5 Surprising Reasons Great Companies Fail, According to a Harvard Professor
How do great companies fail? Consider Sears Roebuck, once so admired that in 1964, Fortune magazine wrote of its success:
“How did Sears do it? In a way, the most arresting aspect of its story is that there was no gimmick. Sears opened no big bag of tricks, shot off no skyrockets. Instead, it looked as though everybody in its organization simply did the right thing, easily and naturally.”
Or think of Digital Equipment Corporation (DEC), a dominant force in the minicomputer industry. DEC was once so highly regarded that it was one of the most prominently featured companies in the study that led to the book In Search of Excellence.
Yet, within a few years, Sears had missed the rise of discount retailing, and DEC was characterized as a “company in need of triage,” having squandered its opportunities. Common explanations for such spectacular falls often cite bureaucracy, arrogance, or poor planning. But what if the real reason is more paradoxical?
In his groundbreaking book, The Innovator’s Dilemma, Harvard professor Clayton M. Christensen argues that for these and many other fallen industry leaders, the cause of failure was not bad management, but good management. His research shows that the very practices that make companies successful can also sow the seeds of their demise when faced with a certain type of technological change.
This article distills the five most impactful and surprising takeaways from Christensen’s work, revealing why the logical, competent decisions that drive success can also pave the road to failure.
1. Your Best Management Practices Are a Trap
The central paradox of the innovator’s dilemma is that the logical, rational decisions managers make to keep their companies profitable and growing are precisely what cause them to lose their leadership positions.
These are not bad managers. They are great managers who are following the most widely accepted principles of business: listen to your customers, invest in innovations that promise the best returns, and focus on your largest and most important markets. While these practices are essential for strengthening an existing business, they become a fatal trap when a new, “disruptive” technology emerges.
Christensen’s research into the disk drive, excavator, and steel industries revealed a consistent pattern. The leaders failed not because they couldn’t see the new technology coming, but because they made a conscious decision that it wasn’t worth pursuing. This is the dilemma in its starkest form:
“Precisely because these firms listened to their customers, invested aggressively in new technologies that would provide their customers more and better products of the sort they wanted, and because they carefully studied market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership.”
2. Listening to Your Customers Can Be a Fatal Mistake
At the heart of Christensen’s theory is a critical distinction between two types of innovation: sustaining and disruptive.
- Sustaining Technology: This type of innovation improves the performance of established products along the dimensions of performance that mainstream customers in major markets have historically valued. Think of a computer with a faster processor, a car with better gas mileage, or a disk drive with more storage capacity. Established companies almost always win the battles of sustaining technology because they are deeply motivated to give their best customers more of what they want.
- Disruptive Technology: This type of innovation initially offers worse performance in the mainstream market. However, it provides a different value proposition that appeals to a new or fringe market—typically being cheaper, simpler, smaller, or more convenient.
This is where listening to your best customers becomes a liability. When faced with a disruptive technology, the most profitable and powerful customers of an established company will explicitly reject it because it doesn’t meet their needs.
The disk drive industry provides a perfect example. In the late 1970s, makers of 14-inch drives for mainframe computers ignored the new, smaller 8-inch drives. Why? Because their mainframe customers didn’t want them; they wanted more capacity, not less, at a lower cost per megabyte. This allowed new companies to sell the 8-inch drives to the emerging minicomputer market.
The pattern repeated itself. When Seagate, a leader in 5.25-inch drives for desktop PCs, developed its first 3.5-inch drive prototypes, its engineers were met with stiff internal resistance. Opposition came primarily from the marketing organization and Seagate’s executive team, who had run the concept by their best customers. Not surprisingly, these PC makers were rebuffed. They were looking for 40 and 60 megabytes of capacity for their next-generation machines, while the new 3.5-inch architecture could only offer 20 MB. This “good” habit of listening to customers—and the rational, data-driven decision to shelve the project—blinded them to the new portable computing market where the disruption was taking root.
3. The Real Danger Isn’t Radical Technology—It’s the Simple Stuff
A common myth is that leading firms fail because they can’t keep up with radical or technologically difficult change. Christensen’s research shows the opposite is true. Established firms were consistently the leaders in developing and adopting even the most complex and expensive sustaining technologies.
In the disk drive industry, for instance, established leaders spent over $100 million each to develop thin-film heads, a radical sustaining technology that kept performance improving. They were brilliant at managing difficult technological transitions when it helped them give their existing customers better products.
The technologies that toppled them, however, were almost always technologically straightforward. They were often built with off-the-shelf components in a simpler product architecture. Christensen describes them this way:
“Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.”
The mechanical excavator industry illustrates this perfectly. The leading firms expertly managed the transition from steam to gasoline power—a radical but sustaining change. Yet, they were almost all wiped out by the advent of hydraulic excavators. Hydraulics were technologically simpler than the complex cable-and-pulley systems they replaced, but because the first hydraulic machines were weak and small, the industry leaders ignored them. This allowed new entrants to seize a low-end residential construction market, improve the technology, and eventually displace the incumbents.
4. The Rational Pursuit of Profit Leads You Off a Cliff
Successful companies have a powerful financial incentive to always move “upmarket.” They are relentlessly pulled toward higher-end products, more demanding customers, and markets that promise higher gross margins. This “northeasterly migration” is a perfectly rational response to the pressures of competition and the desire for greater profitability.
Disruptive innovations, however, almost always emerge at the low end of the market. They promise lower margins per unit and serve customers in small, seemingly insignificant markets. For a large, successful company, investing in a disruptive product that its best customers don’t want and that promises lower profits is an irrational act.
The battle between integrated steel mills and minimills is the classic case study. Minimills first entered the steel industry by making low-quality, low-margin concrete reinforcing bars (rebar). The large integrated steel companies were happy to cede this business, as they were focused on the much more profitable high-end market for sheet steel used in cars and appliances.
Having gained a foothold, the minimills then used their lower-cost structure—which made them profitable at prices the integrated mills couldn’t match—to attack the next market up: angle iron and larger bars. Again, the integrated mills were content to retreat upmarket, abandoning their lower-margin products in what seemed to be a smart financial move. This pattern repeated itself relentlessly. Each step of the retreat was a rational decision for the integrated mills to improve their profitability. But in doing so, they created a vacuum at the low end of the market, which allowed the disruptive minimills to establish a beachhead and then launch an attack from below.
5. Your Organization’s Strengths Are Its Greatest Weaknesses
An organization’s capabilities are not just its resources—its people, money, and technology. According to Christensen, an organization’s true capabilities also lie in two other factors: its processes and its values. And these are the very factors that can turn strengths into weaknesses.
- Processes: These are the methods by which companies do their work—market research, planning, budgeting, and product development. These processes are designed and refined over time to efficiently and effectively produce the outcomes the company needs for its current business. But a process designed to vet large, sustaining projects for big markets will automatically screen out small, uncertain disruptive projects.
- Values: A company’s values dictate its priorities. They determine the rules employees must follow for the company to make money, such as the minimum gross margins it will accept or how large a market opportunity must be to be considered “interesting.” As companies become more successful, their values naturally evolve to focus on bigger and more profitable opportunities.
Digital Equipment Corporation (DEC) is a prime example. DEC certainly had the resources to succeed in personal computers. It had brilliant engineers, plenty of cash, and a strong brand. However, its processes—such as its two-to-three-year product development cycles—were incapable of competing in the fast-paced PC market, which required six-month cycles. Furthermore, its values made it unable to pursue the low gross margins of the PC business. To DEC, a project wasn’t worth doing unless it could generate 40-50% gross margins. The very processes and values that made DEC a powerhouse in minicomputers made it incapable of competing in the personal computer market.
Conclusion: Rethinking Success
The innovator’s dilemma is not a story of managerial incompetence. It is the story of a paradox: the drivers of success in one context become the drivers of failure in another. The dilemma is that the very things we are all taught constitute “good management”—listening to customers, investing for higher profits, and targeting large markets—are the very things that cause great companies to fail. Recognizing this paradox is the first step toward solving it.
This leaves every leader with a critical question to ponder: Are the very processes and values that make your company successful today blinding you to the disruptive threats of tomorrow?
