The Innovator's Solution

"By focusing on ability to learn, it is possible to avoid the trap of assuming that the finite list of competencies important for today are those that will be required in the future."

- Clayton M. Christensen

INTRODUCTION

From his success in the corporate world, to his research and academic work at Harvard, Clay Christensen is perhaps most well known for his (oftne misunderstood) theories on disruption.

The Innovator's Solution is a sequel, to his ground breaking title, "The Innovator's Dilemma", which subsequently also spawned serveral other books by similar names.

The Innovator's Dilemma identified two distinct categories of innovation- sustaining and disruptive.

As per Christensen's theory, incumbent are always motivated to go up-market, and almost never motivated to defend the new or low-end markets that the disruptors find attractive. He call this phenomenon asymmetric motivation. It is the core of the innovator's dilemma, and the beginning of the innovator's solution.

However, that solution is one that requires not only the right skillsets & attitudes, but the ability to also use the right theories all while understanding the overall context of business and enterprise.

 

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TAKEAWAYS

I've reordered and added to these takeaways. For a chronological ordering of the core insights - see my original Thread here.

GENERAL

Emergent strategies result from managers' responses to problems or opportunities that were unforeseen in the analysis and planning stages of the deliberate strategy-making process. Emergent processes should dominate in circumstances in which the future is hard to read and in which it is not clear what the right strategy should be.

A principal refrain in this book is that blindly copying the best practices of successful companies without the guidance of circumstance-contingent theory is akin to fabricating feathered wings and flapping hard. Replicating their success is not about duplicating their attributes; it's about understanding how to generate lift.

We suspect that founders have an advantage in tackling disruption because they not only wield the requisite political clout but also have the self-confidence to override established processes in the interests of pursuing disruptive opportunities.

An organization cannot disrupt itself. It can only implement technologies in ways that sustain its profit or business model.

Because evidence from the past can be such a misleading guide to the future, the only way to see accurately what the future will bring is to use theory.

if you frame a phenomenon to an individual or a group as a threat, it elicits a far more intense and energetic response than if you frame the same phenomenon as an opportunity.

Much of the art of marketing focuses on segmentation: identifying groups of customers that are similar enough that the same product or service will appeal to all of them.

Many of the most insightful management thinkers have accepted the assumption that creating growth is risky and unpredictable, and have therefore used their talents to help executives manage this unpredictability.

Because of this belief that the process of business creation is unfathomable, few have sought to pry open the black box to study the process by which new-growth businesses are created.

Executives often discount the value of management theory because it is associated with the word theoretical, which connotes impractical. But theory is consummately practical.

Every time managers make plans or take action, it is based on a mental model in the back of their heads that leads them to believe that the action being taken will lead to the desired result. The problem is that managers are rarely aware of the theories they are using and they often use the wrong theories for the situation they are in. It is the absence of conscious, trustworthy theories of cause and effect that makes success in building new businesses seem random.

Predictable marketing requires an understanding of the circumstances in which customers buy or use things. Specifically, customers-people and companies-have "jobs" that arise regularly and need to get done. When customers become aware of a job that they need to get done in their lives, they look around for a product or service that they can "hire" to get the job done. This is how customers experience life.

To succeed predictably, disruptors must be good theorists.

An idea that is disruptive to one business may be sustaining to another.

We call disruptions that take root at the low end of the original or mainstream value network low-end disruptions.

The functional, emotional, and social dimensions of the jobs that customers need to get in which they buy. [...] Put another way, the critical unit of analysis is the circumstance and not the customer.

Defining market segments in a product-based way actually causes a headlong, arms race-like rush toward undifferentiable, one-size-fits-all products that perform poorly any specific jobs that customers might hire them to do.

Rather, the new product will succeed to the extent it helps customers accomplish more effectively and conveniently what they're already trying to do.

If your reaction has been that theory is too complicated-that you're an action-driven manager and are not a theory-driven person-think again. While you may not have known it, you have been using theory for the whole of your managerial life. Whenever you have taken an action or made a plan, it was predicated upon a theory in your mind that your actions would lead to the envisioned outcome.

ON INNOVATION & DISRUPTION

The Innovator's Dilemma identified two distinct categories sustaining and disruptive-based on the circumstances of innovation. In sustaining circumstances-when the race entails making better products that can be sold for more money to attractive customers-we found that incumbents almost always prevail. In disruptive circumstances when the challenge is to commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customer set--the entrants are likely to beat the incumbents.

The established competitors almost always win the battles of sustaining technology. Because this strategy entails making a better product that they can sell for higher profit margins to their best customers, the established competitors have powerful motivations to fight sustaining battles. And they have the resources to win.

Disruptive innovations, in contrast, don't attempt to bring better products to established customers in existing markets. Rather, they disrupt and redefine that trajectory by introducing products and services that are not as good as currently available products. But disruptive technologies offer other benefits typically, they are simpler, more convenient, and less expensive products that appeal to new or less-demanding customers.

They are always motivated to go up-market, and almost never motivated to defend the new or low-end markets that the disruptors find attractive. We call this phenomenon asymmetric motivation. It is the core of the innovator's dilemma, and the beginning of the innovator's solution.

Executives must answer three sets of questions to determine whether an idea has disruptive potential. The first set explores whether the idea can become a new-market disruption.

Is there a large population of people who historically have not had the money, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them?

To use the product or service, do customers need to go to an inconvenient, centralized location?

The second set of questions explores the potential for a low-end disruption. This is possible if these two questions can be answered affirmatively:

Are there customers at the low end of the market who would be a happy to purchase a product with less (but good enough) performance if they could get it at a lower price?

Can we create a business model that enables us to earn attractive profits at the discount prices required to win the business of these over served customers at the low end?

Once an innovation passes the new-market or low-end test, there is still a third critical question, or litmus test, to answer affirmatively:

Is the innovation disruptive to all of the significant incumbent firms in the industry? If it appears to be sustaining to one or more significant players in the industry, then the odds will be stacked in that firm's favor, and the entrant is unlikely to win.

With new-market disruptions, in contrast, the challenge is to invent the upward path, because nobody has been up that trajectory before.

Another kind of nonconsumption occurs, however, when people are trying to get a job done but are unable to accomplish it themselves because the available products are too expensive or too complicated. Hence, they put up with getting it done in an inconvenient, expensive, or unsatisfying way.

A new-market disruption is an innovation that enables a larger population of people who previously lacked the money or skill now to begin buying and using a product and doing the job for themselves.

Rather, the successful innovations will emerge from companies who carve disruptive footholds by targeting nonconsumption and moving up-market with better products only after they have started simple and small.

But because they instinctively define the disruption as a threat, they focus on being able to protect their customers and their current business. They want to be there with the new technology ready when they must switch to it in order to protect their current customers. This causes the organization to pursue a strategy that not only misses the growth opportunity but also leads to its eventual destruction-because the disruptors who take root in nonconsumption eventually kill them.

ON GROWTH & BUSINESS MODELS

A company must deliver the rate of growth that the market is projecting just to keep its stock price from falling. It must exceed the consensus forecast rate of growth in order to boost its share price.

Probably the most daunting challenge in delivering growth is that if you fail once to deliver it, the odds that you ever will be able to deliver in the future are very low.

A value network is the context within which a firm establishes a cost structure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers.

New value networks: These constitute either new customers who previously lacked the money or skills to buy and use the product, or different situations in which a product can be used-enabled by improvements in simplicity, portability, and product costs.

We say that new-market disruptions compete with "nonconsumption" because new-market disruptive products are so much more affordable to own and simpler to use that they enable a whole new population of people to begin owning and using the product, and to do so in a more convenient setting.

This asymmetry of perceptions explains why incumbents so consistently try to cram the disruptive technology into mainstream markets, whereas the entrants pursue the new-market opportunity.

First, the biggest markets whose size can be substantiated are those that exist. The very effort to articulate a convincing case for resources actually forces the entrepreneurs to cram the innovation as a sustaining technology in the existing market.

In each of the most successful disruptions we have studied, the product and its channel to the customer formed this sort of mutually beneficial relationship.

And whereas commoditization destroys a company's ability to capture profits by undermining differentiability, de-commoditization affords opportunities to create and capture potentially enormous wealth.

Firms that are being commoditized often ignore the reciprocal process of de-commoditization that occurs simultaneously with commoditization, either a layer down in subsystems or next door in adjacent processes

It is the habit of large, established companies to ramp up expenses ahead of revenues, because in a world of deliberate strategy and sustaining innovation, these are safe bets. But these outlays define a cost structure very quickly, and before you know it you've got yourself a business model that defines the kind of business that does or does not look attractive.

Core businesses that are still growing provide cover for new-growth businesses. Senior executives who are bolstered by a sense that the pipeline of new sustaining innovations in established businesses will meet or exceed investors' expectations can allow new businesses the time to follow emergent strategy processes while they compete against nonconsumption.

ON CULTURE & CAPABILITIES

A surprising number of innovations fail not because of some fatal technological flaw or because the market isn't ready. They fail because responsibility to build these businesses is given to managers or organizations whose capabilities aren't up to the task [...] most often the very skills that propel an organization to succeed in sustaining circumstances systematically bungle the best ideas for disruptive growth.

The problem with the core-competence / not-your-core-competence categorization is that what might seem to be a noncore activity today might become an absolutely critical competence to have mastered in a proprietary way in the future, and vice versa.

Core competence, as it is used by many managers, is a dangerously inward-looking notion. Competitiveness is far more about doing what customers value than doing what you think you're good at. And staying competitive as the basis of competition shifts necessarily requires a willingness and ability to learn new things rather than clinging hopefully to the sources of past glory.

In order to be confident that managers have developed the skills required to succeed at new assignment, one should examine the sorts of problems they have wrestled with in the past. It is not as important that managers have succeeded with the problem as it is for them to have wrestled with it and developed the skills and intuition for how to meet the challenge successfully the next time around.

Whether they are formal, informal, or cultural, however, processes define how an organization transforms inputs into things of greater value.

Innovating managers often try to start new-growth businesses using processes that were designed to make the mainstream business run effectively [...] but very often the cause of a new venture's failure is that the wrong processes were used to build it.

Whereas resources and processes are often enablers that define what an organization can do, values often represent constraints-they define what the organization cannot do.

[...] employees must prioritize those things that help the company to make money in the way that it is structured to make money.

Culture enables employees to act autonomously and causes them to act consistently.

When the organization's capabilities reside primarily in its people, changing to address new problems is relatively simple. But when the capabilities have come to reside in processes and values and especially when they have become embedded in culture, change can become extraordinarily difficult.

A company that works to develop a sequence of new-growth businesses can build a virtuous cycle in management development. Launching growth business after growth business creates a set of rigorous, demanding schools in which next-generation executives can learn how to lead disruption. Companies that only sporadically attempt to create new-growth businesses, in contrast, offer to their next-generation executives precious few of the courses they need to successfully sustain growth.

Heavyweight teams are tools to create new processes, or new ways of working together. In contrast, lightweight or functional teams are tools to exploit existing processes.

If senior managers have properly schooled themselves in sound theories of strategy and management, they can coach the managers of important growth businesses on both the sustaining and disruptive sides of the interface to take the actions that are appropriate to each particular circumstance. Ensuring that deliberate and emergent strategy processes are employed in the right circumstances and that managers are hired whose experience is a match for the problems at hand are ongoing challenges on both sides of the divide.

The school-of-experience theory, however, says that potential should not be measured by attributes, but rather by the ability to acquire the attributes and skills needed for future situations [...] By focusing on ability to learn, it is possible to avoid the trap of assuming that the finite list of competencies important for today are those that will be required in the future.

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