When will businesses learn

By Geoff Colvin via http://management.fortune.cnn.com   Article

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

A worker makes plywood in northeastern China.

“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. … What happened to the industry is described pithily …: ‘The Chinese came in with a low-price, low-quality entry, then got better and better and worked up the food chain.’

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.”

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