Is the customer always right? Phin Upham discusses a seminal work which argues that sometimes serving customers can lead to failure
Recent corporate rhetoric has emphasized how “satisfying the customer” is of core importance to corporate missions. C. M. Clayton and J. L. Bower’s essay Customer Power, Strategic Investment, and the Failure of Leading Firms” shows how this emphasis, if taken too literally, can lead to derisive consequences (in certain situations) for a firm. Christensen and Bower ask the question “why and under what circumstances financially string, customer-sensitive, technologically deep and rationally managed organizations may fail to adopt critical new technologies or enter important markets = failure to innovate which have led to the decline of once great firms” (198). In other words, why goes a good company that try’s to serve its customer and does a good job at doing this nevertheless sometimes fail (and in what circumstances will this happen)?
This essay nicely constructs a case for customer demand being potentially short sighted, and, therefore, the blind satisfying of customer demand to potentially cause firms to ignore important new innovations until too late. The irony is that this occurs in large, well managed, and competitive firms, not in badly managed ones which let their competitiveness slip. Fundamentally, this article shows yet again that there is no way around vision, no way to avoid taking risks, no way to guarantee a firm long term success. “Satisfying the customer” may seem like a cover-all strategy to success, but it is not. Some of the theoretical underpinnings of this paper helps construct the validity of the statement 1) “patterns of resource allocation heavily influence the types of innovation at which leading firms will succeed or fail.” When this thesis is bolted onto the thesis that 2) customer demand can tend to determine the allocation of resource allocations, one can see the theory behind the thesis emerging. One can add that 3) the current customers in an industry demand what works best in the present (or near future) and will not tend to demand in the short run inferior products even if the technology had potential. Lastly, we get that 4) once behind in a new technology, even a strong firm has a hard time catching up to (i.e. gaining market share from) upstarts with technological superiority and a head start. In conclusion, we get 5) a potentially breakthrough technology that is initially inferior for major customers of a firm to the status quo, and whose future potential is not clear/in doubt, may be ignored by the major incumbent firms who are focusing on satisfying their core customers, and this oversight may have serious adverse consequences to the companies long term success.
In order to construct their argument, Christensen and Bower link two historically independent streams of research, resource dependence (Pfeffer and Salancik) and internal resource allocation theory (Burgelman, Bower). Resource dependence looks outside the firm to explain how funds within the firm are allocated. According to this theory, managerial discretion is a myth and firms allocate resources according to pressures from outside players such as customers or investors. Secondly, Christensen and Bower draw from ideas on internal resource allocation introduced by Bower (1970) and elaborated by Burgelman (1983a, 1983b) which claims that strategic decisions with the firm are fundamentally shaped at the lower levels of management and by the extend that middle level managers put their weight and effort behind a project.Because middle level manager’s careers can be damaged if they support a failed idea, they tend to support ideas with built in constituencies, i.e. ideas which serve existing customers and are almost guaranteed a market when they mature. This adds a risk adverse element to R&D decisions previously hidden. Adding these two fields together, the authors built theoretical support for the arguments laid out in the previous paragraph.
A second major theoretical contribution constructed by Christensen and Bower is that of a typology of technical change. The authors divide technical changes in the disk drive industry (but this theoretical construct ought to hold in many other fields as well) into sustaining technical changes and disruptive technical changes. This distinction is important for Christensen and Bower because sustaining changes are of the sort that established firms who are listening to their customers will tend to move toward while disruptive changes are of the sort that established firms will tend to ignore and thus form the basis for the entrance of smaller players who have developed this technology. This distinction also cuts in a very different way, for example, than Tushman and Anderson’s 1986 piece which argues that firms tended to develop technologies that built on their strengths and tended to ignore technologies which did not building on their existing technologies/strengths. This distinction, like Tushman and Anderson’s, provides a rational for Schumpter’s ideas on a constantly changing firm landscape of creative destruction.
A sustaining technology is one which reinforces established trajectories in product performance improvement. If a new technology, even if it undermines current competence, offers a clear advantage to a firm’s current technology, it will likely be pursued by the firm. If, on the other hand, a technology offers no improvement (but, perhaps, has potential) it is less likely to be adapted since its success is less likely and this more risky for inside middle managers to support (since the technology is not guaranteed to be of the sort that existing users will demand). On the other hand, disruptive technologies can either be initially less efficient than traditional technologies (but be improving at a greater rate, or have the potential for a future breakthrough in performance). These technologies are not pursued on speculation of success, but often adopted by a new or small or entering company in order to capture a small group of previously undeserved customers who prefer the technology (but are not mainstream users). Such an example occurs in the 14 inch disk drives vs. the 8 inch drives, the 8 inch vs. the 5.25 inch drives, and the 5.25 inch drives as compared to the 3.5 inch drives. In each change, the new technology was not adequate for existing users but interested a niche market and then finally overtook the old standard after some time. But incumbents producing the old technology had a hard time catching up (they had often abandoned the development of the new technology years earlier.) and gaining market share. According to this analysis, the failure of leading firms to maintain their lead was not laziness, or inability to innovate (along traditional lines) it was the failure to predict the market’s movement to new technology. Thus market leaders do not fail because they get slow but because they are ‘captured” by their customers. On the other hand, this process can be seen as inevitable to even the most nimble of established companies. After all, the universe of experimenting firms and of niche players which have potential breakthroughs/future superior technologies will always be larger than an incumbents ability to pursue technologies.Thus, without prescience, established companies will always eventually miss an important trend.
Christensen and Bower’s research design is to study the disk drive industry from 1975 and 1990. This included over 1400 models and multiple data sources, primarily Disk/trend Report, the leading market research publication in the disk drive industry. The disk drive market was a good place for studying the author’s thesis because it was both self contained (historically) and quick moving (technologically). The disk drive market grew at 27 percent between these years to reach over 13 billion in size. Of the 17 firms which were in the market in 1976 one survived in 1990, so the rate of turnover of leaders way high. Over 130 firms entered the market over this period and 100 of them failed. Further, six architectural designs, all distinct, emerged over this period, leading to the potential for disruptive ands sustaining technological change. The nature of the six changes is not of immediate relevance, but they involved, almost universally, a diminishing of size (the size of a disk drive shrunk from 5,400 to 8 cubic inches over this period), expense (the cost per megabyte of average drive fell from 560 to 5 (in constant 1990 dollars) over the period), storage space, speed, and thinness.
This essay nicely takes an old concept and applies new understandings to reinterpret the explanation of a phenomenon.Though the essay is about competence and the loss of it, it is quick to point out that it uses investment as the prime drives rather than technological know how. That is, it is not that new firms overtook old firms in their own field, but rather that new firms invested differently than old firms such that they developed their own competence.Further, it is important to note once again that existing firms do not need to loose their “technological edge” or “market leadership” in the existing market technology in order to lose the war for market dominance. In some industries, such as the disk drive industry, with radical shifts in technology, they merely have to miss the next big wave.
Samuel Phineas Upham has a PhD in Applied Economics from the Wharton School (University of Pennsylvania). Phin is a Term Member of the Council on Foreign Relations. He can be reached at phin@phinupham.com.