One of the hottest management fads these days is the "innovator's dilemma."
Clayton Christensen coined the term in his 1997 book by the same title, which is now in its 12th printing and has sold 125,000 copies. Intel (INTC) Chairman Andy Grove has credited Christensen's ideas with helping to drive Intel to develop the Celeron chip, its microprocessor for the sub-$1,000 personal computer. A few months back, the New York Times and Forbes (dossier) published gushing profiles about the nerdy Harvard Business School professor. And just this month, Web-software maker Macromedia (MACR) invited Internet business strategists to a free seminar in San Francisco that promised to reveal the solution to the innovator's dilemma (a Macromedia product, of course) and a chance to receive a copy of the book.
The conundrum behind The Innovator's Dilemma is the phenomenon of well-managed companies that listen to their customers and invest in new technologies but still lose market dominance. They lose because of what Christensen calls "disruptive technologies," meaning those technologies that swoop in under a company's radar to offer low-end customers a far better value.
Christensen thinks that current market leaders who lose at the low end today will lose at the high end tomorrow. Think Encyclopedia Britannica, which lost its print publishing empire to Encarta, a reference CD-ROM published by Microsoft (MSFT) and bundled with computers for free.
To solve the innovator's dilemma, Christensen argues, companies should create a separate subsidiary and free it to attack the parent. But upon closer examination, the theory behind the popular book fails to live up to its hype, especially as it concerns the Internet world. In an attempt to prove his theory, Christensen ignores cases that don't fit his rubric, and he bases his definition of good management on pre-Internet case studies ranging from steam-powered earthmoving equipment firms to disk-drive companies.
Using a straw-man definition of good management, Christensen posits that well-managed companies simply won't be able to profit from disruptive technologies. What his definition omits is that there are many companies with "good management" that are able to profit from disruptive technologies instead of being buried by them. An examination of these cases can provide executives with a more nuanced way of profiting from disruptive technologies, especially those like the Internet.
The Cases of Schwab and Hewlett-Packard (HWP)
If Christensen's prognosis is always correct, then how does it explain Charles Schwab's success in online trading, Hewlett-Packard's victory in inkjet printers, Microsoft's comeback in browsers or Sapient (SAPE)'s successful move from client/server to Internet business consulting? According to Christensen's theory, these firms should not have succeeded.
Let's focus on the first two cases. Online trading and inkjet printers started off as low-end technologies that had no immediate value to the firms' core customers. Schwab and HP did not set up separate subsidiaries to compete with their parent companies, and yet they are both No. 1 in these markets.
Charles Schwab is the leading online brokerage in terms of Internet trading revenues, which account for more than half of the company's trades. According to Christensen, E-Trade, one of the original online trading firms, should have trumped Schwab because it had a significant head start over Schwab in online trading.
