The_Innovators_Dilemma__Clayton

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challenges of their competitors. Gross margins tended to evolve in each value network to levels thatenabled the better disk drive makers to make money, given these costs of doing business.In turn, this gave these companies a very specific model for improving profitability. Generally, theyfound it difficult to improve profitability by hacking out cost while steadfastly standing in theirmainstream market: The research, development, marketing, and administrative costs they wereincurring were all critical to remaining competitive in their mainstream business. Moving upmarkettoward higher-performance products that promised higher gross margins was usually a morestraightforward path to profit improvement. Moving downmarket was anathema to that objective.The obviousness of the path toward profit improvement is shown in Figure 4.2. The three bars on theleft depict the size of the desktop, minicomputer, and mainframe computer value networks in 1981 andare labeled with the characteristic margins enjoyed by disk drive makers in each of those networks.Gross margins are clearly higher in higher-end markets, compensating manufacturers for the higherlevels of overhead characteristic of those businesses.The differences in the size of these markets and the characteristic cost structures across these valuenetworks created serious asymmetries in the combat among these firms. Firms making 8-inch drives forthe minicomputer market, for example, had cost structures requiring gross margins of 40 percent.Aggressively moving downmarket would have pitted them against foes who had honed their coststructures to make money at 25 percent gross margins. On the other hand, moving upmarket enabledthem to take a relatively lower-cost structure into a market that was accustomed to giving its suppliers60 percent gross margins. Which direction made sense? A similar asymmetry faced the makers of 5.25-inch drives in 1986, as they decided whether to spend their resources building a position in theemerging market for 3.5-inch drives in portable computers or to move up toward the minicomputer andmainframe companies.Committing development resources to launch higher-performance products that could garner highergross margins generally both offered greater returns and caused less pain. As their managers weremaking repeated decisions about which new product development proposals they should fund andwhich they should shelve, proposals to develop higher-performance products targeted at the larger,higher-margin markets immediately above them always got the resources. In other words, sensibleresource allocation processes were at the root of companies’ upward mobility and downmarketimmobility across the boundaries of the value networks in the disk drive industry.Figure 4.2 Views Upmarket and Downmarket for Established Disk Drive Manufacturers74
Source: Data are from various issues of Disk/Trend Report, corporate annual reports, and data providedin personal interviews.Note: Percentages above each bar indicate typical gross margins in each value network.The hedonic regression analysis summarized in chapter 2 showed that higher-end markets consistentlypaid significantly higher prices for incremental megabytes of capacity. Why would anyone opt to sell amegabyte for less when it could be sold for more? The disk drive companies’ migration to the northeastwas, as such, highly rational.Other scholars have found evidence in other industries that as companies leave their disruptive roots insearch of greater profitability in the market tiers above them, they gradually come to acquire the coststructures required to compete in those upper market tiers. 1 This exacerbates their problem ofdownward immobility.RESOURCE ALLOCATION AND UPWARD MIGRATIONFurther insight into this asymmetric mobility across value networks comes from comparing twodifferent descriptive models of how resources are allocated. The first model describes resourceallocation as a rational, top-down decision-making process in which senior managers weigh alternativeproposals for investment in innovation and put money into those projects that they find to be consistentwith firm strategy and to offer the highest return on investment. Proposals that don’t clear these hurdlesare killed.The second model of resource allocation, first articulated by Joseph Bower, 2 characterizes resourceallocation decisions much differently. Bower notes that most proposals to innovate are generated fromdeep within the organization not from the top. As these ideas bubble up from the bottom, the75
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Copyright © 1997 by the President
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In GratitudeAlthough this book list
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IntroductionThis book is about the
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There are two ways to resolve this
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Most new technologies foster improv
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Chapter 6 examines the emerging per
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To maintain their share prices and
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another—changes. When the perform
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published has been the number of pe
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HOW DISK DRIVES WORKDisk drives wri
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Page 55 and 56: Figure 2.8 Comparison of Disk Drive
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Page 67 and 68: Bucyrus Erie was the only maker of
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Page 77 and 78: Compare that conversation to the ma
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Page 89 and 90: CHAPTER FIVEGive Responsibility for
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Page 97 and 98: Figure 5.2 Gains in Discount Retail
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Page 117 and 118: CHAPTER SEVENDiscovering New andEme
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disruptive technologies are unpredi
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before making commitments that were
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CHAPTER EIGHTHow to Appraise YourOr
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meant not to change—or if they mu
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the companies that had led in the o
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reside in processes and values and
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for its historical success, a bette
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company would experimentally and in
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integrate components more effective
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research is being built.5. See Wick
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drives. By 1989, the measure was 1.
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dimension satisfied market needs, t
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Consider, for example, the product
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When performance oversupply has occ
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Meanwhile, Novo, a much smaller Dan
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propositions centered on convenienc
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supply. Understanding these traject
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CHAPTER TENManaging DisruptiveTechn
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Figure 10.1 The Electric CarSource:
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nothing first-time bet, as Apple di
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models, such as Camry, Previa, and
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sets built with vacuum tubes) to vo
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We need a strong motivation to acce
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16. This list of smaller, simpler,
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Third, just as there is a resource
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The Innovator’s DilemmaBook Group
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lead to success with sustaining tec
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recognizing that different technolo
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The_Innovators_Dilemma__Clayton

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