It is tempting to attribute the downfall of once-dominant companies to arrogance or incompetence. Yet one of the most influential theories in management, Clayton Christensen's "innovator's dilemma", suggests something more unsettling: that well-managed firms often fail precisely because they do everything that conventional wisdom recommends.
Christensen distinguished between sustaining innovations, which improve existing products for existing customers, and disruptive innovations, which typically begin as cheaper, simpler and initially inferior alternatives aimed at overlooked segments of the market. Established firms excel at the former. They listen attentively to their most profitable customers, invest in the improvements those customers request and allocate resources to projects with the highest expected margins. From a short-term perspective, this is entirely rational.
The problem is that disruptive products rarely appeal to an incumbent's best customers at first. Their margins are thin and their markets small, so they struggle to compete for internal investment against more lucrative projects. Meanwhile, the newcomers improve steadily until their offering is good enough for the mainstream market — at which point the incumbent finds itself outmanoeuvred, often with remarkable speed. Digital photography, budget airlines and streaming services are frequently cited examples.
Christensen's prescription was not that managers should ignore their customers, but that they should create separate, autonomous units with the freedom to pursue small, unprofitable-looking opportunities without being judged by the parent company's metrics. Critics have since questioned how predictive the theory is, noting that many supposedly disruptive start-ups fail and that some incumbents adapt successfully. Nevertheless, the core insight endures: the very processes that make a company successful today can blind it to the threats that will define tomorrow.