This article will explain what the Innovator’s Dilemma is, how it works, why it’s inevitable as companies mature.
As companies invest more and more in incremental innovation in a product, its performance starts to outstrip its utility to the customer. As a result, these customers start to get overserved with the performance of a product. As the rest of the industry starts to overdeliver, the basis for competition changes from performance, which was not good enough at the beginning of a product’s lifecycle, to other characteristics such as cost, flexibility, service, and speed.
This is the consequence of incremental, sustaining innovation. The opposite of sustaining innovation is disruptive innovation. As products have too much performance and companies gravitate towards higher margin customers and higher performance products, they start to ignore lower margin customers with lower performance requirements. This creates an opening for a new, disruptive company to come into the market.
At the beginning of the new product’s lifecycle, the performance is just barely good enough to take the bottom of the market or open up new markets that previously were not consuming. Most of the time, this new product is laughed at by the competition (imagine how Blockbuster felt about Netflix when it first came out). But over time, these new entrants continue to invest in their products, technologies and cost structures. As the products become “good enough” for the mainstream market, the incumbent starts to lose significant market share.
Because the disrupting company was born with different cost structures and channels to market, by the time the incumbent realizes how much of a threat the new entrant is, it is already too late.
Here is a great interview with the creator of the theory, HBS Professor Clayton Christensen.