The Innovator’s Dilemma

The Innovator’s Dilemma

Author
Clayton M Christensen
Year
2013
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Review

This book is a product management classic. A great framework for how disruptive technologies change market dynamics. It’s full of great insight for challengers and incumbents. The book is clearly well researched. The conclusions are both surprising and straight forward. A must for anyone trying to innovate and break into a market. Well worth the time.

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Key Takeaways

The 20% that gave me 80% of the value.

  • The ‘Innovators Dilemma’ following these two pieces of traditional business school advice will lead to your success and demise…
    • always listen to and respond to the needs of your best customers
    • focus investments on innovations that promise the highest returns
  • Disruptive technology is the cause behind one of the great engines of progress ‘creative destruction’
  • Often a companies management are getting praise and acclaim at the very time they are ignoring the arrival of their besiegers
  • Principles of good management then, are only situationally appropriate
    • Sometimes it’s a great idea to…. not listen to customers → develop lower-performance product → with lower margins → in a smaller market
  • Sustaining vs Disruptive Technologies
    • Sustaining Technologies improve performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.
      • Can be discontinuous, radical or incremental
    • Disruptive Technologies bring to market a different value proposition. Underperform established products in mainstreams markets, but have other features that fringe (and mostly new) customers value.
      • Typically products get cheaper, simpler, smaller and more convenient to use.
  • Trajectories of Market Need vs Technology Improvement
    • Technologies can progress faster than market demand.
    • Suppliers often overshoot their market. Giving customers more than they need or are willing to pay for.
    • Disruptive technologies may underperform relative to what users in the market demand
    • Needs of users increasing at a slower rate than the technological progress
  • Principles of Disruptive innovation:
    1. Companies depend on customers and investors for resources
    2. Small markets don’t solve the growth needs of large companies
    3. Markets that don’t exist can’t be analysed
    4. An organisations capabilities define it’s disabilities
    5. Technology supply may not equal market demand
      • pace of change of technological progress in products frequently exceeds the rate of performance improvement that mainstream customers demand or can absorb
      • traditional products eventually overshoot the mainstream needs of the market
      • products that underperform today (but based on disruptive technology) can become performance competitive tomorrow
      • Once both meet the needs of the customer, they evaluate the decision differently
        • The basis for product choice evolves …
        • Functionality → reliability → convenience → price
      • Companies move up market, over satisfy customers, higher prices and higher margins → this creates room for low margin, low price competition
      • Always measure how your customers actually are using your product!
  • How the innovators dilemma pans out…
    • Disruptive technologies are developed in established firms
    • Marketing speak to big customers who are unimpressed, they value different criteria
    • Company backs sustaining innovation (due to cannibalisation + margin + customers)
    • New companies form and find a new market for disruptive technology
    • Entrants move up market
    • Established firms react too late
  • It’s easier to move up market and down market
    • Rational managers struggle to justify entering small, poorly defined low-end markets that are less profitable
    • Companies setup sales, marketing, R&D and operations to match their market position.
    • It seems easier and less risky to move up market, than it does to cut costs (marketing, sales, R&D, operations) and move down market
  • As you move up market, you gradually acquire the same cost structures as the competition.
  • The easiest path to growth and profit is up BUT the most deadly attacks come from below
  • Most successful companies have been trained to reject ideas that are high risk with uncertain returns. It’s like they have an immune system to them.
    • They are trained to serve customers, meet sales and profit targets
  • The implication of everyone moving up market is that it creates a vacuum in low-end value networks → drawing new entrants with technology and cost structures better suited to competition
  • Established firms can dramatically increase profit by stopping their low-end, low-profit lines
  • Principles and truths of disruptive innovation:
    1. Resource dependence: customers control resource allocation
    2. It is said small markets don’t solve growth needs of big companies
    3. The end applications of a disruptive technologies are unknowable in advance. Failure is stepping stone to understanding
    4. Organisation’s have their own capabilities → which become disabilities when change is required
    5. Technology supply might not equal market demand. Attributes that make disruptive technologies unattractive in established markets are often are the very ones that constitute their greatest value in emerging markets
  • Successful managers use these truths to their advantage by…
    1. Embed projects to develop disruptive technologies within an organisation who’s customers need them. Demand from the right customers increases the chances of resource allocation
    2. Place projects to develop disruptive technologies in organisations small enough to get excited about small opportunities and small wins
    3. They plan to fail early and inexpensively
    4. Utilise some resources of main company business to address disruption, without leveraging its processes and values
    5. To commercialise disruptive technologies, they found or develop new markets that value the attributes of the disruptive product (vs competing with a sustaining technology in a mainstream market)
  • It might not be possible for a company to pursue a disruptive technology while remaining competitive in mainstream markets
  • Creating new markets is less risky and more rewarding than entering established markets and fighting entrenched competition
  • There’s no observable first mover advantage for pioneering sustaining technologies
    • But if entering a new value network (creating a market) you are much more likely to be successful in the long run
  • It’s best to enter new markets early, leading with disruptive technologies (there is a first mover advantage if you do this)
    • It’s effectively exchanging market risk for competitive risk
  • Markets that don’t exist can’t be analysed. Suppliers and customers must discover them together
  • Applications of disruptive technology are unknowable when they’re developed.
  • Learning and discovery > execution
  • Also because of the unpredictability, a companies initial tactics for entering the market are likely to be wrong too
  • A failed idea > a failed business
    • Many new business ventures abandon their original strategy - they learnt when implementing it what would and would not work for the market
    • Guessing the right strategy < conserving enough resources so that you get a second or third chance at getting it right
  • Spinning out a new organisation, or acquiring a small company are good ways to do it
  • Processes by their very nature are designed to be repeatable and address specific tasks
    • the mechanisms that create value for organisations are intrinsically inimical to change
  • Values are the criteria by which decisions about priorities are made. They a way of programming everyone to act in a consistent way.
  • The best firms become great at systematically investing in and developing sustaining technologies (which aren’t like disruptive technologies)
    • Disruptive innovations are so intermittent, that no company develops a capability to routinely handle them
  • Once the performance level demanded of an attribute has been achieved, customers indicate their satiation by being less willing to pay a premium price for continued improvement in that attribute
  • A product becomes a commodity when market needs on each attribute have been fully satisfied by more than one available product
  • Markets graduate from competing on functionality → reliability → convenience
    • Early adopters → functionality
    • Early majority → reliability
    • Late majority → convenience
  • Watching what customers do is more powerful than listening to what they say
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Deep Summary

Longer form notes, typically condensed, reworded and de-duplicated.

Preface

  • The two questions the author was asking:
    • Why is success so difficult to sustain?
    • IS successful innovation really as unpredictable as the data suggests?
  • The ‘Innovators Dilemma’ following these two pieces of traditional business school advice will lead to your success and demise…
    • always listen to and respond to the needs of your best customers
    • focus investments on innovations that promise the highest returns
  • Becomes true when there’s a disruptive technology arising at the low end of the market
  • Disruptive technology is the cause behind one of the great engines of progress ‘creative destruction’
  • The venture capital model (invest in 20 companies, hoping 2 will make it) suggests innovation is unpredictable

Introduction

  • Many great companies have lost their market position when faced with market/technological changes
    • e.g Computer hardware manufactures missed the personal computer (Apple took)
  • Often a companies management are getting praise and acclaim at the very time they are ignoring the arrival of their besiegers
  • The way decisions get made in successful organisations sows the seeds of eventual failure
    • Good management was the most powerful reason they failed
      • Listen to customers → invest aggressively → allocate investment to innovations that promise the best returns
  • Principles of good management then, are only situationally appropriate
    • Sometimes it’s a great idea to…. not listen to customers → develop lower-performance product → with lower margins → in a smaller market
  • Sustaining vs Disruptive Technologies
    • Sustaining Technologies improve performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.
      • Can be discontinuous, radical or incremental
    • Disruptive Technologies bring to market to market a different value proposition. Underperform established products in mainstreams markets, but have other features that fringe (and mostly new) customers value.
      • Typically products get cheaper, simpler, smaller and more convenient to use.
  • Trajectories of Market Need vs Technology Improvement
    • Technologies can progress faster than market demand.
    • Suppliers often overshoot their market. Giving customers more than they need or are willing to pay for.
    • Disruptive technologies may underperform relative to what users in the market demand
    • Needs of users increasing at a slower rate than the technological progress
    • image
  • Disruptive Technologies vs Rational Investments
    • 3 reasons established companies don’t invest in disruptive products:
      • Often simpler and cheaper, promise lower margins not greater profits
      • Emerge in insignificant markets
      • The most profitable existing customers don’t desire and may not be able to use them
    • Essentially - the least profitable customers in the market are the ones who welcome the disruptive technology. So it can look like a bad bet
Taken in sum, these chapters present a theoretically strong, broadly valid, and managerially practical framework for understanding disruptive technologies and how they have precipitated the fall from industry leadership of some of history’s best-managed companies I ❤️ this writing
  • Harnessing the principles of disruptive innovation
    • Traditionally good management techniques don’t work, they make it worse…
      • planning better
      • working harder
      • becoming more customer-driven
      • taking a longer-term perspective
    • Other techniques are ineffective…
      • sound execution
      • speed to market
      • total quality management
      • process reengineering
  • Principles of Disruptive innovation:
    1. Companies depend on customers and investors for resources
      • Theory of resource dependence: managers think they control the flow of resources, but really customers and investors dictate how money will be spent (as companies that don’t satisfy their customers and investors don’t survive)
      • Companies can kill ideas their customers don’t want - stifling disruptive technologies. By the time their customers want them, it’s too late
      • The only way to win, is to start a new company, that doesn’t need to fight for resources, can focus on the disruptive technologies, the new customers, and survive on a leaner cost structure
    2. Small markets don’t solve the growth needs of large companies
      • Disruptive technologies create new markets
      • Companies that enter emerging markets have a first mover advantage
      • But as they grow, they find it increasingly harder to enter new markets themselves
      • You can’t wait until new markets are big enough to be interesting, as you’ll be too late
      • Large organisations find it hard to give enough resources, focus and talent to small markets
    3. Markets that don’t exist can’t be analysed
      • If you make investments based on market size and projected returns you’ll struggle when faced with disruptive technologies
      • Demanding market data where none exists
    4. An organisations capabilities define it’s disabilities
      • Organisations have capabilities… defined by their processes and values
      • People are flexible, but processes and values are not.
      • The processes and values that define a companies capabilities in one context, will define it’s disabilities in another context
    5. Technology supply may not equal market demand
      • pace of change of technological progress in products frequently exceeds the rate of performance improvement that mainstream customers demand or can absorb
      • traditional products eventually overshoot the mainstream needs of the market
      • products that underperform today (but based on disruptive technology) can become performance competitive tomorrow
      • Once both meet the needs of the customer, they evaluate the decision differnetly
        • The basis for product choice evolves …
        • Functionality → reliability → convenience → price
      • Companies move up market, over satisfy customers, higher prices and higher margins → this creates room for low margin, low price competition
      • Always measure how your customers actually are using your product!

Part One - Why great companies can fail

Chapter 1. How can great firm fail? Insights from the hard disk industry

  • ‘Keeping close to your customers’ isn’t always great advice
  • Density of information and capacity were increasing quickly, footprint was decreasing.
  • Global market size was dramatically increasing as the cost per MB was falling dramatically.
    • Each double in market size resulted in a 53% reduction in cost
  • Sustaining change:
    • Manufacturers establish a trajectory of performance improvement over time.
  • Disruptive change:
    • Ambiguous. Is a notebook computer better than a mainframe?
    • Can redefine how you measure performance
  • New manufacturing techniques helped push forward density over time → in a series of overlapping S curves (imagine a plot of performance over time)
  • Established firms were the leaders in every one of the sustaining innovations in the industry
  • Drive size: 14 inch → 8 inch → 3.5 inch
  • Markets: Mainframe → Minicomputer → desktop → portable → notebook
  • Mainframe customers didn’t care about size, just storage and price. Smaller drives were more expensive initially, but the markets they served exploded… capacity per inch began to increase at a higher rate… eventually smaller drives stole the market
  • Leading firms were held captive by their customers.

Chapter 2. Value networks and the impetus to innovate

  • Clark’s theory… If structure and team interactions make it possible to deliver the dominant product well. They also make it hard to deliver anything other than the dominant product.
    • … is not always true (moving from hard disks to flash required very similar capabilities)
    • Historically the organisation has chosen people, technology, skills and knowledge to deliver the dominant product.
    • If a new product requires a different blend, then it will struggle
  • Value network: identifying and responding to customer needs, solving problems, procures inputs, reacts to competition and tries to make a profit
    • Expected rewards drive the allocation of resources toward sustaining innovations
  • Metrics of value differ across networks. Rank-ordering or importance of different performance attributes defines, in part, the boundaries of a value network
  • You can use hedonic regression analysis to identify how markets valued different attributes and how those values changed over time
    • E.g. price vs size vs reliability
  • Value networks have different cost structures. Watch out for those with a lower cost structure than yours
  • Why S-curves happen as technologies develop
    • Early: slow progress (friction)
    • Middle: rapid progress
    • Mature: slow progress (diminishing returns)
  • Disruptive technologies s-curves often relate to different attributes in a different value network. Once they have reached the point they can serve the traditional market, they will enter it and win share.
  • How the innovators dilemma pans out…
    • Disruptive technologies are developed in established firms
    • Marketing speak to big customers who are unimpressed, they value different criteria
    • Company backs sustaining innovation (due to cannibalisation + margin + customers)
    • New companies form and find a new market for disruptive technology
    • Entrants move up market
    • Established firms react too late

Chapter 3: Disruptive Technological Change in the Mechanical Excavator Industry

  • 23/25 excavator companies successfully navigated the sustaining change to gasoline power
  • 4/30 navigated the change to hydraulics.
  • The old success metric was cubic yards per scoop → shovel width and manoeuvrability of tractor
  • Old market: earth extraction
  • New market: back of tractors (smaller jobs, sold through dealerships)
  • Trajectory of improvement was much faster than the incumbent technology, and it meant it could serve the existing excavator market.
  • All the new entrants to the market were hydraulic, they took nearly all the market share

Chapter 4: What goes up, Can’t go down

  • It’s easier to move up market and down market
  • Rational managers struggle to justify entering small, poorly defined low-end markets that are less profitable
  • The resource allocation process inside companies directs resources to new products that promise higher margins and larger markets
  • Companies setup sales, marketing, R&D and operations to match their market position.
    • It seems easier and less risky to move up market, than it does to cut costs (marketing, sales, R&D, operations) and move down market
    • Managers don’t want to lose their jobs, so the take the safer options
  • As you move up market, you gradually acquire the same cost structures as the competition.
    • Downward mobility becomes harder
  • The easiest path to growth and profit is up BUT the most deadly attacks come from below
  • Most successful companies have been trained to reject ideas that are high risk with uncertain returns. It’s like they have an immune system to them.
    • They are trained to serve customers, meet sales and profit targets
  • Sometimes your customers desire to move upmarket too - they are also likely to reject the disruptive innovation to their model
  • The implication of everyone moving up market is that it creates a vacuum in low-end value networks → drawing new entrants with technology and cost structures better suited to competition
  • Established firms can dramatically increase profit by stopping their low-end, low-profit lines
    • Be wary of gifting business to a new entrant using a new technology that’s rapidly developing. Their trajectory could be a problem

Part 2: Managing Disruptive Technological Change

  • Companies that are managed well are disrupted by innovation because it’s actually the good management that’s the root cause….
    • decision making and resource allocation processes that are the key to the success of established companies are the very process that reject disruptive technologies
      • e.g. listening to customers, tracking competitors, moving upmarket (higher performance, higher quality, higher profit)
  • They want to focus resources on customer needs, higher profits, technologically feasible and that help them play in substantial markets.
    • Therefore, they’re going to miss out on opportunities that don’t fit that bill
  • Principles and truths of disruptive innovation:
    1. Resource dependence: customers control resource allocation
    2. It is said small markets don’t solve growth needs of big companies
    3. The end applications of a disruptive technologies are unknowable in advance. Failure is stepping stone to understanding
    4. Organisation’s have their own capabilities → which become disabilities when change is required
    5. Technology supply might not equal market demand. Attributes that make disruptive technologies unattractive in established markets are often are the very ones that constitute their greatest value in emerging markets
  • Successful managers use these truths to their advantage by…
    1. Embed projects to develop disruptive technologies within an organisation who’s customers need them. Demand from the right customers increases the chances of resource allocation
    2. Place projects to develop disruptive technologies in organisations small enough to get excited about small opportunities and small wins
    3. They plan to fail early and inexpensively
    4. Utilise some resources of main company business to address disruption, without leveraging its processes and values
    5. To commercialise disruptive technologies, they found or develop new markets that value the attributes of the disruptive product (vs competing with a sustaining technology in a mainstream market)

Chapter 5: Give Responsibility for disruptive technologies to organisations whose customers need them

  • Really it’s customers who determine how resources get allocated. Companies will invest more in risky technology projects if they know there’s customer demand.
  • Resource dependence: companies freedom of action is limited to satisfying the needs of the entities outside the firm that give it the resources it needs to survive
    • There’s a survival of the fittest effect. Only companies that have highly tuned their processes and people to give their customers what they want will survive.
    • It becomes hard for a manager or executive to move against the tide and do something customers aren’t asking for or say they don’t want
    • Even once the executive has decided something, there’s still 1000 supporting decisions that need to be made by middle management (who often have conflicting priorities)
  • This leaves managers two choices…
    • Try and convince everyone they’re right
    • Start a new organisation and embed it among emerging customers that do need the technology
  • Good resource allocation processes are designed to weed out products that customers don’t want
  • It might not be possible for a company to pursue a disruptive technology while remaining competitive in mainstream markets
  • Discount retailing, lower margin, but more volume and inventory turnover
  • HP: ink-jet printers weren’t as good as laser printers. The question wasn’t are they better, it was can they be good enough to satisfy the home printer market (that didn’t really exist because lasers were big, expensive and super fast)… home printer market was more interested in size and cost

Chapter 6: Match the size of the organisation to the size of the market

  • Be a leader not a follower → implant the projects that will develop disruptive technologies in commercial organisations that match in size the market they are to address.
    • Small markets can’t solve the near-term growth and profit requirements of large companies
    • Leadership is more crucial in coping with disruptive technologies
  • Creating new markets is less risky and more rewarding than entering established markets and fighting entrenched competition
  • There’s no observable first mover advantage for pioneering sustaining technologies
    • But if entering a new value network (creating a market) you are much more likely to be successful in the long run
  • It’s best to enter new markets early, leading with disruptive technologies (there is a first mover advantage if you do this)
    • It’s effectively exchanging market risk for competitive risk
  • The larger and more successful a company becomes, the harder it is to muster the rationale for entering and emerging market in it’s early stages (even though it’s important to do so)
    • Stock price is somewhat determines by rate of frowht
  • Spinning out a new organisation, or acquiring a small company are good ways to do it

Chapter 7: Discovering New and Emerging Markets

  • Markets that don’t exist can’t be analysed. Suppliers and customers must discover them together
  • Applications of disruptive technology are unknowable when they’re developed.
  • Learning and discovery > execution
  • Most ‘innovation’ is with sustaining technologies and existing customers (be careful of this)
    • Must of what executives have learnt, is unhelpful for this cause
  • Disruptive technologies can’t be forecasted, sustaining technologies can
  • Honda underestimated the US motorbike market, they didn’t think that cheap dirt bikes would sell but they did and changed the size of the market
  • Intel didn’t know what the use for microprocessors would be → PC’s were one of many potential applications
  • Experts forecasts will always be wrong, when it comes to disruptive technologies
  • Also because of the unpredictability, a companies initial tactics for entering the market are likely to be wrong too
  • A failed idea > a failed business
    • Many new business ventures abandon their original strategy - they learnt when implementing it what would and would not work for the market
    • Guessing the right strategy < conserving enough resources so that you get a second or third change at getting it right
  • Individual managers feel like they can’t fail within a company → stops the right behaviour
  • In disruptive situations, actions must be taken before careful plans are made.
    • Plans should be for learning not implementation
    • Discovery-driven planning (focusing on the assumptions in your business plan) is better suited

Chapter 8: How to appraise your organisations capabilities and disabilities

  • Organisations get great at the processes that enable them to scale. They hire people who will be great at executing those processes.
  • Organisations develop core competencies
  • Resources, processes and values determine what your organisation can and can’t do
  • Processes by their very nature are designed to be repeatable and address specific tasks
    • the mechanisms that create value for organisations are intrinsically inimical to change
  • Values are the criteria by which decisions about priorities are made. They a way of programming everyone to act in a consistent way. You can’t go against values.
  • The best firms become great at systematically investing in and developing sustaining technologies (which aren’t like disruptive technologies)
    • Disruptive innovations are so intermittent, that no company develops a capability to routinely handle them
  • Large companies often surrender small markets as smaller companies are more capable of pursuing them
  • There’s a migration of capabilities as small companies turn into big ones. Companies that scale get good at doing repeat tasks and processes
  • Three choices for management:
    • Acquire a different organisation whose processes and values are a close match
    • Try to change the processes and values of the current organisation
    • Separate out an independent organisation and develop new processes and values within it

Chapter 9: Performance Provided, Market Demand and the Product Lifecycle

  • Graphs showing intersecting technology and market trajectories are useful in showing how firms are challenged by disruptive innovations
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  • Notable when rates of improvement of new disruptive tech, exceed that of existing markets and sustaining technologies
    • He calls this ‘performance oversupply’
  • Competition in the market will change. The rank ordering of criteria that customers use to choose change.
  • Hard Drive Example:
    • Capacity was the most important factor
    • Once both have enough capacity → form factor became important (and worth a premium)
  • Once the performance level demanded of an attribute has been achieved, customers indicate their satiation by being less willing to pay a premium price for continued improvement in that attribute
  • A product becomes a commodity when market needs on each attribute have been fully satisfied by more than one available product
  • Markets graduate from competing on functionality → reliability → convenience
    • Early adopters → functionality
    • Early majority → reliability
    • Late majority → convenience
  • The weakness of disruptive technologies are their strengths
    • The factors that render a technology useless in a mainstream market constitute their value in new markets
    • Take the market needs as given → don’t market to them until you meet their criteria
      • Instead → look for the market that doesn’t care about x, but does care about y
      • find a market where competition occurs along dimensions that favour the disruptive attributes of the product
  • Disruptive technologies are typically simpler, cheaper and more reliable and convenient than established technologies
    • When a disruptive technology takes a market
    • It’s usually because it satisfies the market’s need for functionality (as defined by the buying hierarchy) but is also simpler, cheaper, more reliable and more convenient
  • Established firms are often so high up the market they find it hard not to load new products with unnecessary technology

Chapter 10: Managing disruptive technological change: a case study

  • Electric cars: How much do we need to worry about them?
    • Graph trajectories of performance improvement demanded in market vs performance improvement of the technology
      • e.g. range, top speed, performance
  • First have to define the current mainstream market needs → and compare the disruptive technology to them
    • Watching what customers do is more powerful than listening to what they say
  • Could the trajectory going to intersect market demands on key purchasing criteria (industry experts might be unconvinced). What’s happening directionally?
  • Determine a market strategy → lead the company to a legitimate, unsubsidised market which could use them?
    • Make sure your team know that the mainstream market won’t be satisfied because your tech doesn’t meet the performance requirements yet
    • Find a market where the product could be used. Uncover a group of buyers with an undiscovered need for a product that fits your attributes
    • A reminder no market research is going to tell you about a market that doesn’t exist
    • Make a business plan for learning (that has slack for a few failures)
  • Car market is over served (range, top speed and acceleration aren’t utilised)
    • Therefore might have to compete on simpler, cheaper, more reliable and more convenient?
  • Consider distribution. Can you disrupt how your product is distributed? Can you create new distribution channels that cut out cost?
  • Consider spinning off an independent organisation
  • Don’t give the new unit too much money, make them feel constant pressure to find some way (some set of customers somewhere) to make our small organisation cash-positive

Chapter 11: The Dilemmas of innovation:

  1. The trajectory of a technology maybe faster than the market. It doesn’t address the needs today but could tomorrow
  2. Companies find it hard to allocate resources (customer wishes, market size, profitability, risk)
  3. Matching the market to the technology (not the other way around)
  4. Organisations develop capabilities, it’s hard to go against them
  5. Applications are unclear, market sizes unknown (feels very risky in a successful org)
  6. First mover advantage isn’t important in sustaining technologies, but it is for new tech in new markets
  7. A very real barrier to entry is that it doesn’t make sense for market leaders to invest in these opportunities sometimes, based on their learnt behaviour, incentives and customers