The Innovator's Delusion: 4 Assumptions That Make "The Innovator’s Dilemma" Dangerous & What To Do Instead [Part I]

Successful companies today don’t win by “disrupting” themselves.

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Dear Friend, Subscriber, and Category Pirate, 

Last week, we looked at The Innovator's Dilemma — Clay Christensen’s groundbreaking work that altered how many businesses think about innovation — through the category design lens.

Our pirate-y POV: Successful companies today don’t win by “disrupting” themselves.

A reader, pirate Bill had great insight to add:

(You can check out our reply and the other comments here.)

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Now, we Pirates have immense respect for Clay.

Clay is a giant. He made massive contributions, and business people owe him a deep debt of gratitude. His thinking and writing had a unique blend of curiosity, wisdom, and purpose that few business thinkers have. This is best reflected in his book and HBR article, "How Will You Measure Your Life" (one of our all-time favorites), where he shares wisdom with young people in business. He asks three important questions about “How can I be sure that…” 

1. …I’ll be happy in my career?

2. …my relationships with my spouse & family become an enduring source of happiness?

3. …I’ll stay out of jail?

Essentially, don’t be so smart climbing the ladder you’re stupid about what matters. (Some people are so smart, they are stupid.) You can check out his book here. 

These questions only emerge from a giant thinker with a deep sense of purpose and mission to help others, likely stemming from his devout faith in God. (We’re big fans of God on the Pirate ship.) Folks who worked with Clay revered him, and his passing at the too-young age of 67 was tragic. 

As we look back on Clay’s biggest ideas, The Innovator’s Dilemma and Disruptive Innovation, our point of view is that these ideas are far superior as a description vs. a prescription. At the core, they make four fatal assumptions that executives and entrepreneurs need to consider thinking different about.

Let’s dive in.

The Innovator’s Delusion

Clay is best known for spotlighting innovation as a core part of strategy, back when innovation wasn’t so sexy. 

His curiosity about Digital Equipment Corporation (DEC) and its demise when the personal computer category moved the world from mini-computers to PCs. This work led to his PhD — and eventually his seminal book, The Innovator’s Dilemma, and the phrase “disruptive innovation.”

Here’s (an oversimplified) summary of disruptive innovation: 

1. New technologies enter as inferior, cheaper options to serve less demanding customers.

2. Incumbents fail to adopt these new technologies because they are margin dilutive.

3. Incumbents choose incremental or ‘sustaining innovations’ to hold the status quo.

4. New entrants master the new technologies, take risks, and move upstream.

5. Old incumbents die. New entrants become the new incumbents. 

Clay’s work is an excellent description of what often happens. 

He saw the personal computer category (not product) knock out every incumbent mini-computer category player, including DEC, Wang, Honeywell, Data General, and Prime. His theory also describes Walmart’s category takedown of the old-retail category leader Sears, Amazon’s takedown of Borders, and Google/Meta’s new categories displacement of the legacy mass advertising market. 

The challenge is Clay’s prescription of what both incumbents and startups should do as a result of "disruptive innovation" has some dangerous assumptions to watch out for. 

His prescription for incumbents is to:

• Create autonomous business units

• Embrace disruption early

• Target non-consumers

• Use new metrics for success

• Invest in lower margins

• Focus on learning

The issue is there's a long trail of incumbents who followed the "disruptive innovation" prescription and launched brands and businesses that are now dead. They followed the playbook and burned tens of billions of dollars of capital. And even more market cap.

For example, Goldman Sachs is the whitest of white-shoe investment bankers. In 2016, the company decided to go downstream by launching Marcus, a consumer bank. Its cumulative losses since then? $6 billion dollars. 

That's nothing compared to General Motors, who lost $20 billion dollars on the Saturn debacle from 1985 to 2010. Why? In 2010, Tesla went public. The cumulative capital raised by Tesla from inception, IPO, secondary stock offerings, and debt raised was…(you guessed it)...$20 billion dollars. 

Does anyone remember or get American Express Blue?

Made a visit to the Microsoft Store recently?

Have you been connecting with friends on Google+ via your Amazon Fire smartphone while enjoying a Red Bull Cola lately?

To understand why these ventures failed, let's break down what happened when two incumbents followed the "disruptive innovation" playbook.

United Airlines and the "Ted" Disaster