Customer power, strategic investment, and the failure of leading firms

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Citation: Clayton M. Christensen, Joseph L. Bower (1996) Customer power, strategic investment, and the failure of leading firms. Strategic Management Journal (RSS)




Tagged: Business (RSS) Innovation (RSS)


Summary:

Christensen and Bower's article is, in many ways, a template for Christensen's popular book The Innovator's Dilemma or his Harvard Business Review article (also written with Bower) Disruptive technologies: Catching the wave. The article argues that incumbents fail in the face of radical investments because their strong connections to existing customers make it difficult to allocate resources to innovation in new and untested markets that are not, but will become, major sources of business in the future. In other words, Christensen and Bower argue that incumbants have the resources to capitalize on disruptive innovations but their existing market connections act as liabilities. Like Christensen's other work, the paper uses data from the rigid disk drive industry.

Theoretically, the paper tries to make a connection between resource dependence theory (e.g., Pfeffer and Salancik's (1978) The external control of organizations: A resource dependence perspective) and the more strategy-focused literature on resource allocation. Christensen and Bower argue that resources play a critical role in framing firm action, but that managers are not inextricably constrained by these connections and still have agency to act.

Using comprehensive data from industry magazines on innovations within disk drives, The authors look at major changes introduced into the disk drive industries and categorize innovations into either sustaining or disruptive technological changes. Sustaining changes appealed to established customers in mainstream markets while disruptive changes did not. They show that the established firms led in the adoption of every sustaining technology in either component or architecture but failed, almost always, in the face of disruptive changes.

To explain this differences, the authors introduce data from interviews of key managers who played key roles in the leading firms (both incumbents and entrants). Their supports the idea that developing the technology associated with disruptive innovation was never difficult (indeed, very often the first prototypes of new disruptive innovation were developed within established firms). However, they argue that existing customers were uninterested in the new innovations at first. As a result, incumbents diverted resources to the established markets and existing customers.

They author positive a model that explains the patterns associated with disruptive changes in their data set:

  1. Engineers developed the new disruptive innovation, often within incumbent firms.
  2. The existing firms tested the appeal of the new technology with existing customers. Existing customers were uninterested.
  3. As a result, incumbents allocated resources to sustaining technologies instead of the disruptive innovation.
  4. New companies were founded, very often by employees who had "spun out" of the incumbent. These new companies served new and (at this early stage) niche markets.
  5. These niche markets became more established and process innovation improved the quality of the new architecture until it became stronger and more competitive and eventually began to challenge the new mainstream technology.
  6. Incumbents took their prototypes off the shelf, often too late.

In terms of prescriptive advice, the authors hint at the suggestion in Christensen's The Innovator's Solution, that organizational distinct units within incumbents are the best way to address the issue.

Theoretical and practical relevance:

The paper has been cited more than 800 times in the 14 years since it has been published. The Innovator's Dilemna contains essentially the same core argument has been cited more than 2000 times and become a major business best-seller and made Christensen one of the leading management "gurus."