Book Digests/General Business

Book Digest: The Innovator’s Solution

Posted on by Mike Pinkel

In The Innovator’s Solution, Clayton Christensen and Michael Raynor provide a blueprint for creating new growth businesses through disruptive innovation. They argue that solely pursuing sustaining innovations that serve customers in the same way but with higher performance leads to stagnant revenue and commoditization. Customers become satisfied with product performance as technology advances and come to prioritize other factors like price and convenience.

Companies seeking growth should create disruptive innovations that accomplish a job that customers want done in a different way. These come in two forms. One is a low-end disruption that targets customers who are overserved by existing products and would rather have a something less expensive or more convenient. The other is a new-market disruption that targets consumers who currently purchase nothing because their options are too expensive or inconvenient.

Disruptive products improve over time and can move up market, forcing out incumbents and delivering new growth to the disruptive innovator. For example, vacuum-tube electronics initially dominated the consumer market. Solid-state electronics couldn’t deliver sufficient performance for most applications. They started in cheap, convenient transistor radios and eventually improved to the point that they displaced high-margin vacuum-tube products such as televisions.

Advancing technology also changes which companies can earn premium profits and which are commoditized. At the birth of a product category, performance is typically insufficient. This allows integrated producers to earn strong profits. They control each link in the value chain and can therefore maximize performance by creating products where each component is optimized to work with the others.

As technology advances, customers become overserved and prefer lower cost and greater convenience rather than increasing performance. These are delivered more effectively by modular products with interchangeable parts.

When modular products have the advantage, profits go either to the producer of the components that yield the performance the customer cares about, such as microprocessors in a computer, or to producers who are integrated across a link in the value chain that is not yet good enough, like interfacing with customers in retail clothing.

Companies can protect their ability to earn strong profits by remaining integrated across many links in the value chain. This enables them to emphasize whichever part of their business is positioned to earn attractive profits.

Creating disruptive innovation often requires going outside the organization’s normal structure because it requires different corporate values. Corporate values guide prioritization decisions and include matters like what gross margins make a new business attractive and how large a new market has to be to be interesting.

Established companies’ values tend to require high margins and large, clear markets. These values support sustaining innovations that target high-end customers in established markets but they kill disruptive innovation. Disruptive innovations often begin as low margin products with unclear market sizes. Organizations cannot have multiple sets of values, making it necessary to create an autonomous organization to support disruptive innovations.

To stay ahead over time, companies need to create a disruptive innovation engine. Leaders need to ensure that autonomous organizations charged with creating a disruptive innovation have cost structures that enable them to find lower margin opportunities attractive. They also need to develop their strategy in a bottom up, iterative process because top down plans will inevitably be wrong.

Leaders should be impatient for for disruptive ventures to achieve profitability but patient for them to generate growth. Impatience for profit requires a new venture to validate its assumptions before the company makes a major investment. Once these are validated, leadership is responsible for backing the validated strategy and focusing resources on it.

Companies need to invest in disruptive innovation constantly, before their core markets mature and they become desperate for sources of new growth. If companies wait until they are desperate for growth, they won’t allow disruptive ventures the time they need to evolve an effective strategy and will instead overinvest before assumptions are validated in an effort to create immediate results at scale. This causes failure followed by sudden retrenchment, wasting the resources the company invested.

Chapter 1: The Growth Imperative

  • Introduction
    • When core businesses reach maturity, investors demand new growth
    • Expected growth is already priced into stocks, so above market returns require beating growth expectations
    • Companies repeatedly invest heavily in new businesses but these typically fail to deliver additional growth and instead lead to large losses
    • This book is about how to create a process that leads to success in new businesses
  • The Forces That Shape Innovation
    • Companies have processes that decide what plans get funded
    • Middle managers throw their weight behind:
      • Ideas with clear, sizeable markets so they can win approval
      • Ideas that can bear fruit in a few years so they can succeed before rotating to their next assignment
    • This favors ideas that make existing customers happier rather than maximizing growth potential with disruptive new ventures
  • Creating a Theory of Growth
    • Must pay attention to the circumstances under which an idea applies; nothing is universal

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

  • Disruptive strategies maximize growth potential for new businesses
  • The Disruptive Innovation Model
    • Innovation outstrips the ability of customers to make use of it, leading to products that overshoot the quality the market needs
      • Example: Cars now have more horsepower than most consumers demand
    • Sustaining innovations serve high-end customers with better performance
      • Established companies almost always win in sustaining innovation because they have the motivation and resources
    • Disruptive innovations start by targeting low-end or new customers with products that are not as high quality but are either less expensive or more convenient
      • Disruptive innovations then improve and move up market to capture share from incumbents
      • Incumbents aren’t motivated to effectively respond because disruptive innovations target low-margin customers who don’t fit their cost structure or meet their internal incentives to target ever higher margins
  • The Steel Minimill Example of Low-End Disruption
    • Minimills have a cost advantage of 20% over integrated mills but at first could only make lower quality steel than integrated mills
    • Minimills initially targeted the low-end rebar market, which integrated mills were willing to cede so they could pursue high-end markets instead
    • Once only minimills were left in the rebar market, prices went down and their margins disappeared.
    • Minimills innovated so they could move up market and secure better margins
  • The Limits of Sustaining Innovation
    • Sustaining innovations help exploit market opportunities
    • Startups can succeed with a sustaining innovation if they create the innovation and then sell out to incumbents who are motivated and resourced to commercialize it
    • Sustaining innovations are not a good way to create new growth businesses
      • Incumbents will be powerfully motivated to fight back and are likely to win even if the entrant has a lot of resources
      • NCR was late to the electronic cash register wave but still beat back the entrants with the new technology
      • Xerox faced entrants from IBM and Kodak into copiers, but fought them off until disrupted by Canon
      • IBM faced RCA, GE, and AT&T in mainframes but beat them all until disrupted by PC makers
  • New Market Disruptions
    • Compete with non-consumption by allowing a new population of consumers to use the product. They do this by reducing cost or increasing convenience.
    • Examples: Sony transistor radios let people buy radios who previously couldn’t afford them; Canon desktop copiers let people make copies close to their office rather than at the central corporate copy facility
    • Challenge is to create a new value network (the context in which the company works with suppliers and channel partners to serve a class of customers) rather than to displace an incumbent
    • Incumbents normally ignore the attack
  • Low-End Disruptions
    • Capture the low-end of an existing market rather than creating new customers
    • Incumbents typically flee the attack because they cannot maintain the gross margins they need with their current business model
    • Example: Discount retailers offered less service but focused on simple products and had more inventory turns so they could work with lower margins than established retailers. Established retailers went upmarket to higher margin goods like cosmetics and fashion apparel because they couldn’t compete at the discount retailers’ lower margins.
  • Tests for Disruptive Ideas
    • New Market Disruptions
      • Is there a large population that has not had the money, equipment, or skill to meet a need and as a result has gone without or has had to pay someone with more expertise to do it for them?
      • To use the product, do customers have to go to an inconvenient, centralized location?
    • Low-End Disruption
      • Are there customers at the low end of the market who would be happy with a lower quality product at a lower cost?
      • Can you create a business model that allows you to earn attractive profits at that low end?
    • For all disruptive ideas: Is it disruptive to all the incumbents? If it is not disruptive to a substantial incumbent, the entrant is at high risk of failure.
    • Xerox/HP Example
      • Xerox has developed ink jet technology; could it disrupt HP’s inkjet business?
      • Low-end disruption:
        • Customers at the low end won’t pay more for quality improvements
        • But there’s no attractive low-cost business model: HP is probably using the lowest cost production methods
      • New-market disruption:
        • Might be able to create a new market disruption with a much more portable inkjet attached to laptops so people didn’t have to go down the hall to print
        • Would have to create a business model that HP couldn’t profitably follow
    • Air Conditioner Example
      • Window mounted air conditioners are a mature market
      • If an entrant tried to create a sustaining innovation, incumbents would fight back and likely win
      • Low-end disruption:
        • Customers seem to be overserved at the low end as they are often price-sensitive
        • But incumbents can match any cost savings that an entrant finds in production processes
      • New-market disruption:
        • Serving smaller apartments in China with low current, low capacity air conditioners might work
    • Online Banking Example
      • New-market disruption: There isn’t a population of consumers who haven’t been able to open bank accounts
      • Low-end disruption: There’s no cost advantage; the cost of money is the same for all banks
      • It’s also not disruptive to all incumbents: There are already banks with few branches. Internet banking would be a sustaining innovation for them.

Chapter 3: What Products Will Customers Want To Buy?

  • Segment markets based on the job that customers are looking to get done, not based on customer traits
    • Traits like age, income, etc. aren’t as predictive as the job the customer wants to accomplish
    • Milkshake example
      • Morning milkshake purchasers
        • Are looking accomplish the job of alleviate a boring commute
        • Milkshakes compete against messy bagels
        • Could be better served by a longer lasting milkshake
      • Afternoon milkshake purchasers
        • Are looking to accomplish the job of placating loud children
        • Milkshakes compete against other candies
        • Could be better served by small milkshakes with bright, kid-friendly packaging
    • Sony example
      • Founder and small team observed consumers, looked for ways that miniaturized, solid state electronics could help less skilled, less affluent people do jobs they were already trying to do in a more convenient way
      • Built 12 new-market disruptive growth businesses like transistor radios and the Walkman
  • Innovations That Sustain Disruptions
    • Low-end disruptions: Move up market to higher margin products already sold by incumbents
      • Example: Target replicates higher-end product lines sold by department stores
    • New-market disruptions: Have to discover the upward path
      • Blackberry example
        • Don’t:
          • Think about what competitors do (like Palm Pilot calendaring function)
          • Think about demographics (like “business travelers”)
        • Instead, think about the job customers want to do: Make small increments of time productive
          • Competitors are wireless phones, newspapers
          • Therefore: add phone functionality and news headlines
  • Forces That Lead to Unproductive Segmentation
    • Fear of Focus
      • Specialized products have smaller total addressable markets
      • But they can actually capture those markets
    • Demand for Quantification
      • Companies ask their market research teams how big markets are, not about jobs customers try to accomplish
      • Corporate data is segmented by product and customer attributes, not jobs
    • Structure of Channels
      • Channels are structured to sell certain categories of product to certain categories of customer
      • If you don’t fit into these categories, channels won’t be interested
  • Advertising Economics and Brand Strategies
    • Advertising is structured to communicate to demographic groups
    • It’s more effective to communicate to a circumstance than a customer
    • Low-end or new-market disruption may threaten premium brand, so create a purpose brand like Kodak Fun-Saver single use cameras
  • Don’t Ask Customers to Change Jobs
    • Few people spend time using red eye elimination software or organizing digital photos with new software because they weren’t really trying to get that job done before

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

  • Customers for a low-end disruption are those that are unwilling to pay for performance improvements
  • For new-market disruption, don’t target use cases that customers don’t prioritize
    • E.g. Oracle’s $200 computer didn’t take off because the target customers didn’t have any need for a desktop computer
    • Instead, look for customers who are getting a job done in an inconvenient or unsatisfying way
  • Disrupting Vacuum Tubes with Transistors
    • Early electronics were run by vacuum tubes because transistors couldn’t handle enough power
    • Vacuum tube manufacturers tried to make transistors more capable so they could address existing electronics markets; i.e. they tried to make the transistor a sustaining innovation
    • Sony competed against non-consumption with simple transistors
      • First, they created pocket transistor radios whose quality was too low for tabletop radios but that served customers who previously couldn’t have a radio
      • Second, they created small black and white TVs sold to people in small apartments that couldn’t afford normal TVs
    • Vacuum tube makers responded ineffectively
      • Initially, they ignored Sony because Sony was targeting undesirable markets
      • Later, they couldn’t compete by switching to the new technology
        • Their cost structure prevented them from matching Sony’s prices
        • Their distribution channels made money based on replacing vacuum tubes and so weren’t interested in transistor products
        • Sony sold through different channels, such as discount stores, that liked electronics because they were higher margin than other products they sold
  • Angioplasty Disrupts Heart Surgeons
    • Prior to the early 1980s, the only interventional heart treatment option was bypass surgery and this was reserved for acute cases because it was expensive
    • Angioplasty could treat less acute cases with less expense and could be used by cardiologists rather than more highly trained heart surgeons
    • Angioplasty couldn’t be a sustaining innovation: It didn’t offer good enough functionality at first
    • Angioplasty couldn’t be a low-end disruption: Current interventional treatment customers weren’t overserved by bypass surgery
    • Angioplasty was a new-market disruption: People who were not getting treatment but wanted it benefitted from angioplasty
    • As angioplasty gets better, it is pulling in customers who would otherwise have gotten bypass surgery
  • Solar Energy
    • Solar energy is less reliable than conventional energy sources
    • But it could target non-consumers in developing countries who don’t have access to conventional power sources
  • Factors that Aid Growth From Nonconsumption
    • Customers are trying to get a job done but don’t have a good option
    • They compare a new product to having nothing at all
    • Disruptors deploy a simple, convenient product; even if the underlying technology is sophisticated
    • Disruptors create a new value network relying on different channels and customers use the product in a different setting
  • It’s Hard for Incumbents to Compete Against New Market Disruptors
    • Internal dynamics create problems
      • They adopt a threat mindset rather than an opportunity mindset, causing them to focus on protecting existing customers rather than finding new markets
      • Incumbents should create a new organization to fashion their response because the new organization can view the new market purely as an opportunity
      • Budget allocation processes force innovations into the sustaining innovation box because companies want to see proof of a large market and that’s only available for existing markets
      • Incumbents may cut resources for a disruptive innovation if results don’t materialize quickly
    • New-market disruption often requires new channels
      • Distributors want to move upmarket for the same reason that companies do: It creates an edge over their competitors
        • Honda’s motorcycles let sporting goods stores move upmarket to higher margin products, they didn’t sell through traditional motorcycle stores
        • Sony’s radios let discount department stores move upmarket to higher margin products
        • Customers can be channels; e.g., less specialized physicians might want to buy equipment that lets them perform procedures that used to be reserved for more specialized physicians
      • Channels resist selling lower margin products
        • SAP sold sophisticated ERP systems through consultants who implemented them
        • SAP tried to create an SMB ERP system called Pandesic and sell it through the same channel
        • Channels weren’t interested in the new system because it was lower margin

Chapter 5: Getting The Scope of The Business Right

  • Your organization should focus on the tasks that customers define as important, not on your supposed core competences
    • When products are not good enough:
      • Customers value integrated solutions to maximize performance
      • Your company should aim to create a product in which each component is specialized to maximize performance
    • When products are good enough:
      • Customers value modular solutions to maximize convenience and lower cost
      • Your company should aim to produce the performance defining components
    • You should preserve the flexibility to move to whichever strategy (integrated or modular) is right at that stage of the product’s evolution
    • You should aim to integrate across whatever part of the value chain currently is not good enough
  • Architectures and Interfaces
    • Interdependent architectures maximize performance. Architectures are interdependent if one side cannot be created separately from the other side.
    • Modular architectures maximize flexibility, convenience, and minimize cost. Architectures are flexible when each element is specified such that it doesn’t matter who makes each component.
  • When Products Are Not Good Enough
    • To make the best possible products, you can’t just assemble components. You need the freedom to design each piece.
    • This requires an integrated company that controls every aspect of the system
      • Examples: Ford, GM, IBM, RCA, Xerox etc.
    • New technologies are usually sustaining technologies because customers demand more performance. Entrant companies have a hard time commercializing these new technologies because they don’t have experience with all the components they need to integrate.
  • Overshooting and Modularization
    • When product features exceed what the customer will pay for, there is overshooting
    • Customers now want convenience more than they want performance
    • Modularity increases convenience because anyone can assemble standard components
  • Drivers of Reintegration
    • Customer demands for quality can suddenly increase, making products not good enough again and favoring integration
    • Example: In the early 1990s, office software demands increased as customers wanted each type of software to work with the others (e.g., word processors to be compatible with spreadsheets)
    • Example: In the late 1990s, internet bandwidth demands increased, favoring integrated producers of fiber optic cables
  • Success and Failure with Integration and Modularity
    • Nonintegrated local telecom companies (CLECs) offered DSL in the late 1990s. These typically failed. Telecom customer interfaces were not good enough. It wasn’t clear how to effectively bill a customer through the telecom company’s systems when they were a CLEC customer.
    • NTT DoCoMo and J-Phone offer wireless products in an integrated fashion. These are successful because integration lets them solve technological problems with wireless data and billing.

Chapter 6: How to Avoid Commoditization

  • Companies should position themselves at the spot in the value chain where performance is not yet good enough
    • Whenever one part of a value chain is commoditized, another part is decommoditized
  • The Process of Commoditization and Decommoditization
    • When products aren’t good enough, integrated producers earn most of the profits
      • It takes a lot of R&D to enter the market
      • High fixed costs lead to steep economies of scale
      • Component manufacturers earn subsistence profits
    • Over time, products overshoot and become commoditized and modularized starting at the bottom of the market
    • Component producers can earn attractive profits if their component is not yet good enough
      • Their subsystem determines the quality of the product and enables manufacturers to move up market to places where there still are good margins
    • Other value-added layers may be able to earn attractive profits
    • Example: IBM and Disk Drives
      • 3.5 inch drives
        • Came to have enough capacity, leading to modularization and low margins
        • But good disk heads helped cut costs, so disk head manufacturers earned good margins
      • 2.5 inch drives
        • Didn’t have enough capacity, so integrated producers did well
        • But over time, capacity became good enough
        • Best strategy for an integrated producer would be to shift from assembly to selling disk heads
      • Computer business
        • IBM moved from computer assembly to value added services like systems integration
      • Lesson: Integrated producers have the flexibility to shift to whatever part of the value chain earns attractive profits
  • ROA Maximizing Death Spiral
    • As a product becomes modularized and margins shrink, investors want a greater return on assets
    • Assemblers therefore sell off assets to suppliers and disintegrate, improving the ratio of return to assets. Profits can’t be increased in a commodity market.
    • This allows suppliers to become the integrators of the future if performance becomes not good enough
  • The Value of Brands
    • The value of brands in a value chain migrates to the part of the value chain that is not good enough
      • IBM and HP had branding power as assemblers, but once computers became good enough and microprocessors defined performance, Intel became the important brand
      • Clothing manufacturing has become good enough, so brand value has migrated to the channel because retail experience is not good enough
    • The future of cars
      • Cars will move toward modular architectures to increase speed of design and flexibility
      • Car manufacturers are disintegrating
      • Key subsystems will define performance, and car manufacturers may no longer own these. Subsystem brands may become key in the future.
  • The Law of Conservation of Attractive Profits
    • When profits disappear at one point in the value chain because of modularization and commodification, they often reemerge at an adjacent stage where an interdependent component is needed

Chapter 7: Is Your Organization Capable of Disruptive Growth?

  • Organization’s capabilities often become disabilities in disruptive growth situations
  • Capabilities: Resources, Processes, and Values
    • Resources
      • Usually people or things that can be hired, fired, bought, sold; also technology, supplier relationships, brands, information
      • Tend to be flexible in that they can be used in different parts of an organization or by different organizations
      • Managers of stable business units often don’t have the right experience to run a disruptive effort because the skills are different
        • Stable business units require process improvement, cost control, efficiency
        • Disruptive units require adaptability, creativity
    • Processes
      • Patterns of interaction and decision making
      • Examples: Product development, procurement, compensation, resource allocation
      • Organizations only evolve processes for things they are asked to do regularly
      • Key processes are those around market research and resource allocation
    • Values
      • Standard by which an organization makes prioritization decisions
      • Key values:
        • Acceptable gross margin for new business. Companies typically need to move up market more and more as they increase their overhead costs.
        • How large an opportunity has to be to be interesting. Companies typically need larger and larger opportunities to be interesting because smaller ones don’t provide much of a revenue lift on a percentage basis.
  • Migrating Capabilities
    • Startups’ capabilities are primarily resource based, particularly their people
    • Capabilities shift toward processes and values as companies mature and scale
      • E.g., McKinsey loses thousands of consultants each year and hires thousands more, but its work remains high quality because of processes and values
    • Changing processes and values is difficult; they’re the reason an organization is successful
    • Opportunities for new growth businesses occur when an organization’s current processes and values are successful in its current business line
  • Finding the Right Home for Disruptive Businesses
    • Successful companies often have the right processes and values for sustaining innovations
    • Small companies often have the right processes and values for disruptive innovations, such as more informal market research and resource allocation
    • Established companies can sometimes create new processes within their organization by creating a heavyweight team in which members of several functional areas are pulled out of their normal responsibilities to work on the project
    • Taxonomy of organizational type matched to innovation purpose
      • Functional Organization Within Current Company
        • A typical sustaining innovation
      • Heavyweight Teams Within Current Company
        • A breakthrough but sustaining innovation that fits the organization’s values but requires different processes
      • Heavyweight Teams Within Autonomous Organization
        • Disruptive innovation that doesn’t fit either the organization’s processes or values
      • Heavyweight Teams Within Current Company
        • Similar product but much lower overhead needed, so team may use some resources from current company
    • Organizations cannot disrupt themselves
      • Merrill Lynch serves high net worth customers
      • When they opened an online brokerage, they used it to serve their existing customers better, not as a low end or new market disruption in the form of a discount online brokerage
      • They’d have needed to create an autonomous organization to take advantage of the opportunity
  • Creating New Capabilities
    • Resources: Management Bench Strength
      • Hire/promote managers based on learning oriented measures like “seeks and uses feedback” rather than just achievements
    • Making New Processes
      • Creating new processes requires heavyweight teams, meaning that people are pulled out of their functional organizations and put in a new team
    • Creating New Values
      • Requires creating an autonomous organization that can prioritize different things from the mainstream organization
  • Buying Resources, Processes, and Values
    • Need to determine the source of the acquired company’s value
    • If it’s processes and values, then it shouldn’t be incorporated into the parent organization because processes and values will be destroyed
    • If it’s resources, then it makes sense to incorporate it into the parent so the parent’s capabilities can combine with the resources
    • Example: Daimler Acquisition of Chrysler
      • Chrysler’s value was it’s process for rapidly creating new models
      • Wall Street wanted cost savings, so Daimler incorporated Chrysler and destroyed the value of its processes
    • Example: Cisco
      • Cisco normally buys companies that are less than two years old whose value is mostly dependent on their resources
      • They keep the engineers happy and realize the benefit of the acquisition
  • Companies that Got It Wrong
    • Bank One: Wingspan Online Bank
      • They spun out their online bank, but the online bank was a sustaining innovation. There isn’t a new market of people without bank accounts. There also isn’t a profitable way to create a low end disruption as the cost to acquire customers is too high.
    • F.W. Woolworth Discount Retailing
      • F.W. Woolworth was a traditional retailer that created a spinoff discount retailer, Woolco, that could operate with lower margins
      • They decided to reintegrate Woolco with the parent company to take advantage of economies of scale with shared functions
      • Soon, Woolco required higher margins again as its processes and values conformed with the parent. It had to be closed.

Chapter 8: Managing the Strategy Development Process

  • Two Types of Strategy Development
    • Deliberate: Top down, analytical
    • Emergent: Bottom up, arises from cumulative effect of day-to-day decisions
    • Deliberate strategy should be used when the winning strategy is clear, emergent when it is not
      • Example: Walmart’s strategy of going to small towns where the market was so small they could occupy the whole market and preempt competitors emerged accidentally for reasons of logistical efficiency. Then they capitalized on it by putting all resources behind the strategy.
  • Resource Allocation Creates Strategy
    • Middle managers only support ideas that fit the organization’s required gross profit margin and minimum interesting opportunity size
    • Salespeople only push products that customers find interesting
    • Example: Intel
      • Company decided to put the 2/3 of its R&D int DRAM rather than microprocessors
      • But production resources were allocated according to a process that sent resources to products that had the highest gross margins
      • This diverted most production resources microprocessors, even before management decided that microprocessors were the future
  • Matching Strategy-Making Process to the Stage of Business Development
    • 90% of successful companies succeed using a different strategy than they originally intended
    • Many entrants fail because they overspend on a deliberate strategy before they know the right strategy
    • Other entrants fail because, once the right strategy is knowable, they don’t aggressively invest in it
    • Once a company enters a deliberate strategy, it will find it hard to switch back to an emergent strategy
      • Example: Prodigy
        • Prodigy thought people would use their online service to buy products and download information
        • It turned out that people really liked sending email
        • But Prodigy tried to force people back to ecommerce by limiting the number of emails they could send
        • AOL capitalized with “You’ve Got Mail” marketing
  • Points of Executive Leverage in Strategy Development
    • Create A Cost Structure that Finds the Right Customers Attractive
      • Control the initial cost structure so the venture can prioritize customers that match the product even if they have a low gross margin
      • Example: MTC
        • Clayton formed a materials science company that meant to develop a new product
        • They ramped expenses and hired expensive research scientists
        • They had to keep the lights on despite their high expenses and ended up doing contract research for other companies
    • Accelerate the Emergent Strategy Process
      • Use discovery-driven planning
      • Deliberate strategy planning works for sustaining innovations. It has these parts:
        • Start by making assumptions about the future and product success
        • Then make financial projections based on these assumptions
        • Secure executive approval of a plan
        • Then execute the plan
      • Discovery-driven planning works for disruptive innovations and emergent strategy development
        • Start by making financial projections, meaning the required financial performance
        • Compile an assumptions checklist containing all the assumptions that must be true to realize the financial projections
          • E.g., that low-end disruption is possible, that the venture will lead to the part of the value chain where there are attractive profits
        • Implement a plan that tests the assumptions
        • Once the assumptions are validated, devote significant investment
    • Senior leaders need to ensure that a new venture uses the right strategy development process for its stage of development, particularly to switch on the flow of resources when the assumptions are validated

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

  • The type of money you use in a new venture impacts its prospects because it shapes the venture’s strategy and bad money may be withdrawn at the wrong time
  • The right capital is patient for growth but impatient for profit. This:
    • Forces management to test its assumptions
    • Keeps fixed costs low, so low margin customers are attractive, such as those from low-end and new-market disruptions
  • The Inadequate Growth Death Spiral
    • Successful company focuses on core business
      • Excluding distraction, increasing margin lead to success
    • Company faces a growth gap
      • Expected growth is priced into shares
      • Company needs to produce unexpected growth to raise share prices
      • Growth must be huge because company is large and only massive growth moves the share price needle
    • Its money becomes impatient for growth
      • Only opportunities that promise massive growth are worth funding
      • Disruptive ideas are either excluded or shoehorned into existing, non-disruptive markets because only existing markets can clearly show potential for massive growth
      • New ventures sign onto unrealistic growth plans
    • Company temporarily tolerates large losses
      • Competing in an exiting market requires a lot of investment, company is OK with that
    • Losses prompt retrenchment
      • New venture can’t realize profitable growth at scale, company discontinues new venture
  • Create Policies to Invest Good Money Before It Goes Bad
    • Start early: Launch new-growth businesses while the core is still healthy
    • Acquire new-growth businesses regularly
      • Example: Johnson and Johnson’s MDD group acquired four disruptive businesses that fit new-market disruption strategies
    • Start small: Divide business units to maintain patience for growth
      • Decentralized companies can maintain the values necessary to prioritize disruptive innovations before their market potential is clear. A given business unit can achieve strong percentage growth with such an opportunity while a centralized large company could not.
      • Most companies that have transformed themselves were actually decentralized and created new disruptive businesses while shutting down or selling off mature businesses
        • Examples: HP, J&J, GE
    • Demand early success: Minimize subsidization of new-growth ventures
      • Forcing a venture to become profitable compels it to validate its assumptions and protects it from moves toward retrenchment in the main business
      • Example: Honda
        • Honda tried to enter the US motorcycle market with large motorcycles. These failed.
        • Honda managers started riding their small super cub motorbikes around LA because they were cheap to run
        • These attracted interest and they build a business around them through different channels (sporting goods stores) and in a different use case (off road biking)
  • Good Venture Capital Can Turn Bad Too
    • When VC is impatient for growth, its influence is malign
    • In the late 1990s VCs poured lots of resources into early stage companies
      • VC as a sector got a lot more investment capital after earlier successes
      • They didn’t increase the number of VC partners
      • The only way to invest that much more money was to make larger investments
    • This led to massive growth expectations without corresponding pressures for profit
    • The result was spectacular bombs that destroyed value

Chapter 10. The Role Of Senior Executives In Leading New Growth

  • Standing Astride the Sustaining-Disruptive Interface
    • Two innovation processes:
      • Successful companies typically have an engine for creating sustaining innovation. This is their mainstream process.
      • Companies that want to remain successful need to have a separate process for creating disruptive innovations
    • Senior executives should become involved when the company needs to use its disruptive innovation process rather than the sustaining innovation process
      • Only senior executives have the authority to relax the normal rules that often kill or hamstring disruptive innovations, like proof of a large market size
      • Senior executives can build the necessary organization around a disruptive innovation to give it a chance to succeed
      • Senior executives need be aware of disruptive innovation ideas because these could be the future of their industry
      • Most companies that have benefited from subsequent disruptive innovation have been founder-led, likely because founders have the political capital to make exceptions to normal processes when needed
      • Companies that were led by professional managers and benefitted from subsequent disruptive innovation have typically been conglomerates that were experienced at acquiring new businesses
  • Creating a Disruptive Growth Engine
    • Policy: Start Before You Need To
      • Disruptions take a long time to achieve scale, so start before your financial reports suggest that your growth trajectory is leveling off
    • Senior Executive Responsible For Disruption
      • Role is to take potentially disruptive innovations and move them out of the normal corporate process
    • Mover And Shaper Group
      • Responsible for taking potentially disruptive ideas and shaping them into disruptive growth businesses that meet the criteria identified elsewhere in the book
      • Cannot use normal corporate processes that apply to sustaining innovations
    • Train The Troops To Identify Disruptive Ideas
      • Sales, marketing, and engineering need to be on the lookout for ideas and potential acquisitions that would be interesting as disruptions

Epilogue

  • Corporate strategic choices are influenced by powerful factors, they aren’t entirely free
    • Need to move up market to maintain margins
    • Need to satisfy existing customers
    • Processes and values that support sustaining innovation discourage disruptive innovation
  • Key to success is creating the right initial conditions
    • The right initial conditions make successful choices look like the right choices
    • Strategies must be based on circumstances, not one size fits all
  • Theory checklist
    • Don’t target customers that look attractive to competitors; look for markets that competitors either ignore or will walk away from
    • If you get a proposal to target customers who are reasonably satisfied, ask if you can compete against non-consumption instead
    • If non-consumers aren’t available, ask if a low-end disruption is possible
    • Target customers according to categories that match the jobs they are trying to get done
    • Don’t look for partnerships or open standards if your product is not yet good enough. Premature modularity won’t work.
    • Don’t ask what your core competence is, ask if you have the right resources, process, and values
    • Be impatient for profit but patient for growth; don’t commit massive resources until you know an idea can be profitable
    • Constantly look for disruptive ideas even when you’re doing well; waiting until you plateau will make you too impatient for growth to succeed
Mike Pinkel