Why do well-managed companies fail?

why well-managed companies fail

This is a simple but not trivial question. Indeed, in today’s business scenario, driven by fast-growing technologies, there are plenty of cases in which Good Management is simply not enough. 

In his masterpiece The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (1), Professor Clayton Christensen concludes that they often fail because

the management practices that have allowed them to become industry leaders also make it extremely difficult for them to develop the disruptive technologies that ultimately steal away their markets

Well-managed companies are excellent at developing the sustaining technologies that improve the performance of their products in the ways that matter to their customers. This is because their management practices are biased toward:

  • trust the voice of customer
  • investing in technologies that give customers what they want
  • seeking higher margin
  • targeting larger markets rather than smaller ones

Disrupting technologies, however, are distinctly different from sustaining technologies. Disruptive technologies change the value proposition in a market. They are typically cheaper, smaller, simpler, and frequently more convenient to use, therefore they open new markets.

Principles of Disruptive Technologies

  • Companies depend on customers and investors for resources: the highest performing companies have well-developed systems for killing ideas that their customers don’t want. As result, these companies find it very difficult to invest adequate resources in disruptive technologies – lower-margin opportunities that their customers don’t want- until their customers want them. And, by then, it is too late;
  • Small markets don’t solve the growth needs of large companies: to maintain their growth rates, big companies must focus on large markets;
  • Markets that don’t exist can’t be analyzed: companies whose investment plan is based on quantification of market size and return of investment before they can enter a market get paralyzed when faced with disruptive technologies simply because data on markets don’t yet exist;
  • Technology supply may not equal market demand: although disruptive technologies can initially be used only in small markets, they eventually become competitive in mainstream markets. As a result, the products that are currently in the mainstream eventually will overshoot the performance that mainstream markets demand, while the disruptive technologies that underperform relative to customer expectations in the mainstream market today may become directly competitive tomorrow.

How to face with Disruptive Technologies?

  • Give responsibility for disruptive technologies to organization whose customers need them so that resources will follow them
  • Set up a separate organization small enough to get excited by small gains;
  • Plan for the future
  • Don’t count on breakthroughs. Move ahead early and find the market for the current attributes of the technology

Conclusion

In this post, simple question was asked: why well managed company fails? In his book The Innovator’s Dilemma, Professor Clayton Christensen describes how well-managed companies are excellent at developing the sustaining technologies that improve the performance of their products in the ways that matter to their customers. On the other hand, they are not very keen in developing new ideas based on disruptive technologies, which might kick them out of their leadership position in the middle-long term. Professor Christensen also provide some advices on how to face with disruptive technologies.

 

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References

  1. Clayton M. Christensen, The Innovator’s Dilemma, Harvard Business Review Press, 1997