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April 2012

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 The high-tech examples, although surely fascinating in their day, are now hopelessly outdated.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.


Back from Huntington Beach, CA!

Yesterday evening I got back from the INFORMS 2012 Analytics conference, which was held in Huntington Beach, CA. I wanted to post this earlier, but things got hectic at Lehigh with my meeting with the project sponsor for the analytical finance projects, the Spencer Schantz luncheon and lectures, which honored Lehigh ISE alumnus and Stanford emeritus professor Arthur (Pete) Veinott, and the annual ISE banquet, which honored both Veinott as 2012 Distinguished Alum for Excellence in Academia and Lehigh ISE alumnus Tim Wilmott as 2012 Distinguished Alum for Excellence in Industry.

(I also have two Master theses to edit before tomorrow evening/Saturday morning, at which point they have to be in my department chair's inbox for reading and approval before next Friday's deadline in the Registrar's Office... the last problem of the quiz in my financial optimization course to grade... the project and the last homework to upload... an overdue review... several papers that are past their revision deadlines... and those are only the things that need to happen before Monday. Oh, the end of the semester.)  

Anyway, I know I owe this blog a "GoodSemester, Part 2" blog post, but that will have to wait for next week. For today, I'll write about the Analytics conference. I've been to this conference once before, in 2009 when it was called the "Practice Conference" and was held in Phoenix. I wouldn't have attended this year - it is a really good conference but it is really expensive too and the timing in the semester wasn't great - if the ISE department at Lehigh hadn't been named finalist for the UPS George D Smith Prize on the strengths of the application I wrote.

Prof Terlaky, Prof Gustafson and Rob Rappa '11 '12G came along to the conference and presented the department case with me to the judging committee. Our application was for the whole ISE department and included our bachelor's, master's and doctoral programs. The other finalists were Cornell IEOR's M.Eng program and the certificate program of the Tauber School for Global Operations at the University of Michigan. Michigan won. Many thanks to the judges for the time they spent evaluating the submissions - for this award and others, as some did double duty on the Edelman or INFORMS Prize Committees. Their commitment to INFORMS is truly inspiring.

The conference was a resounding success from beginning to end, even if I had to stop by Lehigh on my way to the airport to make copies of my quiz solutions for my teaching assistant, so that she could proctor the exam and grade her part while I was gone (just-in-time operations at their finest). I landed in Orange County late on Saturday, after a "flight" from ABE to EWR that is actually a trip down Route 78 on a tiny bus [the type of the bus you take at the airport to go to the economy parking lot - it is apparently more reliable than operating a flight into EWR for such a short distance, and it leaves outside the airport at ABE so you and your carry-on luggage only go through security at EWR, although your checked-in luggage is screened at ABE] and a flight from EWR to SNA, aka John Wayne Airport.

Because I had made my hotel reservation late to the conference hotel - the Huntington Beach Hyatt Resort and Spa - due to learning late that Lehigh was a finalist for the award, the conference block had been sold out for the first and last nights of my reservation and I was supposed to change rooms 3 times in 4 nights. I showed up Saturday night and started explaining to the young employee at the check-in counter how it would be a great plus in my life if by any chance he could find a way to make me stay in the same room for all four nights... The teenage kid raised an eyebrow and said: "oh, we fixed your reservation. Of course we're not going to have you change rooms in the middle of your stay!" That's customer service to you.

My enthusiasm for the Hyatt hotel chain further skyrocketed when I saw the enormous room I'd been put in. As some of you know, my family used to be very poor so even now that we've pulled ourselves out of that, I can get excited like a little kid for expensive things at bargain prices. The room rates weren't cheap to begin with, but I could tell immediately that the rate of that room was much higher than what I was paying for. I glanced outside and saw palm trees outside my balcony, a courtyard and a fountain (it was dark so I couldn't see much). I thought the view was nice and forgot about it until the next morning, when I opened the curtains and realized I actually had a view of the beach and the Pacific Ocean, and I don't mean far in the distance. From that point on, that conference could be nothing but a success in my eyes! The staff at the Hyatt was extremely courteous and professional; the food was delicious. The hotel has received extremely high ratings on Google Reviews and I can say with full confidence that it deserves every single one of them.

But back to the conference, since that's why I had come all the way to California for. It provided us (the Lehigh team) with great opportunities to connect with companies, and I also enjoyed the excellent talks I attended,

  • from Intel's entry as a finalist to the Edelman competition,
  • to the winning presentation in the Innovation in Analytics competition (US Immigration and Customs Enforcement with Booz Allen Hamilton - a fascinating topic),
  • to "Smarter Analytics in Insurance" presented by the head of the IBM group on advanced analytics and optimization (our Lehigh student Rob Rappa was thrilled to talk to him afterwards, since that group would be a perfect match for his skills),
  • to the work Lehigh's recent graduate Ana Alexandrescu '10 '11G did for her Master's thesis on "Comparison of Risk Prediction Models for Home Health", which was presented by her supervisor at Bayada Home Health Care since she couldn't attend due to her new job.

I also enjoyed the keynote by eBay's Vice President for Analytics Platform, the informative lunches and the great networking opportunities. Lehigh's recent graduate Nick Kastango '09 was part of the Memorial Sloan Kettering team that got recognized with the INFORMS Prize and I'm looking forward to hearing his presentation next year. I'm also looking forward to hearing TNT Express present at the annual meeting in the fall the work they received the prestigious Edelman award for. Since they were recently bought by UPS (another company that values analytics), it is nice for them to show they bring significant value to their new parent company.

The conference was extremely well-organized and ran very smoothly thanks to the tireless efforts of our dedicated INFORMS staff Paulette Bronis, Sandi Owens and many others. Thanks to you all for another great event. See you in Phoenix in the fall!


GoodSemester, Part 1

Two weeks ago I attended a presentation by someone at GoodSemester, a local educational start-up aiming at revolutionizing the way teachers teach and students learn by leveraging online learning tools. The idea, as I understand it, is to create a social network for learning that fosters collaboration and combines student interactions with group management software (including course management software).

From the Feature Tour page: "Open learning is built into the core of GoodSemester. We believe that people learn better when they work together and have the tools that they need for their subject to communicate any message."

The features include:  

  • activity feeds (instead of "static objects full of files"),  
  • courses (understood in a wide sense: "anyone, from anywhere in the world, can create a course to teach anything to anyone"),
  • notes ("Take amazing notes with the built-in editor that supports rich text formatting, math formulas, musical notation, and even diagram drawing, then instantly share your notes with your course or the entire world, and everyone in your course will see them right in the notebook"),  
  • assignments ("easy one-on-one submission" and "built-in group submission"),
  • questions ("With just one click, anyone can second a question and be notified when someone posts a correct answer. And professors can get an amazing at-a-glance view of what topics their courses are having trouble with"),
  • discussions (it "makes holding live, open-ended discussions with people in your course easier than ever before"),
  • groups ("instant, live, private groups for any situation"),
  • dashboards ("the do-everything know-at-all analytics tool for professors" with an array of novel features to grade and track student progress; in particular, GoodSemester has an easy-to-use interface that helps adjust grading curves and visualize student performance in a manner that seems quite revolutionary).

GoodSemester caters to several groups: course instructors (or hobbyists willing to share their expertise) can have their course hosted by GS instead of CourseSite or Blackboard, students can create their own group and use GS to work together even if the instructor has not set up a GS page. (I love using "GS" to refer to a company other than Goldman Sachs... especially a company dedicated to online education on a large scale. The 99% share initials with the 1%, in a way.) The company operates on a freemium model, with a basic version complemented by several more advanced ones that users access for a relatively small fee: GoodStudent ($5/month), GoodProfessor ($25/month), GreatProfessor ($50/month), with further deals for universities.

I was thrilled when I looked up the team page and realized GoodSemester is the local educational startup that Lehigh's Industrial and Systems Engineering very own Olajide Osanyingbemi '12 (who took my course last semester) mentioned working for, back in December. If I remember correctly, he was very proud of his work on the gradebook - and when I see the result, I can understand why.

Olajide, known as Jide for short - and in this case Jide Osan, apparently - has a keen entrepreneurial spirit, which led him to Silicon Valley during winter break as a "Lehigh in Silicon Valley" participant. You can see him in the picture in the top right corner of Lehigh's news release about the program, which is hosted by the Baker Institute for Entrepreneurship, Creativity and Innovation, and gives students "an opportunity to explore all things entrepreneurship in the heart of Silicon Valley." It is great to see him involved in the GS venture.

In addition to the impressive list of features above, I hope GoodSemester includes:

  1. the ability to leave notes for students in the gradebook - the way I write "Congratulations" or "What happened?" on top of an exam, but also the way I use loose grading ranges such as "A-/B+" when I give students their "grades so far" toward the middle of the semester. CourseSite is very inflexible when it comes to grading. I'll spare you the details, but although I just want to insert a bit of text, I have to create a full new user-defined range that the file uploading system doesn't even recognize, and then input each grade by hand.
  2. course rosters - by that I mean tables of reasonably-sized student pictures with their names underneath. I like learning my students' names and the list of participants in Blackboard and CourseSite is not user-friendly at all in that respect. Again, I'll spare you the details, but the short version of the story is that I have to create the roster manually myself, which requires a lot of time and effort that could be put to far better use. My mother who taught at a technical community college outside Paris for years had a course roster at the start of every semester. If the computer systems of the time allowed her Registrar's Office to make rosters, surely I can have one too. 

I have a lot more to say about GoodSemester, but it'll have to wait until next week.