Part II: Why Top-Down Innovation Efforts Usually Fail – From Incremental to Exponential

PART II

Why Top-Down Innovation Efforts Usually Fail

In the pre-exponential era, although many companies met their demise through competitors’ bottom-up innovation, such incursions almost always came from within their industry and were, as Clayton Christensen documented, frontal assaults. In the exponential era, as we’ve noted, with the world changing in myriad ways, legacy companies can fail for many other reasons.

What’s more, a company can fail much faster today: competition is fiercer and wider, technology is changing faster, starting a company even in a capital-intensive industry is less expensive, and customer tastes are more fluid—all leaving legacy companies without the luxury of time in which to figure out how to more effectively compete against startups. This is why, as we noted in the previous section, the turnover in the Dow Jones Industrials is rapidly accelerating and even companies once noted as innovators are struggling to keep pace with others.

Rapid innovation requires care in its coordination, as apparent in the recent fate of Boeing and its 737 Max, which exhibited a chain of cascading failures that led to the loss of hundreds of lives when fear of losing market share drove the company to move faster without creating systems to ensure safety in sustaining this accelerated development.1

Equally challenging to legacy companies is the concentration of power deriving from technological superiority and, similarly, from willingness to deploy the latest technology earlier and in more-important roles than ever before. Economists have noted, in industry after industry, rapid profit consolidations by smaller groups of world-beating companies. In some cases, such as that of the financial industry, this may be due to regulatory capture. But in many others, it is a natural effect of companies’ proving better at harnessing the power of what Erik Brynolfson and Andrew McAfee call the second machine age. They write: “Computers and other digital advances are doing for mental power—the ability to use our brains to understand and shape our environments—what the steam engine and its descendants did for muscle power.”2 In the first machine age, the original Industrial Revolution, companies took decades to understand how to reconfigure their factories to better adapt machinery to new power sources rather than earlier sources such as waterwheels.

For example, factories designed to harness waterpower tended to be vertically stacked, as this was the reality of collecting power from a slowly spinning wheel. Over time, as the steam engine and later electricity allowed power to be distributed more evenly across a factory floor, factory owners created layouts that eliminated the need for vertical travel. The ultimate expression of this optimization, of course, was Henry Ford’s moving assembly line, which slashed the time required to assemble an automobile from nearly half a day to less than two hours.

Even perception of the possibility of such shifts was a painful process of exploration and of trial and error. But the early victors reaped massive spoils as a result of their fundamentally better grasp of how to use the technological shifts of the first industrial age to implement their vision of the world, which allowed them to create enormously profitable manufacturing juggernauts. We are probably seeing a similar dynamic in the second industrial age, as the more technologically proficient companies improve their ability to harness exponentially advancing technologies to accelerate their businesses and generate outsized profits (which, by the way, allow them to pay more for the best talent).

Such proficiency is more difficult to maintain now than it used to be. In most of Christensen’s Innovator’s Dilemma examples, a single innovation provided the dilemma, and the incumbents could clearly see the innovation’s threat (though they often decided to ignore it because it was too far down market to affect their profits). Today, though, the dilemma arises from the fact of multiple exponentially advancing technologies combining.

So yes: we have learned a great deal about innovation since Christensen first brought his concept to the world, and in this section, we analyze and debunk a host of common assumptions about innovation. We then further discuss common failure modes that sink companies, and we attempt to explain them through the lens of modern technologies and altered social and communication structures.