The Innovator's Solution, Clayton Christensen (7/10)

A practical “how-to” guide for executives and managers to grow new businesses and disrupt incumbent competitors

The Innovator's Solution, Clayton Christensen (7/10)

Rating: 7/10
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🎨 Impressions

After reading The Innovator’s Dilemma, I found myself once again sceptical of reading an out-dated book. But I’m very grateful I did - The Innovator’s Solution is an essential follow-up and, in my opinion, better than its predecessor!

In this book, Professor Christensen summarises the theories of The Innovator’s Dilemma and provides executives and managers with a practical, “how-to” guide for managers to grow new businesses and disrupt incumbent competitors. The book is noticeably less old-school and academic in its structure and narrative than its predecessor, but is nevertheless a relatively challenging read and requires some perseverance.

For those pressed for time, and well-versed in business strategy and management, I would recommend skipping to the chapter summaries.

🔍 How I Discovered It

Famous business book used by various CEOs. Known and recommended on Goodreads. Sheerwan read and recommended.

🥰 Who Would Like It?

Overall, I would recommend this book to anyone interested in applying the theory of disruption and innovation - either if starting a new business, or managing and growing an existing business.

☘️ How the Book Changed Me

This book helped me realise the importance of starting innovations early - not to wait for your company to reach a start where you NEED to grow... be forward thinking

✍️ My Top 3 Quotes

  • Never say yes to a strategy that targets customers and markets that look attractive to an established competitor.
  • Be impatient for profit. When someone tells you as a senior executive that you must endure years of substantial losses before a new business will become huge and profitable, this flags a plan to cram a disruptive technology into a sustaining role in an established market
  • Keep your company growing so that you can be patient for growth

📒 Summary + Notes

Chapter 1: The Growth Imperative

Even expanding firms face a variant of the growth imperative. No matter how fast the growth treadmill is going, it is not fast enough. The reason: Investors discount into the present value of a company’s stock price whatever rate of growth they foresee the company achieving. Thus, even if a company’s core business is growing vigorously, the only way its managers can deliver a rate of return to shareholders in the future that exceeds the risk-adjusted market average is to grow faster than shareholders expect. Changes in stock prices are driven not by simply the direction of growth, but largely by unexpected changes in the rate of change in a company’s earnings and cash flows. Hence, a company projected to grow at 5% that keeps growing at 5% and another company projected to grow at 25% and delivers 25% growth will both produce for future investors a market-average risk-adjusted rate of return in the future.

The Innovator’s Dilemma summarised a theory that explains how, under certain circumstances, the mechanism of profit-maximising resource allocation causes well-run companies to get killed. The Innovator’s Solution, in contrast, summarises a set of theories that can guide managers who need to grow new businesses with predictable success—to become the disruptors rather than the disruptees—and ultimately kill the well-run, established competitors. To succeed predictably, disruptors must be good theorists. As they shape their growth business to be disruptive, they must align every critical process and decision to fit the disruptive circumstance.

  • Chapter 2: How can we beat our most powerful competitors? What strategies will result in the competitors killing us, and what courses of action could actually give us the upper hand?
  • Chapter 3: What products should we develop? Which improvements over previous products will customers enthusiastically reward with premium prices, and which will they greet with indifference?
  • Chapter 4: Which initial customers will constitute the most viable foundation upon which to build a successful business?
  • Chapter 5: Which activities required to design, produce, sell, and distribute our product should our company do internally, and which should we rely upon our partners and suppliers to provide?
  • Chapter 6: How can we be sure that we maintain strong competitive advantages that yield attractive profits? How can we tell when commoditization is going to occur, and what can we do to keep earning attractive returns?
  • Chapter 7: What is the best organizational structure for this venture? What organizational unit(s) and which managers should contribute to and be responsible for its success?
  • Chapter 8: How do we get the details of a winning strategy right? When is flexibility important, and when will flexibility cause us to fail?
  • Chapter 9: Whose investment capital will help us succeed, and whose capital might be the kiss of death? What sources of money will help us most at different stages of our development?
  • Chapter 10: What role should the CEO play in sustaining the growth of the business? When should CEOs keep their hands off the new business, and when should they become involved?

Chapter 2: How Can We Beat Our Most Powerful Competitors?

Disruption is a theory: a conceptual model of cause and effect that makes it possible to better predict the outcomes of competitive battles in different circumstances. The asymmetries of motivation are natural economic forces that act on all businesspeople, all the time. Historically, these forces almost always have toppled the industry leaders when an attacker has harnessed them, because disruptive strategies are predicated upon competitors doing what is in their best and most urgent interest: satisfying their most important customers and investing where profits are most attractive. In a profit-seeking world, this is a pretty good bet.

Not all innovative ideas can be shaped into disruptive strategies, however, because the necessary preconditions do not exist; in such situations, the opportunity is best licensed or left to the firms that are already established in the market. On occasion, entrant companies have simply caught the leaders asleep at the switch and have succeeded with a strategy of sustaining innovation. But this is rare. Disruption does not guarantee success: It just helps with an important element in the total formula. Those who create new-growth businesses need to get on the right side of a number of other challenges.

Chapter 3: What Products Will Customers Want to Buy?

Identifying disruptive footholds means connecting with specific jobs that people—your future customers—are trying to get done in their lives. But in building convincing business cases for new products, managers are compelled to quantify opportunities. However, there is a mismatch between the true needs of consumers and the data that shape most product development efforts. This leads most companies to aim their innovations at nonexistent targets. The importance of identifying these jobs to be done goes beyond simply finding a foothold. Only by staying connected with a given job as improvements are made, and by creating a purpose brand so that customers know what to hire, can a disruptive product stay on its growth trajectory.

Chapter 4: Who Are The Best Customers for Our Products?

You want customers who have long wanted your product but were not able to get one until you arrived on the scene. You want to easily delight these customers, and you want them to need you. You want customers whom you can have all to yourself, protected from the advances of competitors. And you want your customers to be so attractive to those you work with that everyone in your value network is motivated to cooperate in pursuing the opportunity.

The search for customers like this is not a quixotic quest. These are the kinds of customers that you find when you shape innovative ideas to fit the four elements of the pattern of competing against non-consumption.

Despite how appealing these kinds of customers appear, the resource allocation process forces most companies to pursue exactly the opposite kinds of customers: They target customers already using a product to which they have become accustomed.

To escape this dilemma, managers must frame the disruption as a threat in order to secure resource commitments and then switch the framing for the team charged with building the business to be one of a search for growth opportunities. Carefully managing this process in order to focus on these ideal customers can give new-growth ventures a solid foundation for future growth.

Chapter 5: Getting The Scope of the Business Right

When the functionality and reliability of a product are not sufficient to meet customers’ needs, the companies that will enjoy significant competitive advantage are those whose product architectures are proprietary and integrated across the performance-limiting interfaces in the value chain. When functionality and reliability become more than adequate, so that speed and responsiveness are the dimensions of competition that are not now good enough, the opposite is true. A population of nonintegrated, specialised companies whose rules of interaction are defined by modular architectures and industry standards holds the upper hand.

At the beginning of a wave of new-market disruption, the companies that initially will be the most successful will be integrated firms whose architectures are proprietary because the product isn’t yet good enough. After a few years of success in performance improvement, those disruptive pioneers become susceptible to hybrid disruption by a faster and more flexible population of nonintegrated companies whose focus gives them lower overhead costs.

For a company that serves customers in multiple tiers of the market, managing the transition is tricky, because the strategy and business model that are required to successfully reach unsatisfied customers in higher tiers are very different from those that are necessary to compete with speed, flexibility, and low cost in lower tiers of the market. Pursuing both ends at once and in the right way often requires multiple business units

Chapter 6: How to Avoid Commoditisation

The power to capture attractive profits will shift to those activities in the value chain where the immediate customer is not yet satisfied with the performance of available products. In these stages, complex, interdependent integration occurs, i.e. activities that create steeper scale economics and enable greater differentiability. Attractive returns shift away from activities where the immediate customer is more than satisfied, because it is there that standard, modular integration occurs.

Understanding this process we might help managers to predict more accurately where new opportunities for profitable growth through proprietary products will emerge. These transitions begin on the trajectories of improvement where disruptors are at work, and proceed up-market tier by tier. This process creates opportunities for new companies that are integrated across these not-good-enough interfaces to thrive, and to grow by “eating their way up” from the back end of an end-use system. Managers of industry-leading businesses need to watch vigilantly in the right places to spot these trends as they begin, because the processes of commoditisation and de-commoditisation both begin at the periphery, not the core.

Chapter 7: Is Your Organization Capable of Disruptive Growth?

Managers whose organisations are confronting opportunities to grow must first determine that they have the people and other resources required to succeed. They then need to ask two further questions:

  1. Are the processes by which work habitually gets done in the organisation appropriate for this new project?
  2. Will the values of the organization give this initiative the priority it needs?

Established companies can improve their odds for success in disruptive innovation if they use functionally oriented and heavyweight teams where each is appropriate, and if they commercialize sustaining innovations in mainstream organizations but put disruptive ones in autonomous organizations.

A primary reason successful innovation seems difficult and unpredictable is that firms often employ talented people whose management skills were honed to address stable companies’ problems. And often, managers are set to work within processes and values that weren’t designed for the new task. Instead of accepting one-size-fits-all policies, if executives spend time ensuring that capable people work in organisations with processes and values that match the task, they will create a major point of leverage in successfully creating new growth.

Chapter 8: Managing the Strategy Development Process

Simply seeking to have the right strategy doesn’t go deep enough. The key is to manage the process by which strategy is developed. Strategic initiatives enter the resource allocation process from two sources—deliberate and emergent. In circumstances of sustaining innovation and certain low-end disruptions, the competitive landscape is clear enough that strategy can be deliberately conceived and implemented. In the nascent stages of a new-market disruption, however, it is almost impossible to get the details of strategy right. Rather than executing a strategy, managers in this circumstance need to implement a process through which a viable strategy can emerge.

There are three points of executive leverage in strategy making.

  1. Manage the cost structure, or values of the organization, so that orders of disruptive products from ideal customers can be prioritized.
  2. Discovery-driven planning—a disciplined process that accelerates learning what will and won’t work.
  3. Vigilantly ensure that deliberate and emergent strategy processes are being followed in the appropriate circumstances for each business in the corporation.

Chapter 9: There Is Good Money and There Is Bad Money

The experience and wisdom of the men and women who invest in and then oversee the building of a growth business are always important, in every situation. Beyond that, however, the context from which the capital is invested has a powerful influence on whether the start-up capital that they provide is good or bad for growth. Whether they are corporate capitalists or venture capitalists, when their investing context shifts to one that demands that their ventures become very big very fast, the probability that the venture can succeed falls markedly. And when capitalists of either sort follow sound theory—whether consciously or by intuition or happenstance—they are much more likely to succeed.

The central message of this chapter for those who invest and receive investment can be summed up in a single aphorism: Be patient for growth, not for profit. Because of the perverse dynamics of the death spiral from inadequate growth, achieving growth requires an almost Zen-like ability to pursue growth when it is not necessary. The key to finding disruptive footholds is to connect with a job in what initially will be small, non obvious market segments—ideally, market segments characterized by non-consumption.

Pressure for early profit keeps investors willing to invest the cash needed to fuel the growth in a venture’s asset base. Demanding early profitability is not only good discipline, it is critical to continued success. It ensures that you have truly connected with a job in markets that potential competitors are happy to ignore. As you seek out the early sustaining innovations that realise your growth potential, staying profitable requires that you stay connected with that job. This profitability ensures that you will maintain the support and enthusiasm of the board and shareholders. Internally, continued profitability earns you the continued support and enthusiasm of senior management who have staked their reputation, and the employees who have staked their careers, on your success. There is no substitute. Ventures that are allowed to defer profitability typically never get there.

Chapter 10: The Role of Senior Executives in Leading New Growth

Senior executives need to play four roles in managing innovation. First, they must actively coordinate action and decisions when no processes exist to do the coordination. Second, they must break the grip of established processes when a team is confronted with new tasks that require new patterns of communication, coordination and decision making. Third, when recurrent activities and decisions emerge in an organization, executives must create processes to reliably guide and coordinate the work of employees involved. And fourth, because recurrent cultivation of new disruptive growth businesses entails the building and maintenance of multiple simultaneous processes and business models within the corporation, senior executives need to stand astride the interfaces of those organizations—to ensure that useful learning from the new growth businesses flows back into the mainstream, and to ensure that the right resources, processes, and values are always being applied in the right situation.

When an established company first undertakes the creation of a new disruptive growth business, senior executives need to play the first and second roles. Disruption is a new task, and appropriate processes will not exist to handle much of the required coordination and decision making related to the initial projects. Certain of the mainstream organization’s processes need to be pre-empted or broken because they will not facilitate the work that the disruptive team needs to do. To create a growth engine that sustains the corporation’s growth for an extended period, senior executives need to play the third role masterfully, because launching new disruptive businesses needs to become a rhythmic, recurrent task. This entails repeated training for the employees involved, so that they can instinctively identify potentially disruptive ideas and shape them into business plans that will lead to success. The fourth task, which is to stand astride the boundary between disruptive and mainstream businesses, actively monitoring the appropriate flow of resources, processes, and values from the mainstream business into the new one and back again, is the ongoing essence of managing a perpetually growing corporation.

Chapter 11: Epilogue: Passing the Baton

We conclude with a summary of our advice to executives who seek solutions to the innovator’s dilemma.

Never say yes to a strategy that targets customers and markets that look attractive to an established competitor. Keep sending the team back to the drawing board until they’ve identified a disruptive foothold that established competitors will be happy to ignore or be relieved to walk away from. If you create asymmetries of motivation, your competitors will help you win. Though you may not have done this before, it should feel good if you are accustomed to bloody fights of sustaining innovation against motivated competitors.

If your team targets customers who already are using pretty good products, send them back to see if they can find a way to compete against non-consumption. When your customers are delighted to have a simple, inexpensive product because their alternative is to have nothing, all the techniques for pleasing customers that you learned in Marketing 101 will be easy and inexpensive. This also should spell welcome relief compared with the alternative, which is the massive investment typically required to make disruptive technologies preferable to the established products that customers already are comfortable using.

If there are no non-consumers available, ask your team to explore whether a low-end disruption is feasible. They must devise a business model that can make attractive profits at the discount prices required to capture customers at the low end of the market who can’t use all the functionality for which they currently must pay. If this isn’t possible either, then don’t invest—or at least, don’t invest with the expectation that this will create a significant growth business.

If the project leader ever uses the phrase, “If we can just get the customer to . . . ,” terminate the conversation. Send the team back to find a way to help customers get done more conveniently and inexpensively what they already are trying to get done. Competing wishfully against customers’ manifest priorities has shortened the tenure-in-job of some pretty good people.

If the team’s product or marketing plan focuses on market segments whose boundaries mirror your organisation’s boundaries, or if the targeted market is segmented along the lines for which data are readily available (by product type, price point, or demographic category), send the team back. Ask them to segment the market in ways that mirror the jobs that customers are trying to get done. Remind the team that you still have no alternative but to hire a one-size-fits-all milkshake for at least two different jobs that arise regularly in your life. The milkshake business is stalled because quick-service restaurants keep improving the shake’s attributes rather than doing each job better and better—which would grow the category by helping shakes to steal share from the real competition.

If your team’s product improvement road map assumes that the basis of competition won’t change—that the types of improvements that merited good margins in the past will continue to merit those margins in the future—look at the low end. Often you can see the opportunity to change the basis of competition.

If your disruptive product or service isn't good enough yet and your team seems enthralled with industry standards and the attendant outsourcing and partnering deals, raise a big red flag. If you prematurely pursue modularity and open standards, or if you keep a proprietary architecture closed while the basis of competition changes, you’ll struggle to succeed. Remember what made Wayne Gretzky so good. It is better to develop competencies where the money will be made in the future than to cling tenaciously to those skills that made you successful in the past.

If your team assures you you’ll succeed because a new venture fits your company’s core competence, tell them that you can’t deal in fuzzy concepts. Ask them 3 questions:

  1. Do we have the resources to succeed?
  2. Will our processes—the ways we have learned to work together to succeed in our established businesses—facilitate what needs to be done to succeed in the new business?
  3. Will our values, or the criteria that folks here use to prioritize one thing over another, enable the critical people to give the needed priority to this initiative when compared with the other initiatives that compete for their time, money, and talent?

Use the answers to choose the right organisational structure and the right organisational home for this project.

Ask these 3 questions about each of the entities that constitute the venture’s channels as well. It’s not just you. The channel companies’ processes and values—their methods and motivations—can cause your venture to come off the rails or even stall before leaving the station.

Unfortunately, you may need to distrust the managers whom you have learned to trust. The managers in your organization who have most consistently delivered results in the past may be the least skilled at delivering success in new-growth businesses. In choosing the management team for your new venture, don’t look at the attributes that describe the people you might tap to lead a new-growth venture, or at the magnitude of their past responsibilities. Search their résumés for the problems they have grappled with, and compare them to the problems that you know this venture must confront.

Be sure that in the beginning years after a venture is launched, the development team remains convinced that they aren’t sure what the best strategy is, in terms of products, customers, and applications. Insist that the team give you a plan to accelerate the emergence of a viable strategy. Call a halt to decisive plans to implement any strategy before there is evidence that it works.

Be impatient for profit. When someone tells you as a senior executive that you must endure years of substantial losses before a new business will become huge and profitable, this flags a plan to cram a disruptive technology into a sustaining role in an established market. Some investments in sustaining technologies with extensive interdependencies across the value chain can indeed require years of massive investment. Let established competitors tackle those. In disruptive circumstances, patiently enduring years of losses generally allows a team to pursue the wrong strategy for a long time.

Keep your company growing so that you can be patient for growth. Disruption—and competing against non-consumption in particular—requires a longer runway before a steep ascent is possible. If corporate growth slows and you then force the new businesses to attempt too fast a takeoff, you will force the management to make other fatal mistakes. The other side to this mandate is important as well. If you’re slated to lead a new venture and corporate management says you need to become very big very fast, what you really are hearing is that management is going to make you cram your disruptive technology into an established market. When you sense this, don’t take the job. You are very likely to fail.