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August 25, 2016updated 20 Oct 2016 8:16pm

Digital disruption and the innovator’s dilemma

By John Oates

Digital disruption or disruptive innovation is a term coined by Harvard professor Clayton Christensen to describe the changes we see in lots of areas of business which seem to be prompted by technology.

But Christensen notes that it is not all about a technological breakthrough  – it is about making a product or service which was once only accessible to a small elite available and affordable for many more people. This might be achieved by new technology or by a new business model.

The history of the computing industry offers a clear illustration of his theory.

The industry began with mainframes and supercomputers which cost millions of pounds, required highly trained staff and were only affordable to the biggest companies and universities.

Today’s computers and mobile phones give millions of people access to similar functions, albeit with far lower performance, for a fraction of the price.

The reality is that creating that change is very difficult – lots of companies fail to ride the wave successfully, and it seems especially difficult for established companies to successfully survive this sort of disruption.

Part of the reason why is what Christensen calls the ‘innovator’s dilemma’.

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Companies all around the world are coming up with new products for their customers every day.

Good managers usually think about making better products, with better margins, for their customers which will lead to bigger profits for the company.

Established companies like and understand these ‘sustaining technologies’ – which offer incremental improvements to their established product or service line-up. But investing in better products which better address what your customers want might be exactly the wrong thing to do.

The innovator’s dilemma is that the right strategy is actually investing in disruptive technology which, at least in the short-term, might make worse products, for less margin, for new customers.

Even when established companies do identify a disruptive technology they often fail to go forward because they regard the market as too small or the margins too low.

This kind of change inevitably favours the start-up or new entrant because established companies will be less willing to give up their margins, and associated profits, in order to chase what appears to be a less profitable business.

The temptation for established players is always to look upwards and to make products with better margins.

This means the space for new entrants tends to be below the established competition.

The arrival and success of discount supermarkets is one recent example.

The car industry offers several more – the established players like British Leyland and Ford faced a threat from cheaper, Japanese competitors like Toyota, Nissan and Datsun. Japanese cars were dismissed as poor quality, toy-like and not serious competition.

But the Japanese car makers learnt fast and moved from dominating the market for cheap cars to taking a big share of all markets including creating their own luxury brands.

Today those same Japanese manufacturers are being challenged by Korean, and increasingly Chinese, car makers who are offering simpler, cheaper vehicles – just like the Japanese car makers used to do.

The real difficult in embracing digital disruption is not in adopting the technology but it is in accepting the new business reality which goes with it.

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