ne of the most consistent patterns in business is the failure of leading compa- nies to stay at the top of their industries when technologies or markets change.

Goodyear and Firestone entered the radial-tire mar- ket quite late. Xerox let Canon create the small- copier market. Bucyrus-Erie allowed Caterpillar and Deere to take over the mechanical excavator market. Sears gave way to Wal-Mart.

The pattern of failure has heen especially strik- ing in the computer industry. IBM dominated the mainframe market but missed by years the emer- gence of minicomputers, which were technologi- cally much simpler than mainframes. Digital Equipment dominated the minicomputer market with innovations like its VAX architecture but missed the personal-computer market almost com- pletely. Apple Computer led the world of personal computing and established the standard for user- friendly computing but lagged five years behind the leaders in bringing its portable computer to market.

Why is it that companies like these invest aggres- sively-and successfuUy-in the technologies neces- sary to retain their current customers but then fail

DRAWING BY CHRISTOPHER BING

to make certain other technological investments that customers of the future will demand? Un- doubtedly, bureaucracy, arrogance, tired executive blood, poor planning, and short-term investment horizons have all played a role. But a more funda- mental reason lies at the heart of the paradox: lead- ing companies succumb to one of the most popular, and valuable, management dogmas. They stay close to their customers.

Although most managers like to think they are in control, customers wield extraordinary power in di- recting a company's investments. Before managers decide to launch a technology, develop a product, build a plant, or establish new channels of distribu- tion, they must look to their customers first: Do their customers want it? How big will the market be? Will the investment be profitable? The more as- tutely managers ask and answer these questions,

foseph L. Bower is the Donald Kirk David Professor of Business Administration at the Harvard Business School in Boston, Massachusetts. Clayton M. Chris- tensen, an assistant professor at the Harvard Business School specializes in managing the commercialization of advanced technology.

DISRUPTIVE TECHNOLOGIES

the more completely their investments will be aligned with the needs of their customers.

This is the way a well-managed company should operate. Right? But what happens when customers reject a new technology, product concept, or way of doing business because it does not address their needs as effectively as a company's current ap- proach? The large photocopying centers that repre- sented the core of Xerox's customer base at first had no use for small, slow tahletop copiers. The excava- tion contractors that had relied on Bucyrus-Erie's big-bucket steam- and diesel-powered cahle shovels didn't want hydraulic excavators because initially they were small and weak, IBM's large commercial, government, and industrial customers saw no im- mediate use for minicomputers. In each instance, companies listened to their customers, gave them the product performance they were looking for, and, in the end, were hurt by the very technologies their customers led them to ignore.

We have seen this pattern repeatedly in an on- going study of leading companies in a variety of in- dustries that have confronted technological change. The research shows that most well-managed, estab- lished companies are consistently ahead of their industries in developing and commercializing new technologies - from incremental improvements to radically new approaches - as long as those tech-

Managers must beware of ignoring new technologies that cl^n't initially meet the needs of their mainstream customers.

nologies address the next-generation performance needs of their customers. However, these same companies are rarely in the forefront of commer- cializing new technologies that don't initially meet the needs of mainstream customers and appeal only to small or emerging markets.

Using the rational, analytical investment pro- cesses that most well-managed companies have de- veloped, it is nearly impossible to build a cogent case for diverting resources from known customer needs in established markets to markets and cus- tomers that seem insignificant or do not yet exist. After all, meeting the needs of established cus- tomers and fending off competitors takes all the re- sources a company has, and then some. In well- managed companies, the processes used to identify

customers' needs, forecast technological trends, assess profitability, allocate resources across com- peting proposals for investment, and take new products to market are focused - for all the right reasons-on current customers and markets. These processes are designed to weed out proposed prod- ucts and technologies that do not address cus- tomers' needs.

In fact, the processes and incentives that compa- nies use to keep focused on their main customers work so well that they blind those companies to important new technologies in emerging markets. Many companies have learned the hard way the perils of ignoring new technologies that do not ini- tially meet the needs of mainstream customers. For example, although personal cotnputers did not meet the requirements of mainstream minicom- puter users in the early 1980s, the computing power of the desktop machines improved at a rnuch faster rate than minicomputer users' demands for corn- puting power did. As a result, personal computers caught up with the computing needs of many of the customers of Wang, Prime, Nixdorf, Data General, and Digital Equipment, Today they are perfor- mance-competitive with minicomputers in many applications. For the minicomputer makers, keep- ing close to mainstream customers and ignoring what were initially low-performance desktop tech-

nologies used by seemingly insignifi- cant customers in emerging markets was a rational decision-hut one that proved disastrous.

The technological changes that damage established companies are usually not radically new or difficult from a technological point of view. They do, however, have two impor- tant characteristics: First, they typi- cally present a different package of

performance attributes - ones that, at least at the outset, are not valued hy existing customers. Sec- ond, the performance attributes that existing cus- tomers do value improve at such a rapid rate that the new technology can later invade those estab- lished markets. Only at this point will mainstream customers want the technology. Unfortunately for the established suppliers, by then it is often too late: the pioneers of the new technology dominate the market.

It follows, then, that senior executives must first be ahle to spot the technologies that seern to fall in- to this category. Next, to commercialize and devel- op the new technologies, managers must protect them from the processes and incentives that are geared to serving established customers. And the

44 HARVARD BUSINESS REVIEW January-February 1995

only way to protect them is to create organizations that are completely independent from the main- stream business.

o industry demonstrates the danger of staying too close to customers more dramatically than the hard-disk-drive industry. Between 1976 and 1992, disk-

drive performance improved at a stunning rate: the physical size of a 100-megabyte (MB) system shrank from 5,400 to 8 cubic inches, and the cost per MB fell from $560 to $5. Technological change, of course, drove these breathtaking achievements. About half of the improvement came from a host of radical advances that v̂ êre critical to continued improvements in disk-drive performance; the other half came from incremental advances.

The pattern in the disk-drive industry has been repeated in many other industries: the leading, es- tablished companies have consistently led the in- dustry in developing and adopting new technolo- gies that their customers demanded - even when those technologies required completely different technological competencies and manufacturing ca- pabilities from the ones the companies had. In spite of this aggressive technological posture, no single disk-drive manufacturer has been able to dominate the industry for more than a few years. A series of companies have entered the business and risen to prominence, only to be toppled by newcomers who pursued technologies that at first did not meet the needs of mainstream customers. As a result, not one of the independent disk-drive companies that existed in 1976 survives today.

To explain the differences in the impact of cer- tain kinds of technological innovations on a given industry, the concept of performance trajectories - the rate at which the performance of a product has improved, and is expected to improve, over time - can be helpful. Almost every industry has a critical performance trajectory. In mechanical excavators, the critical trajectory is the annual improvement in cubic yards of earth moved per minute. In photo- copiers, an important performance trajectory is im- provement in nurnber of copies per minute. In disk drives, one crucial measure of performance is stor- age capacity, which has advanced 50% each year on average for a given size of drive.

Different types of technological innovations af- fect performance trajectories in different ways. On the one hand, sustaining technologies tend to maintain a rate of improvement; that is, they give customers something more or better in the at- tributes they already value. For example, thin-film components in disk drives, which replaced conven-

HARVARD BUSINESS REVIEW January-February 1995

tional ferrite heads and oxide disks between 1982 and 1990, enabled information to be recorded more densely on disks. Engineers had been pushing the limits of the performance they could wring from ferrite heads and oxide disks, but the drives em- ploying these technologies seemed to have reached the natural limits of an S curve. At that point, new thin-film technologies emerged that restored - or sustained-the historical trajectory of performance improvement.

On the other hand, disruptive technologies intro- duce a very different package of attributes from the one mainstream customers historically value, and they often perform far worse along one or two di- mensions that are particularly important to those customers. As a rule, mainstream customers are unwilling to use a disruptive product in applica- tions they know and understand. At first, then, dis- ruptive technologies tend to be used and valued on- ly in new markets or new applications; in fact, they generally make possible the emergence of new mar- kets. For example, Sony's early transistor radios sacrificed sound fidelity but created a market for portable radios by offering a new and different package of attributes-small size, light weight, and portability.

In the history of the hard-disk-drive industry, the leaders stumbled at each point of disruptive tech- nological change: when the diatneter of disk drives shrank from the original 14 inches to 8 inches, then to 5.25 inches, and finally to 3.5 inches. Each of these new architecturesjnitially offered the market substantially less storage capacity than the typical user in the established market required. For exam- ple, the 8-inch drive offered 20 MB when it was in- troduced, while the primary market for disk drives at that time-mainframes-required 200 MB on av- erage. Not surprisingly, the leading computer man- ufacturers rejected the 8-inch architecture at first. As a result, their suppliers, whose mainstream products consisted of 14-inch drives with more than 200 MB of capacity, did not pursue the disrup- tive products aggressively. The pattern was repeat- ed when the 5.25-inch and 3.5-inch drives emerged: established computer makers rejected the drives as inadequate, and, in turn, their disk-drive suppliers ignored them as well.

But while they offered less storage capacity, the disruptive architectures created other important at- tributes - internal power supplies and smaller size (8-inch drives); still smaller size and low-cost step- per motors (5.25-inch drives); and ruggedness, light weight, and low-power consumption (3.5-inch drives). From the late 1970s to the mid-1980s, the avail- ability of the three drives made possible the devel-

How Disk-Drive Performance Met Market Needs

3000

2000

1000

700

600

500

400

300

200

100

,c i

s. u

If,

O X

70 60 50

Point at which hard-disk drives invade minicomputer market

Point at which hard-disk drives invade portable- computer market

Point at which hard-disk drives invade personal- computer market

'74 '75 '76 '77 '78 '79 '80 '81 '82 '83

Year

'84 '85 '86 '87 '89 '90

opment of new markets for minicomputers, desk- top PCs, and portahle computers, respectively.

Although the smaller drives represented disrup- tive technological change, each was technological- ly straightforward. In fact, there were engineers at many leading companies who championed the new technologies and huilt working prototypes with hootlegged resources hefore management gave

a formal go-ahead. Still, the leading companies could not move the products through their organi- zations and into the market in a timely way. Each time a disruptive technology emerged, between one-half and two-thirds of the estahlished manu- facturers failed to introduce models employing the new architecture - in stark contrast to their timely launches of critical sustaining technologies. Those

46 HARVARD BUSINESS REVIEW January-February 199S

DISRUPTIVE TECHNOLOGIES

companies that finally did launch new models typi- cally lagged behind entrant companies by two years-eons in an industry whose products' life cy- cles are often two years. Three waves of entrant companies led these revolutions; they first captured the new markets and then dethroned the leading companies in the mainstream markets.

How could technologies that were initially infe- rior and useful only to new markets eventually

None of the established leaders in the disk-drive industry learned from the experiences of those that fell before them.

threaten leading companies in established mar- kets? Once the disruptive architectures became es- tablished in their new markets, sustaining innova- tions raised each architecture's performance along steep trajectories - so steep that the performance available from each architecture soon satisfied the needs of customers in the established markets. Eor example, the 5.25-inch drive, whose initial 5 MB of capacity in 1980 was only a fraction of the capacity that the minicomputer market needed, became ful- ly performance-competitive in the minicomputer market by 1986 and in the mainframe market by 1991. (See the graph "How Disk-Drive Performance Met Market Needs.")

/- A company's revenue and cost structures play a critical role in the way it evaluates proposed technological innovations. Generally, disruptive technologies look financially unattractive to estab- lished companies. The potential revenues from the discernible markets are small, and it is often difficult to project how big the markets for the technology will be over the long term. As a result, managers typically conclude that the technology can- not make a meaningful contribution to corporate growth and, therefore, that it is not worth the man- agement effort required to develop it. In addition, established companies have often installed higher cost structures to serve sustaining technologies than those required by disruptive technologies. As a result, managers typically see themselves as hav- ing two choices when deciding whether to pursue disruptive technologies. One is to go downmarket and accept the lower profit margins of the emerging markets that the disruptive technologies will ini- tially serve. The other is to go upmarket with sus-

taining technologies and enter market segments whose profit margins are alluringly high. (Eor ex- ample, the margins of IBM's mainframes are still higher than those of PGs). Any rational resource- allocation process in companies serving established markets will choose going upmarket rather than going down.

Managers of companies that have championed disruptive technologies in emerging markets look

at the world quite differently. With- out the high cost structures of their established counterparts, these com- panies find the emerging markets ap- pealing. Once the companies have secured a foothold in the markets and improved the performance of their technologies, the established markets above them, served by high-cost suppliers, look appetizing. When they do attack, the entrant

companies find the established players to he easy and unprepared opponents because the opponents have been looking upmarket themselves, discount- ing the threat from below.

It is tempting to stop at this point and conclude that a valuable lesson has been learned: managers can avoid missing the next wave by paying careful attention to potentially disruptive technologies that do not meet current customers' needs. But rec- ognizing the pattern and figuring out how to break it are two different things. Although entrants in- vaded established markets with new technologies three times in succession, none of the established leaders in the disk-drive industry seemed to learn from the experiences of those that fell before them. Management myopia or lack of foresight cannot ex- plain these failures. The problem is that managers keep doing what has worked in the past: serving the rapidly growing needs of their current customers. The processes that successful, well-managed com- panies have developed to allocate resources among proposed investments are incapable of funneling resources into programs that current customers ex- plicitly don't want and whose profit margins seem unattractive.

Managing the development of new technology is tightly linked to a company's investment pro- cesses. Most strategic proposals-to add capacity or to develop new products or processes - take shape at the lower levels of organizations in engineering groups or project teams. Gompanies then use ana- lytical planning and budgeting systems to select

.. from among the candidates competing for funds. Proposals to create new businesses in emerging markets are particularly challenging to assess be-

HARVARD BUSINESS REVIEW January-February 1995 47

DISRUPTIVE TECHNOLOGIES

cause they depend on notoriously unreliable esti- mates of market size. Because managers are evalu- ated on their ability to place the right bets, it is not surprising that in well-managed companies, mid- and top-level managers back projects in which the market seems assured. By staying close to lead cus- tomers, as they have been trained to do, managers focus resources on fulfilling the requirements of those reliable customers that can be served prof- itably. Risk is reduced - and careers are safeguard- ed-by giving known customers what they want.

eagate Technology's experience illus- trates the consequences of relying on such resource-allocation processes to evaluate disruptive technologies. By al-

most any measure, Seagate, based in Scotts Valley, California, was one of the most successful and ag- gressively managed companies in the history of the microelectronics industry: from its inception in 1980, Seagate's revenues had grown to more than $700 million by 1986. It had pioneered 5.25-inch hard-disk drives and was the main supplier of them to IBM and IBM-compatible personal-computer manufacturers. The company was the leading man- ufacturer of 5.25-inch drives at the time the disrup- tive 3.5-inch drives emerged in the mid-1980s.

Engineers at Seagate were the second in the in- dustry to develop working prototypes of 3.5-inch

Seagate paid the price for allowing start-ups to lead the way into emerging markets.

drives. By early 1985, they had made more than 80 such models with a low level of company funding. The engineers forwarded the new models to key marketing executives, and the trade press reported that Seagate was actively developing 3.5-inch drives. But Seagate's principal customers - IBM and other manufacturers of AT-class personal computers - showed no interest in the new drives. They wanted to incorporate 40-MB and 60-MB drives in their next-generation models, and Sea- gate's early 3.5-inch prototypes packed only 10 MB. In response, Seagate's marketing executives low- ered their sales forecasts for the new disk drives.

Manufacturing and financial executives at the company pointed out another drawback to the 3.5- inch drives. According to their analysis, the new drives would never be competitive with the 5.25-

inch architecture on a cost-per-megabyte basis-an important metric that Seagate's customers used to evaluate disk drives. Given Seagate's cost structure, margins on the higher-capacity 5.25-inch models therefore promised to be much higher than those on the smaller products.

Senior managers quite rationally decided that the 3.5-inch drive would not provide the sales volume and profit margins that Seagate needed from a new product. A former Seagate marketing executive re- called, "We needed a new model that could become the next ST412 [a 5.25-inch drive generating more than $300 million in annual sales, which was near- ing the end of its life cycle]. At the time, the entire market for 3.5-inch drives was less than $50 mil- lion. The 3.5-inch drive just didn't fit the bill-for sales or profits."

The shelving of the 3.5-inch drive was not a sig- nal that Seagate was complacent about innovation. Seagate subsequently introduced new models of 5.25-inch drives at an accelerated rate and, in so do- ing, introduced an impressive array of sustaining technological improvements, even though intro- ducing them rendered a significant portion of its manufacturing capacity obsolete.

While Seagate's attention was glued to the per- sonal-computer market, former employees of Sea- gate and other 5.25-inch drive makers, who had become frustrated by their employers' delays in

launching 3.5-inch drives, founded a new company, Conner Peripherals. Conner focused on selling its 3.5- inch drives to companies in emerg- ing markets for portable computers and small-footprint desktop prod- ucts (PCs that take up a smaller amount of space on a desk). Conner's primary customer was Compaq

Computer, a customer that Seagate had never served. Seagate's own prosperity, coupled with Conner's focus on customers who valued different disk-drive attributes (ruggedness, physical volume, and weight), minimized the threat Seagate saw in Conner and its 3.5-inch drives.

From its beachhead in the emerging market for portable computers, however, Conner improved the storage capacity of its drives by 50% per year. By the end of 1987, 3.5-inch drives packed the capacity demanded in the mainstream personal- computer market. At this point, Seagate executives took their company's 3.5-inch drive off the shelf, introducing it to the market as a defensive response to the attack of entrant companies like Conner and Quantum Corporation, the other pioneer of 3.5- inch drives. But it was too late.

48 HARVARD BUSINESS REVIEW January-February 1995

O) u c ö

By then, Seagate faced strong cotnpetition. For a while, the company was able to defend its existing market by selling 3.5- inch drives to its established cus- tomer base - manufacturers and resellers of full-size personal com- puters. In fact, a large proportion of its 3.5-inch products continued to be shipped in frames that en- abled its customers to mount the drives in cotnputers designed to accommodate 5.25-inch drives. But, in the end, Seagate could only struggle to become a second-tier supplier in the new portable-com- puter market.

In contrast, Conner and Quan- tum built a dominant position in the new portable-computer mar- ket and then used their scale and experience base in designing and manufacturing 3,5-inch products to drive Seagate from the personal-computer market. In their 1994 fiscal years, the combined revenues of Conner and Quantum exceeded $5 billion,

Seagate's poor timing typifies the responses of many established companies to the emergence of disruptive technologies, Seagate was willing to enter the market for 3,5-inch drives only when it had become large enough to satisfy the company's financial requirements-that is, only when existing customers wanted the new technology, Seagate has survived through its savvy acquisition of Control Data Corporation's disk-drive business in 1990, With CDC's technology base and Seagate's volume- manufacturing expertise, the company has become a powerful player in the business of supplying large- capacity drives for high-end computers. Nonethe- less, Seagate has been reduced to a shadow of its for- mer self in the personal-computer market.

should come as no surprise that few j companies, when confronted with dis- iruptive technologies, have been able to 3 overcome the handicaps of size or suc-

cess. But it can be done. There is a method to spot- ting and cultivating disruptive technologies.

Determine whether the technology is disruptive or sustaining. The first step is to decide which of the myriad technologies on the horizon are dis- ruptive and, of those, which are real threats. Most companies have well-conceived processes for iden- tifying and tracking the progress of potentially sus- taining technologies, because they are important to

HARVARD BUSINESS REVIEW January-February 1995

How to Assess Disruptive Technologies

Performance improvement required by mainstream market

Expected trajectory of performance improvement

Current performance of potentially disruptive technology

Time

serving and protecting current customers. But few have systematic processes in place to identify and track potentially disruptive technologies,

Qne approach to identifying disruptive technolo- gies is to examine internal disagreements over the development of new products or technologies. Who supports the project and who doesn't? Marketing and financial managers, because of their managerial and financial incentives, will rarely support a dis- ruptive technology, Qn the other hand, technical personnel with outstanding track records will often persist in arguing that a new market for the tech- nology will emerge - even in the face of opposition from key customers and marketing and financial staff. Disagreement between the two groups often signals a disruptive technology that top-level man- agers should explore.

Define the strategic significance of the disruptive technology. The next step is to ask the right people the right questions about the strategic importance of the disruptive technology. Disruptive technolo- gies tend to stall early in strategic reviews because managers either ask the wrong questions or ask the wrong people the right questions. For example, es- tablished companies have regular procedures for asking mainstream customers - especially the im- portant accounts where new ideas are actually tested-to assess the value of innovative products. Generally, these customers are selected because they are the ones striving the hardest to stay ahead of their competitors in pushing the performance of their products. Hence these custotners are most likely to demand the highest performance from

DISRUPTIVE TECHNOLOGIES

their suppliers. For this reason, lead customers are reliably accurate when it comes to assessing the po- tential of sustaining technologies, hut they are reli- ably inaccurate when it comes to assessing the po- tential of disruptive technologies. They are the wrong people to ask.

A simple graph plotting product performance as it is defined in mainstream markets on the verti- cal axis and titne on the horizontal axis can help managers identify both the right questions and the right people to ask. First, draw a line depicting the level of performance and the trajectory of performance improvement that customers have historically enjoyed and are likely to expect in the future. Then locate the estimated initial performance level of the new technology. If the tech- nology is disruptive, the point will lie far below the performance demanded by current customers. (See the graph "How to Assess Disrup- tive Technologies.") ^ What is the likely slope of performance improve- ment of the disruptive technology compared with the slope of performance improvement demanded by existing markets? If knowledgeable technolo- gists believe the new technology might progress faster than the market's demand for performance improvement, then that technology, which does not meet customers' needs today, may very well address them tomorrow. The new technology, there- fore, is strategically critical.

Instead of taking this approach, most managers ask the wrong questions. They compare the antici- pated rate of performance improvement of the new technology with that of the established technology. If the new technology has the potential to surpass the established one, the reasoning goes, they should get busy developing it.

Pretty simple. But this sort of comparison, while valid for sustaining technologies, misses the cen- tral strategic issue in assessing potentially disrup- tive technologies. Many of the disruptive technolo- gies we studied never surpassed the capability of the old technology. It is the trajectory of the disrup- tive technology compared with that of the market that is significant. For example, the reason the mainframe-computer market is shrinking is not that personal computers outperform mainframes but because personal computers networked with a file server meet the computing and data-storage needs of many organizations effectively. Main- frame-computer makers are reeling not because the performance of personal-computing technology surpassed the performance of mainframe technolo-

gy but because it intersected with the performance demanded by the established market.

Consider the graph again. If technologists believe that the new technology will progress at the same rate as the market's demand for performance im- provement, the disruptive technology may be slow- er to invade established markets. Recall that Sea- gate had targeted personal computing, where demand for hard-disk capacity per computer was growing at 30% per year. Because the capacity of

Small, hungry organizations are good at agilely changing

product and market strategies.

3.5-inch drives improved at a much faster rate, lead- ing 3.5-inch-drive makers were able to force Seagate out of the market. However, two other 5.25-inch- drive rnakers, Maxtor and Micropolis, had targeted the engineering-workstation market, in which de- mand for hard-disk capacity was insatiable. In that market, the trajectory of capacity demanded was essentially parallel to the trajectory of capacity im- provement that technologists could supply in the 3.5-inch architecture. As a result, entering the 3.5- inch-drive business was strategically less critical for those companies than it was for Seagate.

Locate the initial market for the disruptive tech- nology. Once managers have determined that a new technology is disruptive and strategically critical, the next step is to locate the initial markets for that technology. Market research, the tool that man- agers have traditionally relied on, is seldom helpful: at the point a company needs to make a strate- gic commitment to a disruptive technology, no concrete market exists. When Edwin Land asked Polaroid's market researchers to assess the poten- tial sales of his new camera, they concluded that Polaroid would sell a mere 100,000 cameras over the product's lifetime; few people they interviewed could imagine the uses of instant photography.

Because disruptive technologies frequently sig- nal the emergence of new markets or market seg- ments, managers must create information about such markets - who the customers will be, which dimensions of product performance will matter most to which customers, what the right price points will be. Managers can create this kind of in- formation only by experimenting rapidly, iterative- ly, and inexpensively with both the product and the market.

SO HARVARD BUSINESS REVIEW January-February 1995

For established companies to undertake such ex- periments is very difficult. The resource-allocation processes that are critical to profitability and com- petitiveness will not - and should not - direct re- sources to markets in which sales will be relatively small. How, then, can an established company probe a market for a disruptive technology? Let start-ups - either ones the company funds or oth- ers with no connection to the company - conduct the experiments. Small, hungry organizations are good at placing economical bets, rolling with the punches, and agilely changing product and market strategies in response to feedback from initial for- ays into the market.

Consider Apple Computer in its start-up days. The company's original product, the Apple I, was a flop when it was launched in 1977. But Apple had not placed a huge bet on the product and had gotten at least something into the hands of early users quickly. The company learned a lot from the Ap- ple I about the new technology and about what cus- tomers wanted and did not want. Just as important, a group of customers learned ahout what they did and did not want from personal computers. Armed with this information, Apple launched the Apple II quite successfully.

Many companies could have learned the satne valuable lessons by watching Apple closely. In fact, some companies pursue an explicit strategy of he-

Every eompany that has tried to manage mainstream and disruptive businesses within a single organization failed.

ing second to invent - allowing small pioneers to lead the way into uncharted market territory. For instance, IBM let Apple, Commodore, and Tandy define the personal computer. It then aggressively entered the market and built a considerable person- al-computer business.

But IBM's relative success in entering a new mar- ket late is the exception, not the rule. All too often, successful companies hold the performance of small-market pioneers to the financial standards they apply to their own performance. In an attempt to ensure that they are using their resources well, companies explicitly or implicitly set relatively high thresholds for the size of the markets they should consider entering. This approach sentences

HARVARD BUSINESS REVIEW January.Fcbruary 1995

them to making late entries into markets already filled with powerful players.

For example, when the 3.5-inch drive emerged, Seagate needed a $300-million-a-year product to replace its mature flagship 5.25-inch model, the ST412, and the 3.5-inch market wasn't large enough. Over the next two years, when the trade press asked when Seagate would introduce its 3.5- inch drive, company executives consistently re- sponded that there was no market yet. There actu- ally was a market, and it was growing rapidly. The signals that Seagate was picking up about the mar- ket, influenced as they were by customers who didn't want 3.5-inch drives, were misleading. When Seagate finally introduced its 3.5-inch drive in 1987, more than $750 million in 3.5-inch drives had already been sold. Information about the market's size had been widely available throughout the in- dustry. But it wasn't compelling enough to shift the focus of Seagate's managers. They continued to look at the new market through the eyes of their current customers and in the context of their cur- rent financial structure.

The posture of today's leading disk-drive makers toward the newest disruptive technology, 1.8-inch drives, is eerily familiar. Each of the industry lead- ers has designed one or more models of the tiny drives, and the models are sitting on shelves. Their capacity is too low to he used in notebook comput-

ers, and no one yet knows where the initial market for 1.8-inch drives will he. Fax machines, printers, and auto- mobile dashboard mapping systems are all candidates. "There just isn't a market," complained one industry executive. "We've got the product, and the sales force can take orders for it. But there are no orders because nobody needs it. It just sits there." This executive has not considered

the fact that his sales force has no incentive to sell the 1.8-inch drives instead of the higher-margin products it sells to higher-volume customers. And while the 1.8-inch drive is sitting on the shelf at his company and others, last year more than $50 mil- lion worth of 1.8-inch drives were sold, almost all by start-ups. This year, the market will be an esti- mated $150 million.

To avoid allowing small, pioneering companies to dominate new markets, executives must per- sonally monitor the available intelligence on the progress of pioneering companies through monthly meetings with technologists, academics, venture capitalists, and other nontraditional sources of in- formation. They cannot rely on the company's tra-

DISRUPTIVE TECHNOLOGIES

ditional channels for gauging markets because those channels were not designed for that purpose.

Place responsibility for building a disruptive- technology business in an independent organiza- tion. The strategy of forming small teams into skunk-works projects to isolate them from the sti- fling demands of mainstream organizations is wide- ly known but poorly understood. Eor example, iso- lating a team of engineers so that it can develop a radically new sustaining technology just because that technology is radically different is a fundamen- tal misapplication of the skunk-works approach. Managing out of context is also unnecessary in the unusual event that a disruptive tech- nology is more financially attractive than existing products. Gonsider In- tel's transition from dynamic ran- dom access memory (DRAM) chips to microprocessors. Intel's early mi- croprocessor business had a higher gross margin than that of its DRAM business; in other words, Intel's nor- mal resource-allocation process naturally provided the new business with the resources it needed.'

Greating a separate organization is necessary on- ly when the disruptive technology has a lower prof- it margin than the mainstream business and must serve the unique needs of a new set of customers. GDG, for example, successfully created a remote organization to commercialize its 5.25-inch drive. Through 1980, GDG was the dominant indepen- dent disk-drive supplier due to its expertise in mak- ing 14-inch drives for mainframe-computer makers. When the 8-inch drive emerged, GDG launched a late development effort, but its engineers were re- peatedly pulled off the project to solve problems for the more profitable, higher-priority 14-inch proj- ects targeted at the company's most important cus- tomers. As a result, GDG was three years late in launching its first 8-inch product and never cap- tured more than 5% of that market.

When the 5.25-inch generation arrived, GDG de- cided that it would face the new challenge more strategically. The company assigned a small group of engineers and marketers in Oklahoma Gity, Oklahoma, far from the mainstream organization's customers, the task of developing and commercial- izing a competitive 5.25-inch product. "We needed to launch it in an environment in which everybody got excited about a $50,000 order," one executive recalled. "In Minneapolis, you needed a $1 million order to turn anyone's head." GDG never regained

1. Robert A. Burgelman, "Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments," Administrative Science Quar- terly 39 11994], pp. 24-S6.

the 70% share it had once enjoyed in the market for mainframe disk drives, but its Oklahoma Gity op- eration secured a profitable 20% of the high-perfor- mance 5.25-inch market.

Had Apple created a similar organization to de- velop its Newton personal digital assistant (PDA), those who have pronounced it a flop might have deemed it a success. In launching the product, Ap- ple made the mistake of acting as if it were dealing with an established market. Apple managers went into the PDA project assuming that it had to make a significant contribution to corporate growth. Ac- cordingly, they researched customer desires ex-

In order that it may live, a corporation must be willing to

see business units die.

haustively and then bet huge sums launching the Newton. Had Apple made a more modest techno- logical and financial bet and entrusted the Newton to an organization the size that Apple itself was when it launched the Apple I, the outcome might have been different. The Newton might have been seen more broadly as a solid step forward in the quest to discover what customers really want. In fact, many more Newtons than Apple I models were sold within a year of their introduction.

Keep the disruptive organization independent. Established companies can only dominate emerg- ing markets by creating small organizations of the sort GDG created in Oklahoma Gity. But what should they do when the emerging market becomes large and established?

Most managers assume that once a spin-off has become commercially viable in a new market, it should be integrated into the mainstream organi- zation. They reason that the fixed costs associated with engineering, manufacturing, sales, and distri- bution activities can be shared across a broader group of customers and products.

This approach might work with sustaining tech- nologies; however, with disruptive technologies, folding the spin-off into the mainstream organiza- tion can be disastrous. When the independent and mainstream organizations are folded together in or- der to share resources, debilitating arguments in- evitably arise over which groups get wbat resources and whether or when to cannibalize established products. In the history of the disk-drive industry, every company that has tried to manage main-

52 HARVARD BUSINESS REVIEW January-February 1995

stream and disruptive businesses within a single or- ganization failed.

No matter the industry, a corporation consists of business units with finite life spans: the technolog- ical and market bases of any business will eventual- ly disappear. Disruptive technologies are part of that cycle. Companies that understand this process can create new businesses to replace the ones that must inevitably die. To do so, companies must give managers of disruptive innovation free rein to real- ize the technology's full potential-even if it means ultimately killing the mainstream business. For the corporation to live, it must be willing to see busi- ness units die. If tbe corporation doesn't kill them off itself, competitors will.

The key to prospering at points of disruptive change is not simply to take more risks, invest for

the long term, or fight bureaucracy. The key is to manage strategically important disruptive tech- nologies in an organizational context where small orders create energy, where fast low-cost forays into ill-defined markets are possible, and where over- head is low enough to permit profit even in emerg- ing markets.

Managers of established companies can master disruptive technologies with extraordinary suc- cess. But when they seek to develop and launch a disruptive technology that is rejected by important customers within the context of the mainstream business's financial demands, they fail - not be- cause they make the wrong decisions, but because they make the right decisions for circumstances that are about to become history. Ç Reprint 95103

THE. MIGHT OF THE I I

"Good evening, lady and gentleman. "

CARTOON BY H. MARTIN 53

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