Six-Step Pattern of Incumbent Failure
The predictable sequence through which great companies lose to disruptive entrants
Through interviews with over eighty managers who played key roles at incumbent and entrant disk drive firms during periods of disruptive change, Christensen identified a stunningly consistent six-step pattern through which well-managed companies fail. The pattern is not driven by incompetence but by rational decision-making within the existing value network. At each step, the established firm makes the objectively reasonable choice, and yet the cumulative effect of these reasonable choices is catastrophic.
The pattern begins with engineers at the established firm developing the disruptive technology internally, often before entrants do. Marketing then tests the technology with the firm's best existing customers, who predictably reject it. The firm responds by doubling down on sustaining innovations that serve these customers. Meanwhile, a startup enters the emerging market with the disruptive technology. By the time the disruptive technology improves enough to attract the established firm's customers, the entrant has built capabilities and market position that the established firm cannot match. The established firm enters the disruptive market too late, discovers it cannot compete against the entrant's cost structure and market expertise, and either fails or is marginalized.
Recognizing this pattern as it unfolds is the critical first step toward avoiding it. Managers who can identify which step their organization is currently on can intervene before the pattern reaches its inevitable conclusion.
- Disruptive technologies are almost always first developed within established firms, not by entrants
- The failure occurs not in technology development but in resource allocation, when the organization chooses sustaining innovations over disruptive ones
- Each step in the pattern involves a rational decision that makes sense within the firm's value network, which is why the pattern is so difficult to interrupt
- By the time the disruptive technology is good enough for mainstream customers, the window for profitable entry by established firms has typically closed
- Step 1: Engineers develop the disruptive technology internallyEngineers at the established firm develop working prototypes of the disruptive technology, usually using bootlegged resources without formal management approval. The technology employs proven, off-the-shelf components in a new configuration.Pro tipIf your engineers have developed a prototype that nobody in management asked for, pay attention. At Seagate, engineers built eighty 3.5-inch drive prototypes before even asking for formal approval.
- Step 2: Marketing tests with mainstream customers, who reject itEngineers show prototypes to marketing, who test them with the firm's lead customers using habitual procedures. These customers reject the disruptive product because it does not meet their current performance requirements. Sales forecasts are pessimistic, and financial analysts oppose the project due to lower projected margins.Pro tipThis is the critical intervention point. If your marketing team is testing a potentially disruptive product only with existing customers, they are asking the wrong people.WarningNot surprisingly, IBM showed no interest in Seagate's 3.5-inch drives. They were looking for 40 and 60 MB drives and already had slots designed for 5.25-inch drives.
- Step 3: The firm accelerates sustaining innovation insteadIn response to mainstream customer demands, the firm redirects resources to sustaining innovations that offer larger markets, higher margins, and satisfied customers. These sustaining investments appear far less risky because the customers exist and their needs are known.WarningThis step feels like smart management. Seagate's decision to pursue 60-100 MB 5.25-inch drives instead of sub-50 MB 3.5-inch drives was supported by every rational analysis.
- Step 4: Entrants enter the emerging marketEngineers who championed the disruptive technology leave the established firm (often in frustration) and join or found startups. These startups find customers in the emerging market who value the disruptive technology's attributes.Pro tipTrack where your departing engineers go and what they build. They often create the companies that will eventually attack your market from below.
- Step 5: Entrants move upmarket as the technology improvesThe entrants build their businesses in the emerging market, accumulate design and manufacturing experience, and steadily improve their products. Eventually their technology improves to the point where it can satisfy the needs of the established firm's mainstream customers.WarningThe established firm typically does not notice this upmarket movement until it is too late because the entrant's initial market was too small and too different to warrant attention.
- Step 6: The established firm belatedly enters the disruptive marketWhen the disruptive technology begins stealing mainstream customers, the established firm finally enters the disruptive market. But by now the entrant has cost advantages, market expertise, customer relationships, and iteratively refined products that the established firm cannot match.WarningAt this point, the established firm is trying to enter a market against entrenched competition, having exchanged market risk for competitive risk. The evidence shows that late entrants rarely succeed.
Seagate engineers developed eighty 3.5-inch prototypes. Marketing tested them with IBM, which rejected them. Seagate accelerated sustaining 5.25-inch innovation instead, introducing new models at rates of 57, 78, and 115 percent per year. Meanwhile, Conner Peripherals co-developed 3.5-inch drives with Compaq for the laptop market. By the time 3.5-inch drives had enough capacity for desktops, Conner and other entrants dominated the market.
Control Data engineers developed 8-inch drive prototypes internally, nearly two years before the product appeared in the market. But engineers assigned to the 8-inch project kept getting pulled off to resolve problems with 14-inch drives for more important customers. The 8-inch project was given low priority because mainstream mainframe customers needed more capacity, not less.
This six-step pattern emerged directly from Christensen's interviews with managers at firms like Seagate, Control Data, Quantum, Micropolis, and others who lived through the transitions between disk drive generations. The pattern was exemplified most clearly by Seagate's experience with the 3.5-inch drive: Seagate engineers developed working prototypes, Seagate marketers tested them with IBM (who rejected them), Seagate accelerated sustaining 5.25-inch development instead, Conner Peripherals captured the emerging laptop market, and by the time 3.5-inch drives invaded the desktop market, Seagate was too late to lead.