In this chapter we find out that some companies fail to organizational structure, the way its groups of people learn to work together. The organizational group may have been successful the first time around in developing the product but it may not be able to design new products. This is due to the technological change and the company not having knowledge or experience in the new technology, and unable to update their current product without the organizational group that has the technological capabilities. In the book Architectural Innovation: The Reconfiguration of Existing Systems and the Failure of Established firms, Clark found that “firms failed when a technological change destroyed the value of competencies previously cultivated and succeeded when new technologies enhanced them.” Established firms would have a hard time succeeding unless the company created organizationally independent groups to develop the products. In order to develop competitive products established firms need to rely on independent groups. These independent groups would have more experience and expertise in the technology.
Value Network is another major factor for success or failure of companies, they strongly limit and define what companies and should and should not do in order to succeed. Value Network is defined as “the context within which a firm identifies and responds to customers’ needs, solves problems, procures input, react to competitors, and strives for profit.” For established firms the value network past has created the perception to expect rewards through allocating all their resources to sustaining innovations rather than disruptive innovations, which can lead to the downfall of their business. Each value network has a physical and cost structure. The physical being companies that develop products to be sold to higher companies to make their products with. The cost value is at what cost you can get these products for and how much overhead cost needs to be covered, this cost value will determine if the product will be profitable.
Christensen says entrant firms have the attacker’s advantage over established firms, because they are new product architectures that disrupt the technological path for established firms. In order for established firms to be able to lead they need to enter the value network that they create value in. Richard Tedlow’s book New and Improved: A History of Mass Marketing in America, he refers to supermarkets and discount retailing as being the disruptive technology and says “The most formidable barrier the established firms faced is that they did not want to do this.” This is showing that established firms versus entrant firms may be based on the established firm’s lack of flexibility to change strategies and cost structure rather than technology. Entrant firms not only had a new technology to add to the existing established firms, but also had advantages in cost structure with lower gross margins. Even if established firms were able to introduce the product with the new technology they were still unable to do so without losing the sales of older products to existing customers.
Christensen, Clayton, The Innovator’s Dilemma (Boston: Harvard Business School Press, 1997).
Rebecca M. Henderson and Kim B. Clark, “Architectural Innovation: The Reconfiguration of Existing Systems and the Failure of Established Firms” Administrative Science Quarterly (35), 1990, 9-30.
Richard Tedlow, New and Improved: A History of Mass Marketing in America (Boston: Harvard Business School Press, 1994).