The innovator's dilemma

Definition

The innovator's dilemma refers to the challenge that successful companies face when they need to adapt to disruptive innovations while maintaining their existing business models. This paradox occurs when firms are unable to pursue emerging technologies that initially seem less profitable, ultimately leading to their decline as new competitors enter the market with disruptive products.

5 Must Know Facts For Your Next Test

1. The innovator's dilemma highlights why large companies can fail despite having resources and expertise, as they often prioritize current customer demands over potential future markets.
2. Successful companies frequently invest in sustaining innovations, but this focus can blind them to disruptive changes that could alter their industry.
3. Disruptive innovations typically start at the lower end of the market and improve over time, eventually displacing established competitors.
4. Many well-known companies have faced the innovator's dilemma, including Kodak, which failed to adapt to digital photography despite having early technology in place.
5. To address the innovator's dilemma, firms may need to create separate units or spin-off organizations that can explore disruptive innovations without the constraints of the parent company's existing business model.

Review Questions

• How does the innovator's dilemma explain the challenges faced by successful companies when encountering disruptive technologies?
  • The innovator's dilemma illustrates how successful companies often prioritize immediate customer needs and sustaining innovations over emerging disruptive technologies. As they focus on improving existing products for current customers, they may overlook or dismiss new innovations that initially appear less profitable. This can lead to an inability to adapt, allowing smaller competitors who are willing to take risks on these new technologies to gain market share and ultimately challenge the market leaders.
• Discuss how disruptive innovation differs from sustaining innovation in the context of the innovator's dilemma.
  • Disruptive innovation refers to new technologies or business models that create new markets by meeting the needs of underserved customers, often starting at a lower performance level than existing products. In contrast, sustaining innovation focuses on improving existing products and services for current customers. The innovator's dilemma arises when established companies, while successfully implementing sustaining innovations, ignore or underinvest in disruptive innovations, leading to their eventual decline as they fail to adapt to changing market conditions.
• Evaluate the strategies that companies can employ to overcome the innovator's dilemma and remain competitive in evolving markets.
  • To overcome the innovator's dilemma, companies can adopt several strategies. One effective approach is to create independent divisions tasked with exploring disruptive innovations, enabling them to operate without the constraints of the core business. Companies can also foster a culture of innovation and risk-taking, encouraging employees to experiment with new ideas without fear of failure. Additionally, investing in partnerships or acquisitions of startups can provide insights into emerging technologies and help established firms stay ahead of industry trends.

Related terms

disruptive innovation:

A process by which a smaller company with fewer resources is able to successfully challenge established businesses, often starting in overlooked segments of the market.

sustaining innovation:

Improvements to existing products that enhance performance in ways that established customers expect, allowing companies to maintain their competitive edge.

market leaders: Companies that hold a dominant position in a particular market, often characterized by significant market share and brand recognition.