---
description: Listening to best customers investing in highest margins and allocating to proven markets creates structural bias against disruptive innovations that look unattractive on every metric
type: claim
domain: teleological-economics
created: 2026-02-21
source: "Clayton Christensen, The Innovator's Dilemma (1997)"
confidence: likely
tradition: "Christensen disruption theory"
---

# good management causes disruption because rational resource allocation systematically favors sustaining innovation over disruptive opportunities

This is the core paradox of The Innovator's Dilemma: the firms that fail are not poorly managed -- they are excellently managed. They do exactly what business school teaches. They listen to their best customers. They invest in the highest-margin opportunities. They allocate resources to products that promise the greatest returns. They study market trends and respond to competitive dynamics. The problem is that every one of these rational practices creates a systematic bias against disruptive innovations. When a disruptive technology emerges, it looks unattractive by every measure a well-managed firm uses: the target market is small, the margins are low, existing customers do not want it, and it underperforms on the metrics the company tracks.

The steel mini-mill example illustrates this perfectly. When mini-mills entered at the bottom of the steel market making rebar -- the lowest-quality, lowest-margin product at just 7% gross margins for integrated mills -- the integrated mills were happy to cede this business. Their spreadsheets told them the rational move was to shift capacity toward higher-margin products. Each retreat up-market made perfect financial sense on the CFO's spreadsheet until the integrated mills ran out of higher markets to retreat into. No integrated steel company was able to successfully deploy mini-mill technology inside their business model, even with a 20% cost advantage, because it always made more financial sense to re-orient production capacity to higher-margin products. This is the innovator's dilemma in its purest form: rationality at each step produces catastrophe in aggregate.

This mechanism is a specific instance of [[companies and people are greedy algorithms that hill-climb toward local optima and require external perturbation to escape suboptimal equilibria]]. Good management is greedy optimization -- maximizing the objective function (returns to shareholders) at each decision point. The disruption comes from below precisely because the greedy algorithm has no mechanism to evaluate opportunities outside its current value network. Since [[proxy inertia is the most reliable predictor of incumbent failure because current profitability rationally discourages pursuit of viable futures]], the better the management, the more reliably it optimizes for current profitability, and the more vulnerable it becomes to disruption from a different definition of value. This is also why [[the arc of enterprise runs from tight design through resource accumulation to strategic drift as success enables the laxity that creates vulnerability]] -- the resources accumulated through good management become the very anchor that prevents strategic reorientation.

The asymmetry of motivation compounds this. New entrants are motivated to move up-market toward better margins, while incumbents are motivated to retreat from low-margin segments. Both sides act rationally given their position, yet the aggregate outcome is the incumbent's displacement. This is [[the universal disruption cycle is how systems of greedy agents perform global optimization because local convergence creates fragility that triggers restructuring toward greater efficiency]] operating at the industry level: individual firms optimizing locally create the systemic fragility that enables restructuring.

---

Relevant Notes:
- [[companies and people are greedy algorithms that hill-climb toward local optima and require external perturbation to escape suboptimal equilibria]] -- good management IS greedy optimization, which is why it causes disruption
- [[proxy inertia is the most reliable predictor of incumbent failure because current profitability rationally discourages pursuit of viable futures]] -- the specific mechanism by which rational resource allocation becomes fatal
- [[the universal disruption cycle is how systems of greedy agents perform global optimization because local convergence creates fragility that triggers restructuring toward greater efficiency]] -- the industry-level pattern that emerges from individually rational firm behavior
- [[the arc of enterprise runs from tight design through resource accumulation to strategic drift as success enables the laxity that creates vulnerability]] -- the lifecycle through which good management accumulates the resources that anchor it
- [[value networks act as perceptual filters that make disruptive opportunities invisible to incumbents]] -- the perceptual mechanism that makes rational resource allocation blind to disruption

Topics:
- [[competitive advantage and moats]]