance as measured by market share and profit. Business leaders rationally decide to invest in innovations that promise the highest returns, and are reluctant to develop new products that are unwanted by their major and most profitable customers. In contrast, the success of traditional academic institutions is not measured by financial profit but rather by reputation, prestige, and influence. This does not mean that academic institutions do not chase dollars, but rather that becoming a leading institution does not necessarily depend on expanding markets. For businesses, as The Innovator's Solution points out, "growth is important because companies create shareholder value through profitable growth," and the key to growth is in disruptive rather than in sustaining technologies. But growth may be less important in academia, where prestige often depends instead on limiting markets (for example, through selective admissions) and on meeting societal expectations of what a college or university should be. Traditional academic institutions often try to serve their most prestigious customers, even at a financial loss, and programs that bring in financial resources but diminish prestige may find it difficult to flourish. Because the economic metrics of growth and market share are generally of limited consequence in academia, the questions proposed in The Innovator's Solution such as, How can we beat our most powerful competitors? and, Who are the best customers for our products? do not appear to be useful for most colleges and universities. "Beating" competitors in business may be a zero-sum, life-or-death struggle for survival; in higher education, rivalries may exist on the gridiron or in rankings of program quality, but academic institutions welcome the successes of their equals and band together with them for their mutual support. Stanford University, Williams College, the University of Wisconsin-Oshkosh and Miami-Dade Community College do not lose when Harvard University, Pomona College, the State University of New York College at Brockport and Westchester Community College win.
Another part of the reason is that colleges and universities are not just organizations but also institutions. Business organizations, responsive to markets, must adapt and change quickly if they are to remain effective. They produce products to meet customers' desires. Institutions, responsive to cultural norms, must be stable and reliable if they are to maintain legitimacy. They produce symbols to meet societies' needs. While the formal definition of technology in these two books includes social processes, most of the case studies on which the books rely place engineering and manufacturing technologies at the core, with social interaction playing a supporting role. In traditional higher education, in contrast, social interaction is the core, and technologies of every kind are mere facilitators.
Higher education differs from business in another way, as well. The technical innovations described in these books eventually came to create new markets and destroy old ones by replacing earlier technologies. In contrast, the disruptive technology of virtual institutions may be more likely to complement rather than replace traditional ones. The success of virtual institutions has been consistent with the strategy proposed in —The Innovator's Solution. Rather than pursuing consumers already in the market, virtual institutions have focused their attention on non-consumers: those who in the past found their desire for education, or at least for a credential, constrained by location, time commitments, or previous educational performance. While new markets have been created, most controlled by entrant organizations, the old markets of leading institutions remain strong. The long-term strength of these traditional institutions should not be underestimated. Leading business and industrial firms may fail, but leading academic institutions do not. Of the twelve largest corporations in the year 1900, only one still exists today, while of the twelve largest universities at that time, all still thrive.
Of course, as both books point out, organizations in many industries have used these same arguments to justify their continued commitment to doing things the old way. Organizations ignored new entrants that were competing in different value networks, and were surprised when the entrants started taking their customers. As The Innovator's Solution explains it, "Because new market disruptions compete against non-consumption, the incumbent leaders feel no pain and little threat until the disruption is in its final stages. In fact, when the disruptors begin pulling customers out of the low end of the original value network, it actually feels good to the leading firms." Could this happen in higher education? I suspect that there may be some impact on traditional institutions that are both nonselective and high cost, but little elsewhere.
Both books take a contingent approach to management and suggest that before adopting intriguing new ideas developed in other organizations (such as the ideas expressed in these two books), good managers should first ask themselves if they relate to their own circumstances, culture, experience, and production models. The same caveats should apply as traditional academic institutions consider whether their missions are well served by adopting intriguing but potentially disruptive technologies whose value may be inconsistent with what higher education is all about.
Robert Birnbaum is professor of higher education emeritus at the University of Maryland College Park.
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