global trade

When will businesses learn the lessons of the innovator's dilemma?

January 7, 2014: 5:00 AM ET

The perils are dire and well known -- yet companies seemingly can't stop putting themselves at risk.

By Geoff Colvin, senior editor-at-large

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A worker makes plywood in northeastern China.

FORTUNE -- If absolutely everyone in business knows about the innovator's dilemma -- how it works, how it often dooms big, successful companies -- then why is avoiding it still so extraordinarily hard for business leaders?

Harvard's Clayton Christensen published The Innovator's Dilemma 17 years ago, yet we continue to see companies marching into the buzz saw, eyes wide open, apparently helpless to save themselves. The latest example is, of all things, the U.S. plywood industry. The makers of hardwood plywood were getting killed by cheap Chinese imports, so they banded together and petitioned the U.S. International Trade Commission to declare that Chinese makers were dumping -- selling something in the U.S. at "less than its fair value" -- and to put a stop to it. The ITC turned them down in November. The plywood makers, who are appealing the decision, say they've had to eliminate 25,000 U.S. jobs over the past four years partly because of Chinese competition.

What actually happened to the industry is described pithily by an executive quoted in a recent USA Today article: "The Chinese came in with a low-price, low-quality entry, then got better and better and worked up the food chain."

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That is of course precisely how the innovator's dilemma plays out. As Christensen powerfully showed, successful incumbent companies are often happy to cede the bottom of the market to new competitors making cheap, crummy products because those products often earn the lowest profit margins; by dropping out of those categories, the incumbents increase their own overall margins. But the insurgent competitor is gaining economies of scale while innovating ways to compete in the next higher category. Incumbents may be happy to let that category go too, because doing so will again raise their overall profit margins.

That is, the insurgents get better and better, working up the food chain. The incumbents -- the plywood makers, for example -- typically don't wake up until they're in deep trouble.

Christensen showed 17 years ago how that scenario has played out in steel, construction equipment, and many other industries. He described how smart, successful executives fall into the trap. His book, one of the most significant business books of the past 50 years, became a mammoth bestseller, and its title entered the language. Yet no evidence seems to suggest that managers have improved even a little at evading one of business's most disastrous blunders.

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It will be instructive to watch John Chambers' intriguing attempt to avoid the trap. Threatened by the rise of a new technology called software-defined networking, in what looks like a classic innovator's-dilemma situation, the CEO of networking incumbent Cisco (CSCO) has assembled a group of engineers into a new, free-standing company to figure out how to defeat the insurgents.

The approach sounds promising. It might even work. If it does, we'll face the really interesting question: Will anyone learn from it?

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