3 Barriers to Innovation for Larger Companies

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What are some barriers to innovation? How can organizations overcome these obstacles to innovation?

Barriers to innovation are related to the ability to adapt to markets and move up or down. An innovative product needs to be able to position itself well and evolve.

Read more about barriers to innovation and how they can be addressed.

Barriers to Innovation

Successful companies typically focus on growing and moving upmarket with higher-priced products, higher-tier customers, and larger profits. However, this upward mobility makes firms downwardly immobile—it impedes them from adopting disruptive innovations, which always start downmarket. 

Established companies face three key obstacles to innovation: 

  1. Cost structures that favor seeking higher profit margins upmarket over cutting costs to remain profitable downmarket
  2. Organizational cultures that pull efforts toward upmarket projects
  3. The upmarket drift of a company’s customers and competitors

Barrier #1: Cost Structure

As discussed in Chapter 2, organizations develop cost structures that fit their value networks—value networks for higher-priced products require larger gross profit margins to cover higher overhead costs than value networks for lower-priced goods. These cost structures force companies to maintain profit margins to simply stay afloat. 

In fact, most companies aim to move to progressively higher-value markets. This is especially true when disruptive technologies invade their markets, because the disruptive products generally enter the low end of the market and gradually climb to higher tiers. For companies entrenched in the higher markets, the costs are barriers to innovation. For example, when 3.5-inch disk drives ascended from the laptop to the desktop market, Seagate didn’t try to compete—instead, the company increased efforts to improve 5.25-inch drives enough to enter the market for minicomputers.

If an established company wants to invest its limited resources in the small, low-profit market for a disruptive product, company leaders would have to find a way to somehow cut costs. However, a company’s overhead costs include market research, product development, and marketing that’s critical to remaining competitive in its existing market. Most companies find it impossible to bring in enough profits from existing products while also trimming overhead enough to invest in disruptive ones. 

Barrier #2: Organizational Culture

A company’s upward or downward mobility is determined by the projects it chooses to invest in, and most companies have processes that steer them toward high-profit projects. Although it may appear that senior managers are responsible for choosing the projects that a company invests in, middle managers actually play a more significant role in this process as gatekeepers. They can help or be obstacles to innovation.

Middle managers filter the ideas that come from engineers and other employees, carefully deciding which projects they’ll pitch to senior managers. Middle managers want to pitch only projects with a high likelihood of success and profitability—otherwise, they risk taking a hit to their credibilities and careers—and upmarket projects are the surest way to achieve that. 

Under normal circumstances, a company’s success depends on having processes like this (formal or de facto) that weed out low-profit projects—otherwise, the company would waste too many resources on projects that don’t provide a return on investment. But these same processes steer companies away from disruptive technologies, making the firms vulnerable to being overtaken by the disruption. 

Barrier #3: Upmarket Drift 

Often, companies can drift upmarket without making a conscious effort to ascend to the next value network. Companies drift upmarket when their customers are pursuing higher markets, and when their competitors are similarly leaning upmarket to meet customers’ needs. 

As companies move upmarket, they create openings in lower value networks for entrants to move in with disruptive products. Let’s look at how the barriers to innovation played out in the steel industry. 

Barriers to Innovation Case Study: Steel Industry

In the mid-1960s, steel minimills disrupted the steel industry. As the name suggests, the minimills were simply steel mills at a much smaller scale.

When they emerged, the minimills could only produce lower-quality, lower-cost steel products than the established firms, the integrated steel mills. The only product they could make with the lower-quality steel was reinforcing bars (rebars), which were used to strengthen concrete.

Over time, minimills increased the quality of their steel and invested in equipment to make different products. Minimills subsequently took over the next two highest markets:

  1. Larger bars, rods, and angle irons
  2. Structural beams

Paradoxically, integrated steel mills’ profits grew at the same time they were being pushed out of these low markets. Ceding the lowest-profit products to the minimills allowed the integrated mills to invest in high-quality steel products, such as rolled sheet steel, that brought in the biggest profits. The barriers to innovation kept integrated mills from competing with minimills, but it worked out anyway.

3 Barriers to Innovation for Larger Companies

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Rina Shah

An avid reader for as long as she can remember, Rina’s love for books began with The Boxcar Children. Her penchant for always having a book nearby has never faded, though her reading tastes have since evolved. Rina reads around 100 books every year, with a fairly even split between fiction and non-fiction. Her favorite genres are memoirs, public health, and locked room mysteries. As an attorney, Rina can’t help analyzing and deconstructing arguments in any book she reads.

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