Good companies don't fail because of radical new technologies. They fail because of the companies' reactions to those new ideas.
That was the message from Harvard University professor Clayton Christensen, the keynote speaker at yesterday's TR100 conference honoring the world's top 100 young innovators. The conference, held at MIT, was sponsored by Technology Review, the school's magazine of innovation.
According to Christensen, author of The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail and a professor of business administration at the Harvard Business School, well-established companies have problems dealing with disruptive technologies because they aren't prepared to handle the changes they bring on.
Christensen defines disruptive technologies as "simple, convenient-to-use innovations that initially are used by only unsophisticated customers at the low end of markets."
He said large companies tend not to pay attention to these disruptive technologies because they don't satisfy the demands of high-end users -- at least, not at first.
But because these radical innovations initially emerge in small markets, they can, and often do, become full-blown competitors for already established products, Christensen said. And if a company is only prepared to deal with "sustaining technologies," or technologies that improve product performance, not disruptive technologies, it can fail.
Take for example, the demise of minicomputer maker Digital Equipment Corp.
Although it was considered one of the best companies in 1970s and 1980s, Digital was destroyed by a disruptive technology -- the PC, Christensen said.
During the mid-1980s Digital, like other minicomputer manufacturers, kept pace with users' demands for increased amounts of computing power. As the company continued to supply this power, it also continued to lower prices.
The well-managed Digital appeared to be on the road to complete dominance of its market.
Enter the PC.
Introduced by a few start-ups, the PC appealed to individuals, not enterprises, who wanted to use them mainly to play games. Christensen said Digital's founder called the PC "just a toy," and decided the company wouldn't invest time, or money, in a product its companies didn't want. Digital's management continued to invest in its high-end products.
The rest is history. Digital's customers decided they didn't want to pay high prices for its products when the PC was cheaper and performed adequately. Digital was done in by a disruptive technology it failed to recognize.
So how can large companies overcome barriers to innovations that make it difficult to invest in disruptive technologies from the start?
Christensen said enterprises must figure out how to develop new technologies to compete with the start-ups, while continuing to maintain their core business. The most viable way to do this is for companies to set up autonomous organizations charged with building new and independent business units around the new technologies, he said.
In addition, he warned, managers must understand and accept the fact that they may fail. If that happens, they must then incorporate the lessons learned from each failure into the next opportunity.