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Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Practicing disruptive innovation
Brian LeavyBrian Leavy is AIB Professor of Strategic Management at Dublin City University Business School (firstname.lastname@example.org). His research is focused on strategic leadership, competitive analysis and supply chain strategy. The author of more than 40 articles and three books (Strategy and Leadership, co-authored with David Wilson; Strategy and General Management, co-edited with James S. Walsh and Key Processes in Strategy), he is a frequent contributor to S&L.
The Innovator's Solution
Clayton M. Christensen and Michael E. Raynor Published by Harvard Business School Press, 2003, 292 pp.
Nearly two decades ago, in Innovation: The Attacker's Advantage, Richard Foster pointed out that industrial leadership "changes hands in about seven out of ten cases when discontinuities strike". Today these observations continue to hold true, and the reasons why continue to confound us. Do industry-leading companies lose their ability to innovate as they get bigger, or do they lose their motivation?
In the search for answers, many have focused on what typically happens to innovative ventures as they grow and become more formalized over time. Jerry Hirshberg in The Creative Priority characterized the "traditional bureaucratic structure", with its requirements for predictability and conformance, as "a nearly perfect idea-killing machine", and Robert Sutton, in Weird Ideas That Work, argued that most large organizations need to learn (or re-learn) to embrace many things that "clash with accepted management practice", if they hope to recover the innovation initiative.
However, the authors of The Innovator's Solution set out to understand the problem from another angle - why industry leaders are often motivated to innovate in ways that are ultimately self-defeating. For Clayton M. Christensen and Michael E. Raynor, the key issues lie less in pathologies of organization than in the dynamics of innovation at industry level. Understanding these dynamics and how to influence them is their central concern.
The Innovator's Solution is a worthy successor to Christensen's 1997 best-selling The Innovator's Dilemma, and few CEOs will fail to benefit from it. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School, holding a joint appointment in general management and in technology and operations management. Michael E. Raynor, a director of Deloitte Research, the thought leadership arm of Deloitte, joins him for this latest project.
The issue Christensen confronts in both books is, "Why are mature markets so often reinvigorated by the innovation of new entrants and challengers rather than by leading incumbents?" His The Innovator's Dilemma explained how, under certain circumstances, "the mechanism of profit-maximizing resource allocation causes well-run companies to get killed". The Innovator's Solution presents managers with insights that can help them grow businesses with predictable success and "become the disruptors rather than the disruptees".
Nine key questions
The authors do this by developing answers to nine key questions, each question is given its own chapter:
How can we beat our most powerful competitors?
What products should we develop?
Which initial customers offer the most viable foundation on which to build a successful business?
Which activities should our company do internally?
How can we tell when commoditization is going to occur, and what can we do to keep earning attractive returns?
What is the best organization structure for disruptive innovation?
How do we get the details of a winning strategy right?
What sources of money will help most at different stages of development? and
When should CEOs keep their hands off new ventures and when should they become involved?
The Innovator's Solution begins, in its first two chapters, with a comprehensive reprise of basic concepts. At the core of the authors' perspective is the theory of disruptive innovation. The theory has three basic elements: (1) the relentless short-term pressure on leading incumbents from the financial markets for new growth; (2) the distinction between sustaining and disruptive innovation; and (3) the change in market context over time from under-served to over-served in terms of product features. The three elements, working together, create the innovator's dilemma.
As Christensen and Raynor see it, most companies do not stop innovating as they grow. What happens is that the kind of innovation that incumbents tend to concentrate on is typically very different from that of new entrants. The relentless pressure for new growth draws incumbents to sustaining innovation, that is, innovation aimed at the most attractive customers at the higher end of the market. New entrants that try to target this end of the market typically pose little threat. The future leadership of the incumbents is much more at risk from disruptive innovation at the lowest end of the market. The most common form of disruptive innovation marries existing technology with an innovative business model designed to be profitable at price points at the base of the current market pyramid, or better still, below it (Usually the disruptor designs a model that, through a combination of lower margin and higher asset productivity, generates a ROA comparable to the industry leader's model - for example, Nucor, Southwest Airlines, and Dell). In contrast, leading incumbents, under relentless pressure to "surprise" the shareholder with better than anticipated results, always have more incentive in the short-term to move up-market, rather slug it out for low-margin business.
The process of disruptive innovation is dynamic, which is why the threat to sustaining innovators tends to intensify over time. Here's how the pressure builds: most new markets are founded upon a product with features that initially are "not-good-enough" to fully serve the market's requirements. Over time, sustaining innovation typically leads to the stage where the product becomes "more-than-good-enough" to serve the needs of the majority of the market. The market context is by then ripe for disruptive innovation. The original innovators, as they grow, typically change from one-time disruptors to ongoing sustainers. But sustaining innovation alone is not a viable way to build new growth over the longer term (because it is aimed primarily at margin growth, with ever-diminishing scope for growing volume). Thus the innovator's dilemma. The only escape for most companies is to learn how to become serial disruptors. Few have mastered this to date. The Innovator's Solution seeks to help managers remedy this situation.
The remaining eight chapters distil the most relevant insights from the literature on strategy and organization on how to pursue disruptive growth. In relation to product-market considerations, opportunities for disruptive innovation become clearer when the market is segmented in terms of "jobs-to-be-done" rather than customer attributes. Furthermore, the transition in product features over time from "not-good-enough" to "more-than-good-enough" holds the key to when and where commoditization begins, where the profits migrate along the value chain, and how to get the level of integration right.
In terms of organization, the authors' highlight the centrality of the resource allocation process as shaper of strategy. They also stress the importance of a corporate leadership that is adept at knowing how and when to switch between emergent and deliberate modes of strategy making. To be successful, corporate leadership must know how to match the most effective financing policy with the particular phase of innovation. That is, during the emergent phase the right policy is "patient-for-growth, impatient for profit" (to get the disruptive business model right and efficient, quickly). During the deliberate scaling-up phase the company should switch to a policy of "impatient-for-growth". The ultimate goal is to learn how to develop, through repeated practice, a capability for disruptive growth that is deeply embedded in the processes and values of the organization.
Overall, the distillation of theory-based advice in The Innovator's Solution is impressive, and the quality of the ideas on strategy developed over the two Christensen books rank with the best in the field. In the latest book, the authors offer one further valuable insight to managers: learn to distinguish between attribute-based theory and circumstance-based theory. The former tends to produce one-size-fits-all prescriptions, often leading to management fads, whereas the latter takes its premises and prescriptions a step further, asking under what circumstances do they work or not work, providing a much sounder basis for management action.