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GoodSemester, Part 2

Book Review: "The Innovator's Solution"

Today's post is about "The Innovator's Solution" by Clayton Christensen and Michael Raynor, a book I read several weeks ago and have been wanting to write a blog post on ever since.

Readers interested in innovation will most likely have heard of "The Innovator's Dilemma", Christensen's 1997 best-seller that presented his theory of disruptive vs sustaining innovation. I tried to read it but didn't care for it. The high-tech examples, although surely fascinating in their day, are now hopelessly outdated. (There is only so much of relevance today in the hard-drive disk industry of the early 1990s.)

Overall I felt The Innovator's Dilemma could be convincingly summarized in a magazine article - or maybe even just a few pages, as Christensen and Raynor do early in the present book.The beginning of Chapter Two will tell you everything you need to know about disruptive innovation, and emphasizes the importance of the circumstances of innovation to predict whether incumbents or new entrants will prevail. In particular, "in disruptive circumstances - when the challenge is to commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customer set - the entrants are likely to beat the incumbents." Figure 2-1 p.33 ("The Disruptive Innovation Model") and the case study starting on p.35 [of the hardcover edition, I don't think the book is available in paperback - Harvard Business Review Press knows how to keep its margins!] about the minimills, which upended integrated steel companies, convincingly illustrate Christensen's theory.

In contrast with the earlier book, which "summarized a theory that explains how, under certain circumstances, the mechanism of profit-maximizing resource allocation causes well-run companies to get killed", The Innovator's Solution focuses on how companies can "create the right conditions, at the right time, for a disruption to succeed." I was pleasantly surprised by how informative it turned out to be. Below are the points that I found most valuable when I read the book. (I left out plenty of great insights.)

In Chapter 2, Christensen and Raynor distinguish between new-market disruptions, i.e., "disruptions that create a new value network" (defined elsewhere as "a particular market application in which customers purchase and use a product or service") and low-end disruptions, which "attack the least-profitable and most overserved customers at the low end of the original value network." That chapter also offers three sets of questions to help managers determine whether an idea has the potential to become disruptive (see p.49-50). At a high level, these questions seek to identify whether the idea can be turned into a new-market disruption or a low-end disruption, and whether it will be disruptive to all the established players in the targeted market. 

In Chapter 3, the authors make the fundamental argument that "customers "hire" products to do specific "jobs"", and that therefore companies should segment markets according to those jobs and not according to the characteristics of the product. Since many retail channels are attribute-focused, many successful new-market disruptors have had to identify new channels to reach the customer.

Chapter 4 elaborates on the "jobs question" by investigating how to know whether current non-consumers could be enticed to begin consuming. In the authors' words, "a product that purports to help non-consumers do something that they weren't already prioritizing in their lives is unlikely to succeed." Christensen and Raynor also emphasize the importance of reframing disruption as an opportunity rather than a threat, which usually requires placing the disruptive idea in a new, independent unit of the organization for which it will represent pure opportunity.

Chapter 5 explains when the company should use a proprietary product architecture and when it should use modular, open industry standards (in other words: when to outsource and when not). Product architecture is defined as the set of components that represent the product and the way they must fit and work together to achieve the desired functionality. The chapter also discusses interfaces and interdependent vs modular architectures. (Because modular architectures don't exhibit interdependencies, those are the ones for which outsourcing is possible.) The best architecture depends on the limiting factor in meeting customers' needs; different choices are required if functionality/reliability are insufficient (in the early stages of a disruptive innovation) and if speed/responsiveness are the bottleneck factors.

In Chapter 6, Christensen and Raynor explain how to avoid commoditization. Their idea is that if commoditization is happening somewhere in the value chain, then decommoditization is happening elsewhere. Commoditization starts when the product sold by the incumbent becomes too complex for customers' needs and customers refuse to keep paying ever-increasing prices for it (a disruptive innovator then captures market share starting at the bottom of the customer base by producing a cheaper product that is not yet good enough for the top customers, but will soon be). The authors describe the six steps of the commoditization process in detail starting on p.151. The parallel process of de-commoditization is described on pp.152-3 using the example of the steel minimills and summarized starting at the bottom of p.153.

Chapter 7, "Is your organization capable of disruptive growth?", makes the distinction between right-stuff thinking and circumstance-based theory to pick the right people to manage a venture. Using the right-stuff thinking theory, companies should recruit employees who exhibit right-stuff attributes such as "good communicator", "results-oriented", etc. The authors prefer the circumstance-based theory due to someone named Morgan McCall, which views business units as "schools" and the problems encountered as the "curriculum" that potential hires have been through. In this way of thinking, managers who have worked in stable business units in the past haven't taken the "courses" to start a new plant and so would probably be weak in such a task, and the key to successfully staffing a new venture is to examine managers' prior experiences. I enjoyed reading the case study about Pandesic, a promising joint venture between Intel and SAP that ended in a costly failure.

"Managing the strategy development process" is explained in Chapter 8. The two main processes are called deliberate and emergent. Deliberate strategy-making uses a careful analysis of extensive amounts of data and is implemented top-down. An emergent strategy "bubbles up from within the organization". It often results from "tactical, day-to-day operating decisions" (see the example of Sam Walton and Wal-Mart). Table 8-1 on p.228 explains the discovery-driven method for managing the emergent strategy process.

Chapter 9 discusses funding issues, and in particular how the type of money used to fund a venture will affect its prospects because it defines the investor expectations that the managers will have to meet. Christensen and Raynor recommend a "patient for growth but impatient for profit" approach in the early states of a new business. The "death spiral" from inadequate growth is presented starting at p.237. 

Finally, the role of senior executives in leading new growth is described in Chapter 10 and the epilogue contains a summary of the authors' advice in thirteen points starting on p.288.

I found The Innovator's Solution to be packed with insightful advice and highly recommend it.

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