MI376: WHY DO GREAT COMPANIES FAIL? THE INNOVATOR’S DILEMMA

W/ SHAWN O’MALLEY

04 November 2024

In today’s episode, Shawn O’Malley (@shawn_OMalley_) discusses why great companies fail, as outlined by Clayton Christensen in his timeless book, The Innovator’s Dilemma, which was first published in 1997. The Economist actually named it one of the six most important business books ever written.

Christensen was an academic and business consultant who wrote a number of compelling books, but the Innovator’s Dilemma is by far his best-known work. Christensen worked at Harvard Business School for a decade before founding a consulting firm in 2000 and a venture capital firm focused on investing in Southeast Asia in 2005. In this episode, you’ll learn how disruptive innovations shift the status quo, the difference between disruptive and sustaining innovations, why companies can seemingly do everything right and still lose out to new competition, how following logical incentives can actually lead management to disregard threats from disruptive technology, why disruptive technologies tend to emerge on the fringes of established customer demographics, and what companies can do to prepare themselves for the inevitable rise of disruptive technologies, plus so much more!

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IN THIS EPISODE, YOU’LL LEARN:

  • What is a disruptive innovation, and how it differs from sustaining innovations.
  • How the “paradox” of innovation impacts industry leaders.
  • How to think about disruptive technologies from the vantage point of a value investor.
  • Why even the best of the best companies aren’t immune to disruptive innovation.
  • How Tesla disrupted the automotive industry.
  • How Honda stumbled into disruptive innovation in the U.S. market.
  • Why the fast-paced hard-drive industry is such a good case study on innovation.
  • How value networks shape biases and outcomes in companies.
  • What industry leaders can do to manage disruptive innovation.
  • And much, much more!

 

TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Intro: You’re listening to TIP.

[00:00:03] Shawn O’Malley: Hey there and welcome back to the Millennial Investing podcast. I’m your host today. Shawn O’Malley. I’m really excited to dive into today’s episode because I think it’s so relevant to investors today. It’s as difficult as ever to make investment decisions when the pace of technological change is so rapid.

[00:00:19] Does that mean we should try to avoid technology altogether though? And is there really any hope of understanding disruptive technology if you don’t work in Silicon Valley? As a student of Warren Buffett, my hope is not to make a living by investing in difficult to understand tech stocks, especially since I don’t have any kind of technical background to fall back on.

[00:00:38] But I think understanding how emerging technologies have historically impacted all types of companies is relevant to any investor. So today I’ll be exploring disruptive innovation and what it has meant in the past for investors. In particular, my hope is to answer the question, why do great companies fail?

[00:00:55] For help with this, I dug through the classic book, The Innovator’s Dilemma by Clayton Christensen, which was first published in 1997. The Economist actually named it one of the six most important business books ever written, so you can see why I’m excited to share its takeaways with you. Christensen was an academic and business consultant who wrote a number of compelling books, but The Innovator’s Dilemma is by far what he’s best known for.

[00:01:19] With that, let’s get right into it.

[00:01:25] Intro: Celebrating 10 years, you are listening to Millennial Investing by The Investor’s Podcast Network. Since 2014, we have been value investors’ go to source for studying legendary investors, understanding timeless books, and breaking down great businesses. Now, for your host, Shawn O’Malley.

[00:01:53] Shawn O’Malley: So as I outlined at the top of the show, I want to go through The Innovator’s Dilemma today and reflect on how the book’s lessons fit into the world as we see it in 2024 and how investors should think about the impacts of disruptive technology. In the book’s preface, Clayton Christensen begins by saying that two questions shaped his research for the book.

[00:02:11] Firstly, why is success so difficult to sustain? And secondly, is successful innovation really as unpredictable as the data suggests? When you look back on business history, there are so many instances of companies that were at one point the best in class, only to fall to the middle of the pack or the back of the pack a decade or two later.

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