The previous article introduced the concept of product lifecycles. Examining the lifecycle model leads to the conclusion that the most profitable approach is to focus on the majority markets and largely ignore the innovators. In fact this is valid – within limits!

Clayton Christensen addresses this in The Innovator’s Dilemma where he introduces two types of innovation: sustaining innovation, which is innovation directed at solving an existing problem, and disruptive innovation, which involves using new technology to initially create new markets and then to ultimately address mainstream markets.

The concept can be summarized as sustaining innovation is a problem looking for a solution, while disruptive innovation is a solution looking for a problem. For sustaining innovation you understand the problem that needs to be solved and the challenge is to solve it. You understand the market, the customers and their needs, alternative solutions, and competitors. You can perform valid market research, make financial projections, and apply existing resources, processes, and skills.

Christensen discovered that existing companies do very well with sustaining innovation. They can tackle extraordinarily complex and difficult technologies and apply them to meeting their customers needs. They can make large investments and overcome seemingly impossible challenges. As an old saying goes, understanding the problem is 80% of the solution.

On the other hand, Christensen also discovered that successful companies do a poor job of dealing with disruptive technologies. They tend to either ignore a new technology until a competitor has established a strong position or they fail to successfully develop and market products built on the new technologies.

What is going on here? Is the problem with sustaining innovation? Not at all – successful companies are built on continuous improvement. Companies that don’t continuously improve their products and processes will fall behind the companies that do. Unswerving dedication to customers is a hallmark of a great company. Attempts to challenge a successful company in an established market are expensive and usually unsucessful.

Making sense of this apparent contradiction needs several more concepts.

Customer Needs

There are several components to the model that Christensen proposes. A core concept is customer needs – specifically, how well a technology meets customer needs.

This chart is a different look at the innovators/majority market used by Moore in Crossing the Chasm. It shows a typical technology development curve where a new technology starts out being useful but not meeting all customer needs. The technology improves to the point where it meets and then ultimately exceeds customer needs.

Note that a “good enough” product can still be improved. It doesn’t meet all needs of all customers. Customer needs do continue to grow over time. The interesting case occurs when technology/performance improvement is growing faster than customer demands. When this occurs the customer focus moves from technology and performance to other factors such as convenience, reliability – and cost! Customers are unwilling to pay a premium for product capabilities that exceed their needs.

Technology Evolution

Christensen proposed that the evolution of technology shown in the customer needs chart follows an “S” curve. In the early stages investments in a new technology are largely speculative. This is fundamental research – experimentation to discover how to build the new technology and discovery of what it can do.

If the technology is viable an inflexion point is reached where incremental investments in the technology or product produce significant increases in performance or capabilities. This is typically where large market growth occurs.

As the technology matures each increment of investment produces smaller returns – you reach a point of diminishing returns for investments.

With successful products you have typically been moving up-market as the technology evolves – delivering more support to more demanding customers in a broader market. This requires – and delivers! – larger gross margins for the products and a larger organization with more overhead to meet the demands of large customers.

Following this model we have seen a scrappy startup with an exciting new technology growing into a successful and profitable mainstream company – the classic success story!

This leaves us with unanswered questions: First, how does the scrappy startup grow into a profitable company rather than becoming another failure? Second, how can an existing successful company deal with disruptive innovation?

Next: Unknowable Markets