A Critical Analysis of the “Innovator’s Dilemma”: Why Should New Technologies Cause Great Firms to Fail?

The disruptive innovation (DI) theory developed by Clayton Christensen has been one of themost influential management concepts in recent years, being required reading at such prominent companiesas Microsoft, AT&T and Cisco Systems. In this paper we describe the disruptive innovation process andanalyze the underlying assumptions of both the theory and of its practice implications. We argue thatthere is much misunderstanding in the business world as to the exact meaning of the theory and a clearneed for greater clarity on when it arises and what firms can do about it. In particular, we find that thetheory makes implicit assumptions about the availability of information that may be hard to sustain inmost circumstances. Our analysis gives rise to the conclusion that the standard models of managementcontrol cannot fully explain why disruptive innovations should necessarily cause well-run firms to fail,while at the same time startups are able to succeed. That leaves two possibilities: that the process isinvalid as a descriptive phenomenon, or alternatively, that some other force is driving the DI phenomenon.It is the second possibility that we focus on in this paper, developing a model based on Prospect Theorythat more fully explains why managers at large firms would react differently to a DI than those at startups.Better understanding the assumptions underlying DI theory and its practice implications is critical forthose whose responsibility it is to develop the firm’s strategic control systems, in particular, to managementaccountants.