From an article I wrote in 2006, here are some ways small software companies should rejoice in and respond to the Innovator’s Dilemma. Listed here are principle causes of company failure as identified by Christensen. In response to each one, I have identified how these pitfalls can be avoided, and indeed exploited, by small software companies.
“Issue 1. Companies Depend on Customers and Investors for Resources”.
Most companies listen to their biggest customers and develop their products along the lines of what those customers say they want. These companies find themselves unable to respond to disruptive technologies or to think of a future beyond the customers’ current self-expressed needs. Companies spend resources trying to please their current customers and loose sight of potential new markets and changes in what capabilities the market values and what capabilities are really leveraged vs. simply stated desires.
To break this dependency on customers and investors for company direction, Christensen recommends managers form small, autonomous, breakaway teams that are not constrained by what their mainstream customers want. Fortunately for small software companies, most of the time their organizational structure will directly support the small, autonomous team model.
“2. Small Markets Don’t Solve the Growth Needs of Large Companies”.
This principle is closely related to the first. Large companies will only take on projects and seek customers that provide large returns on their investments. This limits the potential target customer base for large companies. This practice is even further limiting to large companies because their investments are usually large.
Small software companies have an opportunity to build products and customers in markets in which large software companies will not participate.
“3. Markets that Don’t Exist Can Not be Analyzed”.
Besides competing in markets that larger companies will not enter, small software companies also have the opportunity to discover completely new markets that larger companies would never see. Small software companies can be much more effective at discovering new markets and taking advantage of their fast growth rate. This advantage is a result of the cost and time required in large companies to discover new markets and to move into new markets. Large companies have processes and tools used to analyze markets. They do not have as good of processes and tools to discover completely new markets. Even if a new market is discovered, large companies usually have too heavy an organizational structure to move quickly to enter that market.
Small software companies, answering only to themselves and usually making decisions among a group of three or less people, can decide to enter a market quickly and can execute on that entry quickly.
“4. An Organization’s Capabilities Define its Disabilities”.
A new, small, nimble software company is perfectly positioned to take advantage of this principle. These companies have an opportunity to create new capabilities. New, small software companies should ensure that their processes and values serve their target or goal and do not unnecessarily constrain them from leveraging existing capabilities. In other words, assess the target market. Then assess what capabilities are required in that market. Then, be aware that in deciding what capabilities to build you are also deciding which ones not to build. Small companies are at once determining their capabilities and disabilities.
”5. Technology Supply May Not Equal Market Demand.”
In the examples cited by Christensen, technology capabilities exceed what the market really wants. This leaves open a market demand for less capable technologies that is not met. Small software companies have a great opportunity here for two reasons. One – small software companies likely have the resources to create the less capable technology where they may not have the resources to create technology that exceeds demand. Two – small companies will not have the investment in time and capital sunk into the technology supply that a large company would have. New, small software companies can fill the need for simpler, less capable (and therefore more accessible and easy to implement) technologies.