Customer Power, Strategic Investment, and the

Faiure of Leading Firms

Clayton M. Christensen and Joseph L. Bower

March 14, 2008

• How hard it is for rms to repeat their success when technology of markets
change

• no leading computer manufacturer has been able to replicate its initial
success when subsequent architectural technologies and ther corresponding
markets emerged

• Concept of Managerial Myopia

• Aim of the paper

 why and under what circumstances nancially strong, customer-

sensitive, technologically deep and rationally managed organizations
may fail to adopt critical new technologies or enter important mar-
kets

• Def. of Technoloy

 processes by which an organization transforms labor, capital, mate-

rials, and information into products or services

• Premise

 patterns of resource allocation heavily inuence the types of innova-

tions at which leading rms will succeed or fail

• Conclusion

 the inability of some successful rms to allocate sucient resources

to technologies that initially cannot nd application in mainstream
markets, but later invade them, lies at the root of the failure of many
once-successful rms

1
Earlier Views of Factors Inuencing Patterns of
Resource Allocation in the Innovation Proccess
1. Resource Dependence

• rms are constrained by external factors

2. Resource Allocation

• process internal to the rm

• Linkage between (1) and (2)

1. customer's expectations and needs for product improvements

2. accepted innovative proposals

3. market-targets

4. rm's success

• Primary Conclusion

 when signicant customers demand it, technologically dicult inno-

vations can go through

 when innovation addresses emerging markets, rms will nd it hard

to accept them, even when technologically straightforward

• Why leading rms may fail when faced with technological change?

 Cooper and Schendel (1976)

∗ new technologies often are initially deployed in new markets,

and that these were generally brought into industries by entering
rms

 Foster (1986)

∗ when new technologies enter an industry, 'attacker's advantage'

 Henderson and Clark (1990)

∗ new entrants advantage in architectural technology change

• Objective of the paper

 dene the types of innovation in which we expect attackers to enjoy

an advantage

 explain the puzzle

∗ why have incumbent rms generally intensied their commit-

ments to conventional technology, while starving eorts to com-
mercialize new technologies

 how managers can more successfully address dierent types of tech-

nological change

2
Research Methods
• Data

 data base

∗ product and performance specications (all population)

∗ 1975-1990

∗ over 1.400 product models

 Disk/Trend data

∗ disk drive sales per rm and per year

∗ validated through Electronic Business magazine

· monthly issue

· history

∗ 1976-1990

∗ measure the impact of component and architectural technology

on disk drive performance

∗ rst rms to develop

∗ trace the patterns of diusion for each technology

 Personal Interviews

∗ 70 unstructured

∗ ~80% of disk drives

• Why this Industry

 History of rapid change in technology and market structure

 6 architecturally distinct product generations emerged

∗ new market leader 4 out of the 6

Typologies of Technological Change

• Firms failure when

 Tushman and Anderson (1986)

∗ when technological change destroys the value of established tech-

nological competencies

 Henderson and Clark (1990)

∗ when new architectural technologies emerge

• Concepts

 trajectory-sustaining innovations

 trajectory-disrupting innovations

3
Sustaining Technological Changes
• sustaining impact on an established trajectory of performance improve-
ment

• see gure 1

Disruptive Technological Changes

• disrupt an established trajectory of performance improvement

• or redene what performance means

• see table 1

The Impact of Sustaining and Disruptive Tech-

nologies on Industry Structure
• Disruptive innovations don't have initial capacity to meet the current de-
mand

• Once disruptive architectures became established in their new markets,

the accumulation of hundreds of sustaining innovations pushed each ar-
chitecture's performance ahead along very steep, and roughly parallel,
trajectories

Leaders in Sustaining and Disruptive Technologi-

cal Innovations
• see gure 2

• Building upon Henderson and Clark (1990)

• longitudinal

• The leading rms led the rms along the trajectories

 even when competency-destroying

• Disruptive Architectural technologies tended overwhelmingly to be entrant

• Between half and two-thirds of the established manufacturers never intro-

duced a model in the new architecture

• It was in the process of allocating scarce resources amongst competing

product and technology development proposals, however that disruptive
projects got stalled.

4
A Model of the Resource Allocation Process in
Established Firms Faced with Disruptive Change
1. Leading established rms' engineers are the rst to develop the disruptive
architectures

2. Market Test

(a) lead customers of the existing product line

(b) little interest - lack of higher performance

3. Response to current customers needs

(a) impetus on sustaining projects

i. competitive wars among established players on the market

ii. frustrated engineers teams

(b) rejection of disruptive projects

4. Start-ups proliferation

(a) to exploit the disruptive product architecture

(b) including frustrated engineering teams

(c) Unsuccessful in interesting established computer makers

i. Find new customers

ii. without a clear marketing strategy

iii. trial-and-error approach

5. Adoption of sustaining improvements

(a) capacity growth faster than demand

(b) customers in established markets eventually embraced the new archi-

tectures

i. smaller, cheaper, faster and more reliable

6. Established rms' response

(a) when their market is invaded

i. took their prototypes o the shelf 

ii. at best succeeded in defending a portion of their prior business

• Ex post asymmetries lead by ex ante perceptions of risk and rewards

 Resource allocation decisions:

5
 ∗ sustaining technologies extremely expensive and risky (techno-
logically) pursued
∗ disruptive innovations were technologically straightforward re-
jected
• Successful Firms

 risk of creating new markets

• Individual innovative behavior VS rm's processes allocated resources

• No-parallel trajectories

The Linkage between Models of Resource Depen-

dence and Resource Allocation
• Both Resource dependence and Resource Allocation supported

 rm's scope for strategic change is strongly bounded by the interests

of external entities who provide the resources the rm needs

 but, managers can, in fact, change strategy

Case Studies
• See Table 4

Distinct organizational units for small drives at Control Data

• creation of stand-alone organizations

Quantum Corporation and the 3.5-inch Hardcard

• spin-o venture

• the spin-o absorbed the leader

Micropolis: Transition through managerial force

• organization's own mechanisms allocated resources to where the customers
were

• Failure

Proposition
• Managers can eect a strategy change despite resource dependence, by
creating independent organizations that depend exclusively upon resources
in the targeted market.

6
Conclusions
• Insights

1. allocation of resources to some product development and commer-

cialization programs, and the denial of resources to others, is a key
event or decision in the implementation of strategy

2. the process by which impetus and consequent resources may be de-

nied to technological opportunities that do not contribute to the
needs of proeminent customers

3. causal relationship might exist between resource allocation processes

and the phenomenon of resource dependence

4. despite the powerful forces of resource dependence, however, man-

agers can, in fact, wield considerable power, and wield if eectively,
in changing the strategic course of their rms in directions other than
those in which its resource providers are pulling.

5. The Model and these case studies illustrate the mechanism through
which autonomous and induced strategic behavior can aect, or fail
to aect, a company's course