THE BOOK. THE INNOVATOR'S SOLUTION

A Conversation with Clay Christensen and Michael Raynor, authors of The Innovator's Solution

The Innovator’s Dilemma was a frightening wake-up call for many executives. Can you explain how companies get caught in this situation?

By doing what good companies are supposed to do—cater to their most profitable customers and focus investments where profit margins are most attractive—established industry leaders leave themselves open for disruptive technologies to bury them. This happens because the resource allocation processes of established companies are designed to maximize profits through sustaining innovations, which essentially involve designing better and better mousetraps for existing customers or proven market segments. When disruptive innovations—which are typically cheaper, simpler to use versions of existing products that target low-end or entirely new customers—emerge, established companies are paralyzed. They are almost always motivated to go up-market rather than to defend these new or low-end markets, and ultimately the disruptive innovation improves, steals more market share, and replaces the reigning product. We call this phenomenon “asymmetric motivation.” It is the core of the innovator’s dilemma, but it is also the beginning of the innovator’s solution.

In a way, the dilemma and the solution are like opposite sides of the same coin.

Yes. Because the established company’s course of action is so predictable, it is clear what executives who seek to create new growth businesses should do. They should target products and markets that the established companies are motivated to ignore or run away from.

So while The Innovator’s Dilemma was aimed at companies that were being disrupted by new innovators, The Innovator’s Solution is for the would-be attackers.

At its heart, this book is about how to improve the odds of success in launching new growth businesses by shaping and introducing disruptive innovations, whether by start-ups or established firms. But we’ve tried to reveal how established companies can avoid getting overthrown by disruption, and instead find ways to capitalize on it, since established firms face a unique set of challenges. Our research has uncovered a set of theories that can help make innovation far more predictable and successful than it’s been in the past, regardless of whether it is a start-up or an established firm.

Most managers believe the only predictable thing about innovation is its unpredictability. History seems to support this random pattern—great new innovations can fail; unlikely products take off. Can you explain?

Certainly the outcome of past innovations seems random. But what our research focused on was the process by which new growth businesses are created. And that process turns out to be quite amenable to control and predictability, whether the company makes clothing, disc drives, contact lenses, or computers. There are a number of powerful forces that act on managers as they shape innovations within an organization, and those forces most often cause companies to churn out “me-too” innovations rather than disruptive ones. However, if managers understand those forces and learn to leverage them, they can vastly improve their odds of innovative success.

Your book introduces a number of theories managers can use to better decipher and execute the innovation process. How will these theories change the way managers currently make decisions?

Many managerial predictions are currently based on the “correlation of attributes”, such as “industry standards improve profitability” or “outsourcing reduces cost” or “giant leaps forward are harder than incremental steps.” These kinds of theories are frustratingly undependable because they have low “predictive power.” The theory of disruption, in contrast, is based on the underlying causal mechanisms of success and recognition of the importance of circumstances when attempting to exploit those same causal mechanisms. As a result, we offer a set of theories that helps predict with much higher accuracy whether incumbents or entrants will win a given competitive battle, and what each can do to improve their odds of success.

Actually, you have a rule of thumb theory about competitive battles. What is it?

In general, we found that, historically, incumbents almost always prevail in sustaining situations, because they have the motivation to protect their current business and the resources to fight for it. In disruptive situations, entrants are more likely to beat incumbents because established leaders are motivated to flee rather than to fight. This pattern is likely to continue uninterrupted unless both incumbents and entrants understand why this has been the case, and learn to turn those same forces that have so far led to their downfall to their advantage.

Should companies avoid the aggressive pursuit of sustaining innovations in favor of disruptive ones?

No, sustaining innovations are critical to the growth of existing businesses. And in fact, the innovator’s dilemma is rooted in the fact that sustaining innovations are so important and attractive, relative to disruptive ones, that executives ignore disruptive threats and opportunities until the game is over. However, in order to successfully create new growth, companies must also be capable of executing a strategy of disruption.

Why can’t companies just change the current resource allocation process to be more receptive to ideas with disruptive potential?

Executives need the current resource allocation process because that process is critical to managing sustaining innovations, which in turn is critical to the success of the established business. Instead of changing the current process, they need to create another, parallel process into which they can channel potentially disruptive opportunities. To get on the other side of the innovator’s dilemma, companies need to follow two important steps. First, they need to get top-level commitment by framing an innovation as a threat during the resource allocation process. This will force the company to address the technology because their instincts will be to protect their core business and most profitable customers. Later, after the new innovation has won funding and is ready for shaping and developing, the company should shift responsibility to an autonomous organization that can frame it as an opportunity.

How can managers tell if an idea has disruptive potential?

Innovations with disruptive potential target customers who are over served or unserved by existing offerings and have a trajectory of improvement that intersects the performance profile of successful products in some established market. So, for example, transistors were a disruptive innovation because they made possible a set of products that made life much easier or more enjoyable for customers that vacuum tube based technology was too expensive and, ironically, too good for. Initial applications in hearing aids and portable radios represented seemingly unattractive markets for the vacuum tube manufacturers. But from that disruptive foothold the makers of transistor-based products marched relentlessly up market to disrupt every application of vacuum tube technology. More recently, personal computers took root as toys for children, but ended up supplanting many mainframe and minicomputer applications. The list of examples is long, but in every case the distinguishing characteristics are the same: finding a foothold among customers ignored – usually deliberately – by incumbent firms, then delivering a series of improvements that eventually results in usurping market dominance.

New product introductions have a more than a 60% failure rate. You say that market segmentation plays a big role in this—why?

It’s well understood that market segments should reflect the way customers experience life—yet most executives instead segment markets along the lines for which data is available: product categories, price points, demographics. Because such categories don’t reflect the things that customers are actually trying to get done in their lives, executives end up introducing products customers simply don’t want. A new way to think about market segmentation is based on the notion that customers “hire” products to do specific “jobs” for them. By targeting products at the circumstances in which customers find themselves, instead of at the customers themselves, innovators can get a much clearer road map for improving their products to beat the true competition from the customers’ perspective.

Many companies base outsourcing decisions on the notion of “core competencies.” Why is that a mistake?

Competitiveness is far more about doing what customers value than doing what you think you’re good at. Instead of asking what their company does best today, managers should ask what they need to master today and in the future in order to improve in the arenas that customers will define as important. The answer begins with the job-to-be-done approach: customers will not buy your product unless it solves an important problem for them. But what constitutes a “solution” changes because what customers perceive as their most important problem changes: as soon as one problem is solved, what used to be #2 on their list gets promoted to #1. And solving this new #1 problem often requires mastering a new set of activities. Our research shows that companies should design and build internally with proprietary architectures those elements of value-added whose performance is not yet good enough – that is, when they are trying to solve the most important problem. When performance is more than good enough – that is, when a problem has essentially been solved – the architecture will become modular and others should provide it. The bedrock principle is simply that you can’t get paid a lot for doing easy things.

Is it inevitable that at some point, every innovation will become commoditized?

One of the most exciting insights from our research about commoditization is that whenever it is at work somewhere in a value chain, a reciprocal process of de-commoditization is at work somewhere else in the value chain. And whereas commoditization destroys a company’s ability to capture profits by undermining differentiability, de-commoditization creates opportunities to create and capture potentially enormous wealth.

How does disruption fit into the commoditization phenomenon?

Disruption and commoditization actually go hand in hand. A company that overshoots—one that improves a product to the point that it is more than good enough for customers to use and pay a premium for—simply can’t win. Either disruption will steal its markets, or commoditization will steal its profits. As new waves of disruption wash over an industry, the place where the money will be will shift across the value chain over time. As this happens, companies that position themselves at a spot in the value chain where performance is not yet good enough will capture the profit.

Why are “right stuff” managers often the wrong people to lead new growth ventures?

It takes an entirely different set of skills to lead an already established business than it does to lead a nascent one. For one thing, many top managers have little experience with outright failure—and it is those kinds of learning experiences that are critical to shaping and guiding new, risky innovations. But it isn’t just the leadership that sinks so many new growth ventures. Many companies think that since the policies, processes, and values of the core business work so well, they should also apply them to the new business. You can’t do that. Often the very things and people that make the core business successful are what will cause a new venture to fail.

Most executives feel pressure to grow as fast as possible, so they grow first and hope profits will follow. You say have it backwards: companies must be patient for growth but impatient for profits.

Expecting new growth businesses to generate profit relatively quickly does two important things. First, it helps accelerate the emergent strategy process by forcing the venture to test as quickly as possible the assumption that there are customers who will pay attractive prices for the firm’s products. The fledgling business can then press on or change course based on this feedback. Second, forcing a venture to become profitable as soon as feasible helps protect it from being shut down when the core business turns sour. Money should be impatient for growth in later-stage, deliberate strategy circumstances, after a winning strategy for the new business has emerged.

Have any companies become successful “serial disruptors”—or has disruption primarily been a one-time event?

Sony was a serial disruptor for a time, creating a string of a dozen disruptive new-growth businesses between 1950 and 1983. Hewlett-Packard did it at least twice, when it launched microprocessor-based computers and ink-jet printers. But disruptors in one generation often become disruptees later. The Ford Model T, for example, created the first massive wave of disruptive growth in automobiles. Toyota, Nissan, and Honda then created the next wave, and Korean automakers Hyundai and Kia have now begun the third.

Is it possible for companies to make disruption a permanent aspect of how they do business?

If a company tackles the task of creating disruptive growth again and again, the ability to create successful disruptive growth businesses can become ensconced in a process—something we call a disruptive growth engine. To succeed, companies will need to launch new growth businesses while their established businesses are still growing. They’ll need senior executive support and a team that is dedicated to finding and shaping ideas with disruptive potential. And they’ll need to train people throughout the company to identify disruptive opportunities when they see them.

Most business books end with a caveat about how success depends on the involvement of the CEO and senior executives. But the truth is, the CEO has only a limited amount of time. How can executives determine where their input is most valuable?

Most executives believe that the decisions that merit their direct involvement are those business units and situations in which a lot of money is at stake. We have a different theory. For those decisions that the mainstream processes and values were designed to make effectively (primarily sustaining innovations), less senior executive involvement is needed. It is when senior executives sense that the processes and values of the mainstream organization were not designed to handle important decisions (typically the case in disruptive circumstances) that a senior executive needs to participate. It is those decisions that will determine whether a company becomes a serial disruptor—or the victim of one.

THE INNOVATOR’S SOLUTION

Creating and Sustaining Successful Growth

Clayton M. Christensen and Michael E. Raynor

Harvard Business School Press

Publication Date: October 9, 2003

Price: $29.95; Page Count: 320; ISBN: 1-57851-852-0

Visit our Web Site: www.hbspress.org