Why does the Innovator’s Dilemma repeatedly happen?

We have researched Disruptive Innovation (DI) cases not only in theory,
but also in practice through a variety of consulting interactions.

＠Copyright Lead Innovation Center, Inc. All rights reserved

The most emphatic points in our research of Disruptive Innovation
As Prof. Christensen mentioned, too many functions surely cause the Innovator’s Dilemma.
However most manufactures had already noticed this problem, and therefore developed
inexpensive products before Disruptive Innovation (DI) happened.
Then, why couldn’t the innovators deal with the DI products?

1. Too much variety in the numbers of products would force too high of a cost structure,especially in quality validation, consequential procurement management and sales
costs.
2. The most noticeable warning signs before DI happens are;
- Sales amount per product has continually decreased. (but the change is slight)- Development cost divided by the Sales amount (D/S) per product has continually
increased . (but the change is slight )- However the sales price stays at almost the same level for years.
3. Too many user segments would result in a shrinking market. Once a manufacturer
succeeds in a new segment discovery, the other companies usually keep up in notime by incorporating a slightly difference function.
＠Copyright Lead Innovation Center, Inc. All rights reserved

Product and Market Architecture≪Product Architecture× Market Architecture≫【Product architecture】

Pursuit of the mostPopular function

Entirely based on a
Modular Platform
Module hardware andsoftware applied tomost functions
Partial introduction ofModule hardware andinterchangeable
softwareIntegral Architecture
in Hardware andSoftware④

Absorb other product
Functions and services

DI
happens

Integralof Multi function
Pursuit for
one specificfunction
Economy of
Scale

Singlefunctionpursuit【Market/Economy architecture】
Economy of
Scope
Introduction
multi-functions
into a single
product

Economy of Network

Absorb otherfunctions fromexternal
products【Function feature】

＠Copyright Lead Innovation Center, Inc. All rights reserved

Product and Market Architecture•Netbook
Entirely based on a
Modular Platform•PND•Smartphone•Turn key PV•DS

Module hardware andsoftware applied to mostfunctions•Personal
ComputerPartial introduction ofModule hardware andinterchangeable software•Smartgrid•TV•Game Device-PS•Digital Camera•PV

Integral Architecture in
Hardware and Software•Car navigation【Market/Economy architecture】

Economy of Scale

Economy of Scope

Economy of Network

Most Japanese manufactures have a slightadvantage in this zone.
＠Copyright Lead Innovation Center, Inc. All rights reserved

Similarities in recent Disruptive Innovation
Common factors in recent DI cases include: too much variety in the numbers of products (and of course too many
functions); the core components shift to lower functions; and the complementary market starts to change.
Previous Market Status
 Too many functions

Game
Device Soaring development costs for gamesoftware In game’s complementary market, newcategory and contents like “Physical play
& Health & Sports” was pioneered
 Too many functions and too wide rangeof the number of products

Car
Navigation

 Continuous increase in developmentcosts The core components shift from highadvanced types to common functions
types at a lower pricePrevious Product Status Difficult to use the game device andsoftwarePrevious DI product appealing
points【DS, Wii】

 Not to play at ease

 Fresh user interface such as two
screen, touch pen

 Popular game software based oncontinuing the existing games Connection the game device withthe complementary content【PND】

 The amount of user time reduced , but theprice almost stayed at the original level Difficult to use it PDA products started to include the map
and navigation functions.

 Concentration on the navigation
function by removal of he others’
functions already in PDA
 The DI product price was one –third of existing high advanced car
navigation【Netbook】

 Too many functions and too much variety
in the number of products

Personal
Computer The Core components shift from highadvanced types to common functions
types at lower price New concept trial for “Nonconsumer”($100 PC for Bottom of Pyramid) The amount of user time reduced , but theprice almost stayed at the original level Almost all of the usage is just for web
browsing The DI product price was one –third of high advanced PC
 Concentration on connection to the
Web browser was the mostpopular usage in PC
 The DI product was composed ofthe pre-generation OS and CPU,and utilizing the new trial

＠Copyright Lead Innovation Center, Inc. All rights reserved

What factors come together before DI happens【Sales amount】

What factors come together before DI happens?
• Continual Increase of development and manufacturing
cost

100・・

• Limited suppliers of core components• Overwhelmed with functions which are totally different
from users’ needs and life styles

80・・• Too mach variety in the number of products

60・・• Stay at original price or excessive price reduction• Too many increases in the number of user segments

40・・• The amount of user time reduced /Frequency decrease of
the product usage• Major customers are geeks and early adopters

20・・【Market Lifecycle】

0・・
LaunchFirst level off

GrowthThe latterof growthSecond Level off

If the above factors come together, DI would happen by an external company soon. However a lack of the above
factors may not create the occurrence of DI.
＠Copyright Lead Innovation Center, Inc. All rights reserved

The cycle Innovators follow prior to DI happening
Advance product functions , andcomplication

Too wide range of products would cause some constraints which innovators can’t
flexibly deal with rapid changes

Soaring product development andmanufacturing costs

Monopoly on core components

Cost reduction by introducing
common or interchangeable
components

Diversify the number of the products
to compensate for the highdevelopment costs

Keep the original sales price tocompensate for the high cost

Attempt to pass the cost to low end
products which are in high volume

Most customers are geeks and early
adopters who accept expensive
prices.

Side effect of unnoticeable costs

Scared of main customers

Excess high cost oriented assets
such as test machinery, procurement
management costs and high skilled
engineers/workers fees

Reluctant to approach non-consumer
or untapped market

Co-development and joint
ventures on core components

Further outsourcing of manufacturing on low end
products

Further in-house concentration on high end products

Constraint of development and manufacturing scheme
Too much “Selection and Concentration” strategy onhigh end product know-how

If the concentrated core competence in a manufacturer were changed to the weakness by DI product, besides R&D
division focused on the core technology, it would be so quite difficult for the company to survive.
＠Copyright Lead Innovation Center, Inc. All rights reservedDecrease sales amount per product and Increase development cost per one
 In general, high advanced products market is small scale. Therefore most manufactures tend to transfer the somuch development and manufacturing cost to other products which are high volume.
 Due to put it that way, the innovators can’ t come to rein in increasing the Development cost divided by the Sales
amount (D/S) per product, release unceasing new products and decrease sales amount per product.
 In other words, a variety of products strategy-economy of scope can’t become a countermeasure just tocompensate for the high cost, not meet customers’ needs.

 PND DI case

（D/S cost and Sales amount per product; ten millions）
100（Number of
released products）

Number of released
products

200

Development cost
divide sales amount(D/S) per productBy doing the continuous
product release, they try toforcibly keep the sales price

100

50

Sales amount per
product

50

Sales price102002 year（growthlate phase）

2005 year （DIhappened）

2006 year（PND
growth）

＠Copyright Lead Innovation Center, Inc. All rights reserved

The loss of common production know-how as market lifecycle forward

High
End
Prod
uct

Low
end
Prod
uct

Product
Planning

Whole
Functions
Framework

Basic designon hardware

Detailed
designon hardware

Basic
Development
on software

Detaileddevelopment
on software

Functionsverification

Quality
Assurance

manufacturing

Launch～First level
off

◎

◎

◎

◎

◎

◎

◎

◎

◎

Growth

◎

◎

◎

◎

◎

○

◎

◎

◎

In the latterof growth

◎

◎

◎

○

○

△

○

◎

◎

Launch～First level
off

◎

◎

◎

○

◎

○

◎

◎

○

Growth

◎

◎

○

△

△

▲

△

△

△

In the latterof growth

○

○

△

▲

△

▲

△

△

▲

◎Complete in-house production, ○：Almost in-house production, △：Mainly outsource management,▲：Dependency on outsourcers

 If DI happens in this phase, since the innovators become lose low end
production know-how, they can’t develop the similar DI product tocompete with it.
 Therefore, during the market growth period, a lot of preparation have tobe implemented.
＠Copyright Lead Innovation Center, Inc. All rights reserved

Common Factors in each Innovator’s Dilemma case＠Copyright Lead Innovation Center, Inc. All rights reservedPrior game market situations and Nintendo’s strategy before DS was released【Game market barriers for further expansion】【Nintendo’s strategy】

Dependant on some famousgame software which could
cover the development cost
Soaring development
costs of game softwareHigh functional
game device-PS2
and PS3 wasbooming

Dependant on limited
talented specialists ingame softwaredevelopment
Reduction of gamesoftware venders
because of too highdevelopment cost
Make it difficult tohandle the gamedeviceDiversify succeed gamesoftware into others media like
DVD etc.
Increase M&A to compensate
for the development cost

Promoted cost
reductions ingame-software
vendors andremoval of entry
barriers

Most users are geek types
Only initially after release of
new game software are thesales strong
The number of game software
types become limited【Common recognitions before Nintendo
DS was released】
１．Practical oriented game software didn’t sellso much２．Heavy and two screens user interface
couldn’t be accepted by existing users

Improve user
experience withgame device,
return to original
spirits

A great number of development
tools on offer for game software
Loosen the grip on software
license screening criteria
Lower the licensing fee

Introduce new UI which mostcustomers would think of as“cool”
Reasonable sales price of thegame device-hardware
New release of intuitive oriented
game software【Change of the common sense】
The targeting of the practical game software wasincorrect.
Limited resources put toward development of thepractical game software
Until then, the interface of all games were only for
one screen device, so game vendors only produced
this typeTwo screen device offered more than the traditional
sensory inputs, extending game software options
＠Copyright Lead Innovation Center, Inc. All rights reserved

Simultaneous changes to absorb external functions and services

New category occurrence in toy market such as Brain type applications and Play & Wealth software
Process
adaptation to
be capable ofevaluation for
the above
applications

Product
adaptation to theabove trend【New product architecture】
・Two screens・New interface which can make use of atouch panel and a censing pen
・Lower function in MPU to smoothly playpractical and easy oriented gamesoftwareBusinessmodel
adaptation to
attract theabove vendors【New development organization and process】
・Concurrent development process between
hardware div. and software div.
・CEO lead the division to develop withexternal vendors
・authority reinforcement to final evaluation div.
and criteria change to keep up the market
trend【New Business model】
・A great number of offer development
tools for game software
・Grip Loose for software license
screening criteria
・Lower the License fee

Make it easy to develop
practical and easy game software

Brain training
game software

Animal typegame software

English lesson
game software

＠Copyright Lead Innovation Center, Inc. All rights reserved

Car navigation innovator’s dilemma
The rapid share drop of Japanese car navigation manufacturers is exactly Innovator’s dilemma.
【Car navigation reactions】【Impact on the whole market】

Continuous function
improvement in Navigation• Due to connection with a lot ofsafety systems, equivalent
with OEM navigation function
and manufactures own
navigation’s• Difficult to handle the product

Soaring the development cost,especially software

Try to stay the high sales price to compensate forhigh cost
Depend the development cost on OEM
manufactures
Make use of temporary engineer staff to reducethe development cost

Remain the limited carnavigation manufacturers
which can perceive automotivefunctions in depth.

Remain cooped up in the automotive market

Excessive authorization to design divisions
Become Indifferent and insensitive to externalmarket changes• Decreasing use frequency of
Navigation

Not become penetrated into
new customers

＠Copyright Lead Innovation Center, Inc. All rights reserved

The strength converts to the weakness in Car navigation
Japanese car navigation manufacturers have too much acknowledged and cling to automotive field

Strength so far• Be familiar with automotive quality
standard, process establishment for carOEM• Be capable of developing even a large
amount of software scale which canoperate map, music, video, and digital TV• In basic design phase, be capable ofsolving EMI and Heat issues emitted
from software and electronics

Change to weakness• Due to optimized with the automotive field too much,they couldn’t develop any different products from car
manufacturers needs.
MarketChange• Owing to OEM navigation development cost so much,they couldn’t help pass the cost to other navigation• Overstaffed and high salary engineers from the
hardware to software• Shortage ion Car navigation complementary market
information• Vertical integration model from hardware
to software• Experience lack about horizontal specialization
implements with oversea companies• Sales root for car shop

• Hesitation to sale to home appliance shop which tend
to discount the price＠Copyright Lead Innovation Center, Inc. All rights reserved

Innovators features- Vertical integration model vs PND market features

Mismatch elements

Human
Resources

Business
Processes or
Business Models• Few talented leader who have much experienced a variety of toughnegotiations with external companies in accordance with PND-Horizontal
specialization• Gap between a development style which a design division has a strong
authority and a style which make the most of external technologies fromother markets and products• Lack of experience on a great number of procurements know-how fromlimited suppliers which is required in PND.
• Lack of experience for specific function appealing marketing.

Technologicalfeatures• Gap between too strict design standard of existing navigation in accordancewith a car market, and the design criteria of PND

＠Copyright Lead Innovation Center, Inc. All rights reserved

High end Navigation features vs PND product features【High end car navigation】

Function Targets
1.

2.
3.

Current position monitor bya lot of censors: Gap a
couple of meters
Traffic jam prediction
Screen Resolution：VGA（Obligation: Assurance ofdrive safety）

Censors

The differences are;
• How current position should be monitored by only GPS precisely?
• How open oriented OS should be used and assure a lot of functions?
• How removal of one component or software have affected to other functions?

A great amount for time and effort s are required to verify the function
and quality
DevicesGPS

AccelerationSpeed

・・・

様々なセンサ情報を解析して、最適なHMIで表示Gyro

Devices

Censors

Telecommunication
DRAM
module

HDD

LSI

・・・

CPU

OS（ITRON）・

LCD

【PND】

Application
Map

Positioning

Prediction

HMI

TV

Game

様々なセンサ・通信情報を基に、複雑な機能擦り合わ
せでアプリを提供

GPS

LSI

LCD

DRAM

FM

CPU

・・・

Open oriented OS

Application
Map

Positioning

HMI

＠Copyright Lead Innovation Center, Inc. All rights reserved

The strength convert to the weakness in PC

Japanese PC manufacturers put too much resources on specific design and functions.

Strength so far• Be familiar with cutting edge functions needsfrom Japanese customers• Active and passive components mounttechnology and make it smaller• Design engineer division has the authority tolead the advanced function to much moreprogress• Advanced SCM which can rapidly react thecustomers’ needs changes• Sales root for big home appliance stores

Change to weakness• A lot of engineers tend to put the priority the highfunction to meet the actual customers needs
Market • Owing to too specific functions and the system, it was
Change quite difficult to adopt interchangeable components anddevelop the integrated product with mobile• Put their resource into the unique functions and needs
too much, as a result, spend 30% of the entire cost on
the high advanced products which account for 10% of
the sales amount• Too much dependency on the functions that the home
appliance stores requested

＠Copyright Lead Innovation Center, Inc. All rights reservedCompact size and lightweight PC shrink spiral

In a compact and lightweight PC similar to netbook, Japanese PC manufactures position the product as theexpensive category by themselves（Sales price: yen）
A modelin 2005

Set nearly 200,000
yen due toadoption thespecific hardwareand components

200,000
A firstmodel
in 1996

100,000

Compact size andlightweight type PC wasin this high end zone until
netbook was released

PC manufacturesby themselves
recognized thecompact PC as
the high end
product（Screen size）
6 inchLow sales target
owing to nearly
200,000 yen

Most customers
for the compact
PC are geeks andearly adopters
who can be
acceptable atexpensive

7inch
＠Copyright Lead Innovation Center, Inc. All rights reserved

The difference between Japanese PC innovators and DI manufacturer

Japanese PC
manufacturers’
product structure
and business
model

Target at replacement of existingcustomers

Target at Nonconsumers such andChildren and their mothers

Unique chipsets and components In
accordance with OS and CPU

Common or previous OS and CPU,
7 inch LCD which can be used for
car navigation

Smaller size and customized
function by introduction specificcomponents through mounttechnology

Shorten interval model change andtoo wide range of the products inorder to stay the original price(Scope of Economy)

Asustek-DI

Totally Different manufacturer’
product structure
and business
model

Based on Referential design,common components layout andunique mount made the most ofaccumulated ODM technologies

Set the product price which can becompared with mobile phone, low
profit and a large number of sales
amount target (Scale of Economy)

＠Copyright Lead Innovation Center, Inc. All rights reserved

Essential reason for Continuous market share drop
【Sign for market change】

A part of DI manufacturers’ reaction
Acquire a great deal of fund

Purchase and FIT
subsidy
Get to transfer the
manufacturing knowhow to a machinery【So far Japanese PV manufacturers
strength】

Specific manufacturing line andmachinery by themselves

Flexible and unique design and avariety of PVs which can meetcomplex house design needs inJapan

Procure a large amount of Si-material in long term contract before
demanding it
Introduction so much manufacturing machinery including turn key type

A wide range of sales roots which can sell the manufacturing products

Factors for difficulties of the Si-material procurement
Information shortage on material price predict and avoided a procurement
risk at costly Si-material
Didn’t initiate commercial condition changes such as from ordinary deal tolarge volume and long term with Si-material suppliers

＠Copyright Lead Innovation Center, Inc. All rights reserved

Solutions against the Innovator’s Dilemma

＠Copyright Lead Innovation Center, Inc. All rights reserved

Actual reason for Continuous market share drop
Scope of
Economy【Early and Late Majority user
ratio of Sales amount】
Transaction Cost
Reduction Strategy

80％

50％

Removal the barriers sothat the majorities canaccess the product easily.

Scale of Economy
Global Common
Product Development
Strategy

Genuine Commoditization

Integration separated
division and too wide
range of products

Commoditizationby themselves

DI happens【Market Lifecycle】

0％
LaunchFirst level off

GrowthWhich division
should lead acompany

Planning div.

Target user

Geek and
Early adopter

Early Majority

Main profitablesourceProduct

Product

Product featureSpecific
Function

A variety of products
and introduction somany functions to a
product

Design div. andmanufacturing
technique div.

Second level off

Second Growth

Procurement div.

Business Development div.

Late Majority

Nonconsumer and become
unused customer

Product and coretechnology transfer

Multi-profitable source including
services, but mainly productConcentration on themost popular function

Take in other functions fromexternal products or services

＠Copyright Lead Innovation Center, Inc. All rights reserved

The Balance of Total Optimization and Specific Optimization

Too specific optimization examples• Too specific design rules and quality standards• Scale of economy know-how lost

• Too unique functions• Lack of crossover or integrated new products• Each procurement from a lot of suppliers• Diffusion of the product brand image• Too specific manufacturing line process• Too customized development IT systems, tooland development process
Most manufactures try to introduce the following structures into their companies
USA

EU

China

Japan

Business
Model
Develop/
Sales
Manufacturing
Process
Process

Business
Model
Develop/
Sales
Manufacturing
Process
Process

Business
Model
Develop/
Sales
Manufacturing
Process
Process

Business
Model
Develop/
Sales
Manufacturing
Process
Process

Interchangeable hardware
Platform for Software
Integrated Procurements of whole the company including the affiliate
Integrated SCM

However in reality, there
are left a lot of thespecific structures,process and productfunctions.

＠Copyright Lead Innovation Center, Inc. All rights reserved

When Transaction Cost Reduction Strategy should implement in lifecycle?

【Limit the competition to 】

Function Value

Σ Value for Consumer＝

Affordable

User Friendly

Σ Transaction Cost

Restraining Factors
in Development
and Manufacturing

Restraining Factors
in Sales aspect

Restraining Factors
In Product Purchase【Dare to promote the competition】

＠Copyright Lead Innovation Center, Inc. All rights reserved

Transaction Cost Reduction Strategy contents

Development

Manufacturing

Sales

購入検討

Enterprise ProcessCoretechnolog
y license
offer

Referential
design andAPIdisclosure,developme
nt tool offer

Initial cost
reduction

Portable size
can be usedanywhere

Easy to manufacture
Adoption ofinterchangeable
components,
Modularity

廃棄Σ Affordable and User Friendly

Easy to develop

Adoptioncommondesign

利用

Consumer ProcessΣ Beyond too specificStandard
withothersproduct
canPurchase

Transfer the manufacturingknow-how to a lot ofmachinery which industrial
machinery firms provide

Too wide
range of thenumber of
the productEasy tounderstandthe usage
merit

Operability
anyone canuse at easeHigh quality
and reliability

Synergy with
thecomplement
ary services

Bandwagon
effect withwhole
society andsystem

The most important is to implement all of the activities,
not to do a couple of trials.

＠Copyright Lead Innovation Center, Inc. All rights reservedDisruptive Innovation Occurrence Risk Portfolio【R&D expenditure ratio related to current
business division to whole R&D expenditure】（High）

C：Potential DI risk type

A: The most risky type

D：Risk hedge type

B：Capable of reaction
against DI risk

70％

【Operating profit margin incommoditization products bythemselves to whole enterprise OPM】

（Low）
（Low）

70％

（High）

If positioned in “A”, required to change to B, and finally C.

＠Copyright Lead Innovation Center, Inc. All rights reservedDisruptive Innovation Occurrence Risk Portfolio【Mainstream R&D scheme by 2007】
Entrust time-consuming activities such as functions verifications and programming on embedded software
to oversea R&D division.

【Mainstream R&D scheme since 2008】
Entrust not only the above activities but also development on a part of basic design and detail design
software. Besides
And then, “Reverse Innovation” became trend in some innovators.

【Current and future Mainstream R&D scheme- Which division is advantage?】
Not In term of cost reduction and beyond RI, regardless the location of R&D, Internal Competition
between oversea R&D div. and domestic R&D div. is required to deal with rapid environmental
changes. But the crossover is taken into consideration.

＠Copyright Lead Innovation Center, Inc. All rights reserved