The Innovator's Dilemma: U.S. Steel's Choice

For a company or industry in crisis, innovation is a bit like the difference between waiting to die and courting death.

That's why you fix the roof while the sun is shining. "Prepare for danger in times of peace" is ancient wisdom — the kind of thing that can only be proven over a long span of time.

Not long after we finished discussing the U.S. Steel case, the company announced it was being acquired, ending its life as a century-old steelmaker. Because business schools hold the copyright on their cases, I'm not sure how much information is appropriate to share. You can search "U.S. Steel" for more background and detail; roughly, here's the story: In December 2023, U.S. Steel (USS), once a giant of American steel manufacturing, was finally "sold off cheap" to a Japanese company for US$14.9 billion after a four-month bidding contest. This steelmaker was once a pillar of the American economy, with a 122-year history, and was once the largest and most valuable company in the world. At the start of the last century, the steel it produced helped the United States become a global economic superpower. It witnessed the rise of one American building after another, supplying steel for skyscrapers, dams and bridges, as well as for the cars and appliances American consumers dreamed of. Its competitive power was so great that it helped prompt the creation of American antitrust law, and it was the first company in the world whose market value passed US$1 billion. In 1943 the company had 340,000 employees in total; by last year, only 22,500 remained. And the valuation in this sale is less than 0.5% of Apple's. The company's decline is just a microcosm of the fall of American steel. In fact, the entire American steel industry today is little more than an empty shell, and not a single company makes it into the world's top ten steel producers. As for the reasons why,

First, a lack of technological innovation. The company kept using technology from the 1940s. The American steel industry long relied on the traditional blast furnace–converter method of producing steel, neglecting the development of new technologies such as electric arc furnace steel and continuous casting and rolling, which led to high production costs, low quality and serious environmental pollution.

Second, changes in market demand. The American steel industry depended mainly on demand from industries such as autos, construction and machinery, and in the late 20th century these industries all declined or transformed, reducing demand for steel.

Third, intensifying international competition. The American steel industry faced fierce competition from Japan, Europe, China and other countries, whose steelmakers used more advanced technology, lower costs, higher quality and more flexible strategies, seizing market share from American steel.

Finally, unfavourable policies and institutions. The American steel industry was affected by excessive government intervention, excessive union protection, excessively restrictive environmental regulation and other factors, leaving steelmakers with low operating efficiency, weak innovation capacity and poor adaptability. The Innovator's Dilemma identifies two different categories based on the environment of innovation: "sustaining innovation" and "disruptive innovation."

In a "sustaining innovation" environment — when the competition is about making better products that can be sold at higher prices to attractive customers — we find that incumbents win almost every time. In a "disruptive innovation" environment — when the challenge is to commercialise a simple, convenient product and sell it at a lower price to new or unattractive customer segments — the upstarts often win. This is the phenomenon we so often see of successful companies being toppled. Of course, it also implies that for upstarts, the best way to beat the well-known players in an industry is to use a disruptive strategy.

Just like U.S. Steel (USS), which gave up its market share bit by bit, steadily and gradually attacked from the thin-margin bottom by the mini-mills.

Were they all just too stupid? No. When we dig into the case from back then, we can clearly see that traditional "sustaining innovators," when facing choices about innovation, "each had their own difficulties," and each had good reasons — it was rational choices that led them, step by step, to be disrupted. Imagine: when facing new technologies like "electric arc furnace steel and continuous casting and rolling," who would be in the room at a USS leadership meeting? The union, customers, sales reps, the finance team, shareholders. Would each of these roles want the new technology or the old one? The union: the old technology, because it keeps their jobs. Customers: the old technology, because they want good, stable products. Sales: the old technology, because they need to keep customers happy. Finance: the old technology, because the numbers look better on the statements — new technology has to be amortised, and profits take time. Shareholders: also the old technology, because they care more about the statements. Does the CEO want the new technology? Maybe yes. But who, at the negotiating table, will take on the risk of choosing to invest in new technology? This isn't an event; it's a process. Many big players look down on the meagre profits that new technology brings at first, ignore disruptive innovation, and choose to put their effort into sustaining innovation. If the decision-makers don't have to answer for the company's "hundred-year plan," then decline seems the most likely outcome. — Here, family businesses actually have something of an advantage.

Sometimes strategy is about seeing how the battlefield is shifting. As one entrepreneur said during the discussion:

"I can go without making money, but this technology must be invested in — that's how you lock the small competitors into the low end of the market."

That kind of boldness got my heart racing a little.

Anyway, let me jump to a conclusion:

We should pursue "innovation" beyond what "rationality" alone would dictate. Rationality calculates and judges based on the "known," while innovation is full of unknowns — innovation is being vaguely right.

Other truths that are just as right:

"To love" is always better than "indifference"

"To forgive" is always better than "holding a grudge"

"To learn" is always better than "standing still"

"Openness" is always better than "closedness"