The Innovator’s Solution: Creating and Sustaining Successful Growth
The Innovator’s Solution: Summary and Review
Keywords: Innovation, Market, Marketing, Majority, Niche, Package, Pragmatist, Segment, Technology
Please Note: There are links to other reviews, summaries and resources at the end of this post.
In Clayton M. Christensen’s prior work, The Innovator’s Dilemma, he explores the paradox of successful companies’ frequent failures when exposed to disruptive markets. The Innovator’s Solution looks for solutions. Using examples from numerous different companies, Christensen develops a framework to help executives create disruptive products and services that will maintain growth for their firms.
As a follow up to The Innovator’s Dilemma, this piece rehashes quite a bit from the previous work. Those who’ve read The Innovator’s Dilemma may choose to quickly skim the first few chapters of The Innovator’s Solution to save some time. Once he brings readers up to speed on the last book, Christensen does a good job of bringing the theoretical work of the previous volume down to a practical level, with lots of advice and hints that managers can apply to their own companies.
Failure is common among disruptive technology firms; only a small percentage succeed. To understand what works and what doesn’t, Christensen offers his theory of innovation. Innovation, he promises, is predictable and controllable.
He details two kinds of innovation: sustaining and disruptive. Sustaining innovation modifies or adds to something that already exists; disruptive innovation changes the playing field dramatically, diminishing or destroying anything that preceded it. Disruptive innovation is potentially quite profitable, especially when it creates new markets and reaches people who previously weren’t consumers. These types of innovation thrive under circumstances that are considerably different from one another. Capabilities that guide a company through periods of sustained growth become disabilities during disruptive change.
Christensen tackles practical issues: identifying customers that make for a good foundation for the business; deciding which processes to keep in-house and which to outsource; and determining appropriate product architecture. His advice is general enough to apply to different companies without becoming so generalized as to lose its usefulness.
The Innovator’s Solution provides a good sense of the issues with which a disruptive growth company manager must contend. Any executive in this position will want it on their bookshelf. Those with limited time might want to consider skipping Dilemma altogether and going directly to Solution, as the latter book summarizes the information presented in the previous work. Many readers, however, will want to read Dilemma first in order to be firmly grounded in the analytical and theoretical foundations of Christensen’s framework.
Chapter 1: the Growth Imperative
Growth is important. Investors don’t seem to care so much about a company’s assets or how much money it makes today—they want to see growth. Unfortunately, after the core business matures, growth usually plateaus. This is precisely the time to work on new growth initiatives, but trying new things is risky. Innovation doesn’t always make growth happen fast enough for investors, even when money is thrown at the effort. And we all know that when investors are unhappy, managers are fired and the status quo is reasserted.
Very few companies can sustain a high level of growth. Once growth stalls, they’re extremely unlikely to reach those lofty heights again. They lose investors’ attention, and their stock price goes down, which puts more pressure on managers to create growth. This can be an impediment for managers who should be focusing on running the company.
Most managers can’t produce the needed growth, and blaming managers for low growth is pointless. Think about it: it’s just not possible that nearly all managers across industries are substandard. Something else must be going on. Some people think that managers become risk averse over time and that this negatively affects growth. But the facts don’t support this. There are plenty of examples of corporate executives taking huge risks, like when IBM bet the farm on the System 360 mainframe. Sometimes they win,; sometimes they fail— but there’s no evidence of executives shrinking from the big decisions and avoiding risk.
Some argue that finding success with innovation is just not very likely; expecting a company to sustain growth is like expecting lightening to strike twice in the same place. Certainly, to those that don’t understand the causes of a phenomena, results will appear random, and impossible to predict or control. Once you understand the underlying mechanics, however, you can understand the patterns. This is true for innovation. It is as predictable and controllable as anything else, once you know how it works.
Chapter 2: How Can We Beat Our Most Powerful Competitors?
Managers want to understand what makes one company prevail over competitors. Some think that the better and more plentiful the resources, the better a company will do. Evidence shows, however, that the level of resources isn’t necessarily related to success. A better basis for understanding and predicting success can be found in the author’s previous work, The Innovator’s Dilemma.
There are three important elements of disruption:
- The rate of performance that the customer can use— fFor example, you may design a car to be faster than competitors, but if the customer is driving in heavy traffic, speed capabilities won’t matter.
- The rate of technological innovation— tTechnology usually improves faster than people can keep up with.
- The distinction between the two different kinds of innovation; sustaining innovation and disruptive innovation.
Sustaining innovations build on and improve existing technologies, making them faster, easier, and tastier. Disruptive innovations shake up the whole paradigm with new products. These innovations are usually more convenient, cheaper, and simpler. These products often penetrate the lower ends of markets first, offering something that isn’t perfect but at least it’s cheap. Once it gets a foothold at the low end of the market, the product is improved and it gradually takes over more of the market. Competitors generally don’t know how to deal with a takeover from below; they are used to defending their upper markets.
Established firms are better at managing sustained change. Entrant firms are better at dealing with disruptive change. Because established companies aren’t motivated to compete in markets below them, they ultimately lose to the innovation. Although disruptive innovation can create explosive growth, that doesn’t mean that sustained innovation should be neglected. The world needs both.
There are two kinds of disruption innovation. With new-market disruption, disruptive products compete with non-consumption. They create new markets and reach people who previously weren’t consumers. Once established with previous non-consumers, new-market products chew their way upwards. As their performance improves, they run into some existing markets to disrupt. Low-end disruptions, on the other hand, don’t create new markets, they just take over the bottoms of established markets. Their traditional competitors often don’t bother defending the low end of the market. They are just as glad to focus on higher market levels and they don’t recognize the disrupters as a problem until it’s too late.
For technology to be disruptive, it has to serve a large population that previously couldn’t do something for themselves. These people either had to do without or else do it themselves. A disruptive technology might also enable people to do something that previously had to be done at a centralized location. For something to be a low-end disruption, there will be customers at the low end of the market who previously didn’t have the thing and who maybe don’t mind so much if it doesn’t perform perfectly. If a product meets these qualifications, there is one more test: is the innovation disruptive to all the important players in the industry? If it’s sustaining to any important company, then it won’t likely be the basis for new growth.
Chapter 3: What Products Will Customers Want to Buy?
The majority of new products never make it out of development. Those that do face an uphill climb to profitability. Naturally, people working on new products believe their products will succeed, but they often don’t. It’s good if you can predict which products will be popular, but it isn’t easy.
You’ve got to understand your market. Marketers put a lot of emphasis on market segments, dicing up the populace and finding the percentage that will need or want the product. But if you get the process wrong, you can end up without any actual customers. To accurately segment the market, don’t focus so much on the attributes of people and things. Research may show correlations between various attributes and demographics, but that doesn’t explain someone’s reasons for buying a product.
Instead, look at the circumstances people are in when they make a purchase decision. There are many tasks that people do routinely; people are always looking for things that will do those jobs or help them do those jobs. The customer is trying to solve a problem, so to find out what that problem is, segment the market by circumstance. Observe how people act, then ask them about it.
By way of example, in the old way of doing things, if you’re trying to sell milkshakes, you’d identify existing milkshake customers. You develop a profile of your milkshake-loving customers based on their attributes. Then, convene a focus group and ask them about milkshakes: Are they better when they’re chunky? Thicker? Cheaper? The new method of research that Christensen describes entails figuring out what people want the milkshake to do for them. Observe people buying milkshakes in the wild. What time of day are people buying shakes? Are customers alone or with others? Do they have their shake in the premises or order it to-go?
A real study on these customers showed that many people drank shakes during their morning commute. A shake is food they can eat with one hand, and they won’t get crumbs on their clothes. Breakfast sandwiches, by comparison, are greasy and hard to eat while driving. Customers needed the shakes to do two jobs: put something in their stomachs and provide some distraction during a boring commute. Understanding these things helped researchers identify one of the shake’s biggest morning rivals: the bagel.
Looking at circumstance instead of attributes brings out all sorts of nuances about a market. Circumstance- based segmentation can be used to cause disruption and gainet a foothold in the market. Once that foothold is gained, the process of product improvement can begin. Continuously upgrade the product so it appeals to larger market segments.
Chapter 4: Who Are the Best Customers for Our Products?
It’s essential to understand how to identify the customers that will constitute a good foundation for a disruptive business. For low-end disruptions, just find people who don’t like to pay so much or don’t even use a product because it’s too expensive. Figure out how to catch this group’s attention and make a profit at what’s probably a low price-point.
Finding customers for new-market disruptions is more difficult. A good strategy is to identify people who want to get a job done but can’t because available products are too expensive or complicated to use. Innovators who target these new markets are said to be competing against non-consumption. These entrepreneurs make growth from non-consumption; they make something from nothing. Of course, they won’t have much success if there’s non-consumption simply because nothing’s there. In the 1990s, there were attempts to market cheap computers to houses that didn’t have computers. (The effort wasn’t successful because the targeted people didn’t have a need for computers; computers didn’t solve any particular problem for them.)
Christensen charts a path to successful disruption by looking at the histories of several innovative companies. The first step on this path is to target people who want to do something but can’t, either because they don’t have the money, the skill, or perhaps there’s just not an easy solution to their problem. They’ll be glad to have anything at all, since they can’t afford the higher-end solutions that might currently exist. But the new thing has to be convenient and easy to use. It needs to be foolproof so that lots of people with little skill can use it. Once it has a foothold in the market, the new product creates a new value network— it is purchased through new channels and used in new places.
Established firms nearly always try to sell disruptive products in mainstream markets. They are often afraid to try new markets. But doing so takes lots of marketing resources, and it isn’t a very successful approach. These firms see disruption as inherently threatening. Christensen explains that looking at things as threats rather than opportunities affects how people respond to them, and you can use people’s responses to your strategic advantage. Get commitment from top management by framing innovation as a threat, and then put the new product in an organization or department separated from the core business, treating it like an opportunity to be nurtured.
Disruptive products usually require disruptive channels, as well. Retailers and distributors also have to grow by moving up market. Sometimes disruptive technology comes along to help them do this. When this happens, the entire channel participates in the disruption.
Chapter 5: Getting the Scope of the Business Right
Which processes should be kept in-house, and which should be outsourced? This decision can have far- reaching consequences.
A traditional approach is to identify the activities that are part of your core competence— in other words, those that are central to your business and for which you should already have the equipment and labor to perform. Anything not meeting this definition is farmed out to another firm. But there is a problem with this approach. The activities that don’t seem to be core today might become critical in the future. It goes the other way, too— essential activities can become obsolete. New technology can come along and eliminate whole categories of competencies.
A better approach is to revisit the customer problem for which you’re solving. Then, consider whether your product offers a solution that’s adequate or beyond adequate. If the product is not good enough to offer an adequate solution, then integration is the best strategy. If there’s performance surplus (in other words, it’s beyond adequate), it’s better to outsource lots of elements.
Product architecture can be integrated (also referred to as “interdependent”), meaning that all interlocking parts are specialized and proprietary, or can be nonintegrated (also known as “modular”), meaning that all pieces can be standardized. Interdependent architecture optimizes performance, but the resulting products and processes aren’t so flexible. Modular architecture results in high flexibility, low- performance products.
New technology is usually interdependent. Initially, the basis of competition is performance. In time, performance becomes good enough to satisfy the customer’s requirements. At this point, other things come into play, like convenience, and price, and the basis of competition changes. Often, managers don’t understand the changes. They try to use the same strategy that brought them success before, and they end up overshooting on performance.
At this stage, architecture needs to be as fast and efficient as possible. This is when modular architecture comes into play. This approach allows components to be updated independently from each other. Outsourcing is easier as things become standardized. Nonintegrated firms can now outcompete the integrated ones, delivering on performance that’s sufficient for their customers’ purposes. Their organizations are leaner and meaner than those of their integrated competitors.
Interdependence and modularity can be thought of as existing on a continuum. Few companies exist in a pure state at one end of the scale or another. Most firms have characteristics of both. It’s important to be flexible and adapt the architecture to changing circumstances.
Chapter 6: How to Avoid Commoditization
Commoditization occurs when competition drives profits down to minimal levels. (It’s best to avoid this.) Some people think commoditization is inevitable, but it’s not.
The long road to commoditization begins when a company develops a product using proprietary architecture. The new product isn’t great— perhaps it isn’t even good enough— but it meets the customer’s needs better than any other product out there. It sells well and makes money for the company. Meanwhile, the company works to stay ahead of the competition and makes regular improvements in the product. Eventually, the product’s performance exceeds what customers in the lower tiers can use. The continued improvements are overshooting the mark.
At this point, the basis of competition changes. The environment shifts to favor modular architecture. The industry becomes dis-integrated. It becomes more and more difficult to distinguish the product from the competitor’s product. The performance and cost between each company’s version of the product are all close. This process starts to happen at the bottom of the market and then it works its way up.
On the flip side, the process of de-commoditization starts when low- cost- module product assemblers drive higher- cost suppliers out of a market tier. In order to maintain high levels of growth, the module product assemblers have to move up-market against higher- cost suppliers. The modules only perform so well, which limits how far and fast they can move upmarket. This changes the playing field– that new technology is disruptive. In trying to increase performance, designs become more proprietary and interdependent. Once the products are differentiated and proprietary, the profits are good, bringing us back to where we started. The cycles of commoditization and de-commoditization can begin anew.
When something becomes commoditized in a value chain, something else in the chain becomes de-commodified. In other words, the potential for profits shifts over time through the value chain. The astute manager will learn to understand not only where the money is, but also where it will be.
If your product is becoming commoditized, it behooves you to look around on the value chain for opportunities. Focusing inward on core competencies can be dangerous. The best place to be is where performance isn’t quite good enough. Once a product is performing well and overshooting, the profitability goes to the parts of the chain that have room for performance improvements. These can be found in subsystems within the product or in improvements in speed, convenience, or other features.
Managers who can anticipate the movement of profitability along the value chain can give their company the ability to sustain growth and capture high profits.
Chapter 7: Is Your Organization Capable of Disruptive Growth?
Capability, the power to get things done, is comprised of resources, processes, and values— the “RPV” framework.
Resources include tangible things like people, equipment, and real estate, but things like brands, information, and reputation are also valuable resources. The most important resources for a growth company are its managers. Hiring committees typically look for certain attributes in potential managers: qualities like good people skills and a history of success in previous positions. Managers who worked their way up in the ranks of a stable department can be expected to have developed skills that were useful in that environment, but they wouldn’t necessarily be prepared for new challenges. It’s good to look at the problems candidates have wrestled with in the past when you’re evaluating their skills, but don’t assume that they needed to solve all the problems in order to gain experience. Sometimes bouncing back from failure gives people their greatest learning experiences.
Processes turn resources into value and include patterns of interaction, coordination, and communication, as well as the way things are developed, manufactured, and marketed. Some processes are formal (i.e., defined, documented, and consciously follow by those in the company), and some processes are informal. The latter are an important part of an organization’s culture.
Processes relate to specific tasks. When a process is used for the task for which it was invented, the results are usually good. The same process applied to a new task, however, is likely to be inefficient and ineffective. Using processes developed for mainstream businesses and applying them to growth businesses is an exercise in futility. Processes should be appropriate given the environment.
Many companies have value statements outlining the ethical playbook that the company follows. In the RPV framework, however, values has a broader meaning. Employees at all levels, even those at the bottom of the hierarchy, make decisions. Under the framework, values are standards that determine how employees prioritize these decisions. It’s important for managers to control this process by clearly communicating the company’s priorities.
Capabilities migrate over time. Entrant firms get a lot done through its their resources; established firms rely more on processes and values. Capabilities can also become disabilities. The very skills that a manager gains from guiding a company through periods of sustained growth are liabilities during disruptive change.
Companies that focus on sustained growth get good at it over the years, but they don’t develop the wherewithal to manage disruptive growth. Small, disruptive companies, on the other hand, are good at managing this kind of growth. To foster innovation, Christensen suggests creating “heavyweight teams”— a bunch of people drawn from different functional groups within an organization who can work across boundaries and think across them, too.
Chapter 8: Managing the Strategy Development Process
To develop the right strategies, first consider the strategy development process. Two processes define strategy in a company:
- Deliberate strategy making is conscious and analytical; it’s based on research. Usually, deliberate strategy is implemented from the top down. And it’s only useful in some circumstances, not all.
- Emergent strategies bubble up from within. They’re usually tactical strategies that help manage day-to-day decisions, and they are the culmination of multitudes of decisions made by middle managers, engineers, sales staff, and other employees. They are especially useful in situations where it’s difficult to see what the future will bring.
Ideas are filtered through resource allocation. To get funded, they need to go through what’s usually a complex and unruly process. It’s heavily influenced by the company’s cost structure; it’s also influenced by what sized projects customarily are funded. There are many other ways that money affects decision-making:
- Sales people will make decisions based on how they’re compensated.
- Employees can derail projects by assigning them low priority.
- Customers affect what sort of initiatives are undertaken.
Strategy should be matched to the stage of business development. Know that you’ll probably have to change strategy more than once. It’s a mistake is to spend substantial amounts of money at the beginning of a project, because you might not have enough when the strategy will havehas to change. Strategy changes depending where you are in the cycle, so resource allocation must change over time.
It’s difficult to manage many strategy development in a range of different businesses at different stages of maturity. Not many executives can finesse this.
To effectively manage the strategy process, managers must have strong control of a new growth business’ cost structure. Cost structure is very influential in behavior and decision-making, more so than memos from the head office. This structure needs to be built so that target customers will appear profitable.
These early decisions determine the values that drive resource allocation down the line. Business plans should be designed to test critical assumptions with tools like discovery- driven planning. Start by making targeted financial projections, and figure out what needs to be true to meet the projections. Test whether the critical assumptions are reasonable, and then implement the strategy.
Chapter 9: There Is Good Money and There Is Bad Money
It’s important to get funding for a new enterprise. The traditional wisdom is that if you’re dealing with a corporation, you should find yourself a champion in the company who can help with the political battles and the layers of bureaucracy. Startups looking for venture capital tend to focus on making deals that don’t give up too much control. This advice is all well and good, but it is more important to look at the type of money that these sources offer. The decisions you make now are important, because the terms to which you agree set the investor expectations that you must meet.
Not surprisingly, money affects every decision down the line, and Christensen examines how good money turns bad:
- It starts with success. A company focuses solely on core business— no new growth enterprises are started— and it moves upmarket, where the money is. But the stock market still isn’t endeared to the stock. The company isn’t growing fast enough. Like someone in debt to a loan shark, a company stuck in this growth gap reflexively does what it must to raise money, without addressing the underlying issues.
- The resource allocation process changes. The only thing that matters is creating growth, and anything that promises less- than- stellar growth is left by the wayside. The company tolerates loss because that’s the game, but that puts it in the hole until the new product pays off. The company needs lots of money at this point, so they position their new product up-market. This, however, is a mistake, as new products should start down-market. The company has become impatient for growth but patient for profit— this is bad money for a new growth business. Competitors can undercut the company with disruptive products that are less expensive.
- Expenses pile up and losses mount; the stock price goes south. Usually there will be some firing and hiring of a new management team. To reduce the continued loss, the team stops all spending except what’s needed for the core business. The stock price bounces back up, which puts the executive in the position of needing to grow the company. And so, the process begins anew.
To avoid this pitfall, start early and start small. Demand early success. Funding needs to be patient for growth— enough time should be given for the thing to grow. At the same time, money should be impatient for profit— needing to turn a profit ASAP will stimulate a company to try things out in real life. It will expose products to real customers; force the company to keep costs low.
It can be very hard for investors to watch an enterprise go through these awkward stages, and it’s very hard for a publicly traded company to ignore its shareholders who are looking for evidence of growth. It takes some discipline to get the good money.
Chapter 10: the Role of Senior Executives in Leading New Growth
A single disruptive enterprise can keep a company on the gravy train for years. A chain of disruptions can unlock profits for decades to come. In order to succeed at this game, a senior executive must determine which resources and processes to apply to the new enterprise and must guide the creation of a disruptive growth engine (a system of processes that engenders and nurtures disruptive growth). The executive must also be alert for signs of changing circumstances. If the basis of competition starts to change, the executive needs to be prepared to lead the company to a new strategy and explain to others that changing circumstances are an opportunity for growth and not an occasion to turn inward.
At least until a new enterprise has developed stable processes, it’s also important to establish direct oversight by a senior executive— someone with the authority and the knowledge base to take care of a myriad of issues, from ethics to product development. This person decides which processes should be borrowed from the parent company and which processes need to be created fresh. It’s the executive’s role to keep communication flowing across the company and across the boundaries between sustaining departments and disruptive ones.
The very best time to invest in new growth projects is when the company is still growing. Companies should create a growth engine that is run by policy, so it gets funding and projects are started, not because of immediate needs, but rather because it is part of the day-to-day business. It is important to have the right senior executive leading the enterprise. This should be someone with experience managing a disruptive growth business.
Finally, it is essential to create a team: a small group of people who develop a system for identifying disruptive opportunities and shepherding them through the process to launch. These experts should have a good grasp of theory to ensure that the team’s actions fit the circumstances. Company-wide training can also teach people to flag disruptive ideas for the small group. Rank-and-file employees are often the ones with their ears to the ground. They understand the consumer through frequent contact, and they often see opportunities before those who are higher in the company’s hierarchy.