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The Innovator's Dilemma as a Problem of Organizational Competence

The Innovator's Dilemma as a Problem of Organizational Competence

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The Innovator’s Dilemma as a Problem of Organizational Competence
Rebecca Henderson
Introduction
This paper explores the role of embedded organ-izational competencies in shaping the innovator’sdilemma. I argue that while popular accounts of Christensen’s theories often focus almost entirely onthe role of cognitive failures in the senior team as thecentral explanatory construct, this focus obscures thecritical role played by deeply embedded customer ormarket-related competencies in shaping the waysfirms respond to disruptive innovations.It has now been nearly eight years since ClaytonChristensen first published
The Innovator’s Dilemma
(1997). Since then it has not only had a dramatic im-pact on practice— 
disruptive innovation
is now a com-mon term of art—but it has also served to reignitedebate within academia as to the role of the market inshaping incumbent response to discontinuous techno-logical change.Christensen’s work brought an intriguingly differ-ent perspective to the existing literature. Scholarsstudying the management of technology had, by andlarge, located the difficulties established firms encoun-tered in responding to discontinuous innovation as aproblem of competence. Much of this work was sup-ply-side focused—failing incumbents appeared to fallvictim to competence-destroying innovations thatmade it difficult for them to introduce the next gen-eration of technology (e.g., Henderson and Clark,1990; Tushman and Anderson, 1986). But researchhad also identified the difficulty established firmsencountered in responding to shifts in the marketplace (e.g., Abernathy and Clark, 1985) and in thelarger institutional and social regime (e.g., the excel-lent survey in Chesbrough, 2001).Christensen (1997) explicitly rejected problems intechnological competence as an explanation for firmfailure in the examples he described—in the disk driveindustry, for example, he demonstrates quite clearlythat the incumbent firms had no difficulties in devel-oping the next generation of product—and insteadfocused attention on problems in decision making atthe most senior levels. Drawing on resource depend-ency theory, he argued that senior teams are, inessence, captured by their largest, most profitablecustomers, making it exceedingly difficult to allocateresources to initiatives that serve new customers atlower margins.The fact that Christensen’s work has met with suchsuccess suggests that this explanation resonates deeplywith practicing managers. My own experience inworking with senior teams grappling with potentialdisruption has also highlighted its usefulness. Timeafter time I have seen senior conversations aboutlong-term innovation strategy hijacked or shortcircuited by appeals to the pressing needs of large,highly profitable customers, and as Eisenmann’s workin the newspaper industry has shown, sheltering newinitiatives from the margin pressure characteristic of the current business may be a critical step towardbuilding successful disruptive businesses (Eisenmannand Bower, 2000). Christensen’s hypothesis is thus acritically important idea that must play a central rolein understanding why disruption creates so muchcompetitive turmoil.Nevertheless, this article argues that a focus onthe dynamics of decision making in the senior team asthe dominant explanation for why established firms so
Address correspondence to: Rebecca Henderson, MIT SloanSchool, E52-543, 50 Memorial Drive, Cambridge, MA 02142. Tel.:(617) 253-6618; E-mail: rhenderson@mit.edu.J PROD INNOV MANAG 2006;23:5–11
r
2006 Product Development & Management Association
 
often miss disruptive innovations is potentiallymisleading—particularly as it has been interpretedin the popular press. I suggest that organizationalcompetence, in the traditional sense of the embeddedorganizational routines of established companies, maybe much more central to established firm failure inthe face of disruptive innovation than is generallyacknowledged. Christensen himself offers tantaliz-ing hints of this possibility throughout his publishedwork, and I argue that expanding on these hintsto acknowledge the depth and complexity of the roleplayed by embedded organizational competence iscritically important in understanding why respond-ing to disruptive innovation is so difficult for estab-lished firms.The article begins by tackling the important ques-tion of whether it is rational, from the perspective of the shareholders, for established firms to respond todisruptive innovation. Although popular interpreta-tions of Christensen’s work assume that establishedfirms not introducing disruptive innovation are fail-ures, I argue that as Christensen himself acknowl-edges this is not an easy question. Indeed if estab-lished competencies in production and marketing arenot only difficult to change but also, by their verypresence, are barriers to the development of new,more appropriate competencies, then deciding not torespond to disruptive innovation may be a completelyrational choice.I then turn to a discussion of the circumstances inwhich a response to disruptive innovation would havebeen, ex post, a rational decision and explore why es-tablished firms find it so difficult to respond appro-priately even in this subset of cases. I build on thework of Ron Adner, who in a sequence of carefulpapers has shown how changes in the structure of consumer demand—in combination with technicalprogress—almost certainly lie behind the phenome-non of disruption (e.g., Adner, 2002; Adner andZemsky, 2005). I argue that the established routinesof large incumbent firms make it particularly difficultfor them first to sense and then to act on preciselythese kinds of shifts, so that the decision-making dy-namics highlighted by Christensen may be as much aproduct of failures in what one might call
market-re-lated competence
 —or of what Danneels (2002, 2004)calls
customer competence
 —as they are of resourcedependence. The article concludes with a brief discus-sion of the implications of this hypothesis for futureresearch and for our understanding of the dynamicsof technical and competitive change.
Is It Rational to Respond toDisruptive Innovation?
Are established firms irrational in failing to respondto disruptive innovation? Christensen’s work can,I think, be read both ways on this point, but it is acentral question that deserves clarification. My read-ing of the
Innovator’s Dilemma
, and certainly popularinterpretations of the work, seems to suggest that sen-ior teams failing to invest in disruptive innovationsare irrational—that they should have made the ap-propriate investments but were unsuccessful in doingso because they were blinded by current customersand larger margins. However, in the
Innovator’s So-lution
this stance has shifted: the book can be read assuggesting that established managers who do not re-spond to disruptive innovation are, in fact, acting intheir firm’s best interest.
The asymmetries of motivation chronicled in this chap-ter are natural economic forces that act on all business people, all the time. Historically, these forces almostalways have toppled the industry leaders . . . becausedisruptive strategies are predicated upon competitorsdoing with is in their best and most urgent interest:satisfying their most important customers and investingwhere profits are most attractive (Christensen and Raynor, 2003, p. 55).
The neoclassical literature has identified a number of cases under which established firms might rationallychoose not to invest in innovation threatening to dis-place them (e.g., the survey of the issue in Henderson,1993), and it seems plausible that at least some dis-ruptive innovations meet these criteria. If, for example,an investment by the incumbent firm will significantlyaccelerate the date at which a replacement technologywill be introduced, then under some circumstances itmay be rational for an established firm to delay its owninvestment until it can be certain the new technologywill be introduced by another firm. But this does notseem to be the reasoning for the majority of disruptiveinnovations identified in the literature.When there is no danger of self-induced canniba-lization, the neoclassical literature would suggest thatif it is rational for an entrant to invest in a particulartechnology it should also be rational for an incumbentto invest in the same opportunity. Intuitively, if anopportunity yields a return at greater than the prev-alent cost of capital, then it should be attractive to allpotential investors—including incumbents—and theonly (rational) reason an incumbent might choose not
6 J PROD INNOV MANAG2006;23:5–11R. HENDERSON
 
to invest is if it is capital constrained and the financialmarkets are willing to fund entrants but not incum-bents. The availability of the incumbent’s other, high-er-margin projects should not, in a perfectly rationalneoclassical world, have any effect on its willingnessto take on additional profitable projects.Does this mean we can safely assume that, exceptfor a few marginal and uncommon cases, managerswho fail to invest in disruptive opportunities are irra-tional—at least from their shareholders’ perspective— and blinded by their existing mental models or cap-tured by their dominant constituencies?I think not. Another possibility is that senior man-agers rationally anticipate the constraints placed uponthem by their existing organizational competencies.As Leonard-Barton (1992) suggested, the same com-petencies that may be an organization’s most endur-ing source of competitive advantage may also be
competency traps
 —engrained habits and ways of be-having that make significant change in the organiza-tions modes of operation extraordinarily difficult.Reconfiguring an organization to take advantage of new opportunities is extremely difficult, particularly if doing so requires the development of new productioncapabilities, new logistics or distribution systems, ornew channels to market. Building a new unit withinthe old to take advantage of new technology is onepossible solution, but the literature suggests that suchunits have significant difficulty putting in place ap-propriate incentive structures and in successfullyimitating the behaviors of successful entrants (e.g.,the survey reported in Campbell et al., 2003). Viewedfrom this perspective, a senior team’s decision to re-frain from investing in disruptive innovation can seemmuch more rational. Why invest in opportunities thefirm is much less likely to be able to exploit than
denovo
entrants or than firms entering from related fieldsare already equipped with appropriate capabilities?Christensen’s (1997) work hints that such forcesmay be at work. For example, in the
Innovator’sSolution
, he and his coauthor suggest that incumbentfirms failed to invest because ‘‘the cost structure of that model and of their distribution and sales channelswas not competitive’’ (p. 106). But if this is the dom-inant force behind the upheaval we associate with the
Innovator’s Dilemma
, it stems from an old-fashionedconcern with competence rather than with anymisperception by the senior team. Incumbent firmsfail to respond to disruptive innovations becauseresponding appropriately requires building competen-cies they are ill-equipped to acquire and not becausethey focus too much on existing customers and high-margin opportunities.But this is clearly not the sense of the original bookor of how Christensen’s (1997) work has been widelyinterpreted. Indeed there are hints throughout eventhe
Innovator’s Solution
that Christensen has some-thing else in mind: that established firms could andshould react to disruptive innovation but that some-thing goes wrong that could implicitly be fixed.Interpreting Christensen (1997) from this perspec-tive, one possibility is that the underlying problem iscognitive. Senior managers cannot understand thepromise of disruptive innovation because theirviews of the world are deeply entrenched and largelyshaped by their current experiences. Focusing on theircurrent customers they literally do not see other op-portunities. This is consistent with some intriguingrecent work suggesting that the cognitive frames of senior managers do, indeed, play a major role in guid-ing strategic decisions (Kaplan, 2004; Tripsas andGavetti, 2000).Another theory is that the problem is political. If power within an organization adheres to those withresources, managers in charge of, or aligned with, thelargest and most profitable customers will pull themost political weight and will be able to divert re-sources to their own projects.These two interpretations of Christensen’s (1997)work have the widest currency, and as suggested al-ready I am deeply sympathetic to both of them: theyboth clearly play an important role in making it dif-ficult for established firms to respond to disruptiveinnovation. To them, however, I propose a third,competence-based explanation. As Danneels (2004)suggested, I argue that organizational competencies— particularly market facing or customer competencedeveloped through experience with the existing gen-eration of the technology—make it very difficult toevaluate the promise of disruptive technologies andthus that the senior team is very rarely equipped withthe information they might need to make an appro-priate decision (Danneels, 2004).Christensen and Raynor’s (2003) distinction be-tween
low-end disruptions
and
new-market disruptions
is a useful building block in this argument. Low-enddisruptions introduce products or services that arecheaper and of lower quality than existing productsbut that offer no other performance improvement.New-market disruptions, on the other hand, offerbetter performance on dimensions the currentcustomers do not greatly value. Christensen’s (1997)
THE INNOVATOR’S DILEMMA AS A PROBLEM OF ORGANIZATIONAL COMPETENCE J PROD INNOV MANAG2006;23:5–117

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