Book Summary — Innovator’s Solution

Creating and Sustaining Successful Growth

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1 paragraph summary:

How companies can disrupt or get disrupted.

Intro

This is a book about how to create new growth in business. Growth is important because companies create shareholder value through profitable growth.

Most companies follow an all-too-similar pattern. When the core business approaches maturity and investors demand new growth, executives develop seemingly sensible strategies to generate it. Although they invest aggressively, their plans fail to create the needed growth fast enough; investors hammer the stock; management is sacked; and Wall Street rewards the new executive team for simply restoring the status quo ante: a profitable but low-growth core business.

Probably the most daunting challenge in delivering growth is that if you fail once to deliver it, the odds that you ever will be able to deliver in the future are very low.

Once growth had stalled, in other words, it proved nearly impossible to restart it.

How to Beat Competitors

Our ongoing study of innovation suggests another way to understand when incumbents will win, and when the entrants are likely to beat them.

The Innovator’s Dilemma identified two distinct categories — sustaining and disruptive — based on the circumstances of innovation.

In sustaining circumstances — when the race entails making better products that can be sold for more money to attractive customers — we found that incumbents almost always prevail.

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. This is the phenomenon that so frequently defeats successful companies. It implies, of course, that the best way for upstarts to attack established competitors is to disrupt them.

Disruptive innovations don’t attempt to bring better products to established customers in existing markets. Rather, they disrupt and redefine that trajectory by introducing products and services that are not as good as currently available products.

But disruptive technologies offer other benefits — typically, they are simpler, more convenient, and less expensive products that appeal to new or less-demanding customers.

Disruption has a paralyzing effect on industry leaders. With resource allocation processes designed and perfected to support sustaining innovations, they are constitutionally unable to respond.

They are always motivated to go up-market, and almost never motivated to defend the new or low-end markets that the disruptors find attractive. We call this phenomenon asymmetric motivation.

It is the core of the innovator’s dilemma, and the beginning of the innovator’s solution.

Although you could never have predicted what the technical solution would be, you could predict with perfect certainty that the minimills were powerfully motivated to figure it out. Necessity remains the mother of invention.

Can the idea become a new-market disruption?

1. Is there a large population of people who historically have not had the money, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them?
2. To use the product or service, do customers need to go to an inconvenient, centralized location?

What products will customers buy?

Predictable marketing requires an understanding of the circumstances in which customers buy or use things. Specifically, customers — people and companies — have “jobs” that arise regularly and need to get done.

Companies that target their products at the circumstances in which customers find themselves, rather than at the customers themselves, are those that can launch predictably successful products. Put another way, the critical unit of analysis is the circumstance and not the customer.

Only by staying connected with a given job as improvements are made, and by creating a purpose brand so that customers know what to hire, can a disruptive product stay on its growth trajectory.

Who are the best customers for your products?

1. The target customers are trying to get a job done, but because they lack the money or skill, a simple, inexpensive solution has been beyond reach.
2. These customers will compare the disruptive product to having nothing at all. As a result, they are delighted to buy it even though it may not be as good as other products available at high prices to current users with deeper expertise in the original value network. The performance hurdle required to delight such new-market customers is quite modest.
3. The technology that enables the disruption might be quite sophisticated, but disruptors deploy it to make the purchase and use of the product simple, convenient, and foolproof. It is the “foolproofedness” that creates new growth by enabling people with less money and training to begin consuming.
4. The disruptive innovation creates a whole new value network. The new consumers typically purchase the product through new channels and use the product in new venues.

Despite how appealing these kinds of customers appear to be on paper, the resource allocation process forces most companies, when faced with an opportunity like this, to pursue exactly the opposite kinds of customers: They target customers who already are using a product to which they have become accustomed.

To escape this dilemma, managers need to frame the disruption as a threat in order to secure resource commitments, and then switch the framing for the team charged with building the business to be one of a search for growth opportunities. Carefully managing this process in order to focus on these ideal customers can give new-growth ventures a solid foundation for future growth.

Getting the Scope of the Business Right

A widely used theory to guide this decision is built on categories of core and competence. If something fits your core competence, you should do it inside. If it’s not your core competence and another firm can do it better, the theory goes, you should rely on them to provide it.

Right? Well, sometimes. The problem with the core-competence/ not-your-core-competence categorization is that what might seem to be a noncore activity today might become an absolutely critical competence to have mastered in a proprietary way in the future, and vice versa.

IBM and others have demonstrated — inadvertently, of course — that the core/noncore categorization can lead to serious and even fatal mistakes. Instead of asking what their company does best today, managers should ask,

“What do we need to master today, and what will we need to master in the future, in order to excel on the trajectory of improvement that customers will define as important?”

When the functionality and reliability of a product are not good enough to meet customers’ needs, then the companies that will enjoy significant competitive advantage are those whose product architectures are proprietary and that are integrated across the performance-limiting interfaces in the value chain.

When functionality and reliability become more than adequate, so that speed and responsiveness are the dimensions of competition that are not now good enough, then the opposite is true. A population of nonintegrated, specialized companies whose rules of interaction are defined by modular architectures and industry standards holds the upper hand.

How to avoid Commoditization

Executives who seek to avoid commoditization often rely on the strength of their brands to sustain their profitability — but brands become commoditized and de-commoditized, too. Brands are most valuable when they are created at the stages of the value-added chain where things aren’t yet good enough. When customers aren’t yet certain whether a product’s performance will be satisfactory, a well-crafted brand can step in and close some of the gap between what customers need and what they fear they might get if they buy the product from a supplier of unknown reputation.

The power to capture attractive profits will shift to those activities in the value chain where the immediate customer is not yet satisfied with the performance of available products. It is in these stages that complex, interdependent integration occurs — activities that create steeper scale economics and enable greater differentiability. Attractive returns shift away from activities where the immediate customer is more than satisfied, because it is there that standard, modular integration occurs.

This process creates opportunities for new companies that are integrated across these not-good-enough interfaces to thrive, and to grow by “eating their way up” from the back end of an end-use system. Managers of industry-leading businesses need to watch vigilantly in the right places to spot these trends as they begin, because the processes of commoditization and de-commoditization both begin at the periphery, not the core.

Can you disrupt?

Managers whose organizations are confronting opportunities to grow must first determine that they have the people and other resources required to succeed. They then need to ask two further questions:

1. Are the processes by which work habitually gets done in the organization appropriate for this new project?
2. And will the values of the organization give this initiative the priority it needs?

Managing the Strategy Development Process

The key is to manage the process by which strategy is developed. Strategic initiatives enter the resource allocation process from two sources — deliberate and emergent.

There are three points of executive leverage in strategy making.

1. The first is to manage the cost structure, or values of the organization, so that orders of disruptive products from ideal customers can be prioritized.
2. The second is discovery-driven planning — a disciplined process that accelerates learning what will and won’t work.
3. The third is to vigilantly ensure that deliberate and emergent strategy processes are being followed in the appropriate circumstances for each business in the corporation.

Good Money and Bad Money

Be patient for growth, not for profit. Because of the perverse dynamics of the death spiral from inadequate growth, achieving growth requires an almost Zen-like ability to pursue growth when it is not necessary. The key to finding disruptive footholds is to connect with a job in what initially will be small, nonobvious market segments — ideally, market segments characterized by nonconsumption.

Pressure for early profit keeps investors willing to invest the cash needed to fuel the growth in a venture’s asset base. Demanding early profitability is not only good discipline, it is critical to continued success. It ensures that you have truly connected with a job in markets that potential competitors are happy to ignore. As you seek out the early sustaining innovations that realize your growth potential, staying profitable requires that you stay connected with that job. This profitability ensures that you will maintain the support and enthusiasm of the board and shareholders. Internally, continued profitability earns you the continued support and enthusiasm of senior management who have staked their reputation, and the employees who have staked their careers, on your success. There is no substitute. Ventures that are allowed to defer profitability typically never get there.

The role of Senior Execs

Senior executives need to play four roles in managing innovation.

1. First, they must actively coordinate action and decisions when no processes exist to do the coordination.
2. Second, they must break the grip of established processes when a team is confronted with new tasks that require new patterns of communication, coordination and decision making.
3. Third, when recurrent activities and decisions emerge in an organization, executives must create processes to reliably guide and coordinate the work of employees involved.
4. And fourth, because recurrent cultivation of new disruptive growth businesses entails the building and maintenance of multiple simultaneous processes and business models within the corporation, senior executives need to stand astride the interfaces of those organizations — to ensure that useful learning from the new growth businesses flows back into the mainstream, and to ensure that the right resources, processes, and values are always being applied in the right situation.

When an established company first undertakes the creation of a new disruptive growth business, senior executives need to play the first and second roles. Disruption is a new task, and appropriate processes will not exist to handle much of the required coordination and decision making related to the initial projects. Certain of the mainstream organization’s processes need to be pre-empted or broken because they will not facilitate the work that the disruptive team needs to do. To create a growth engine that sustains the corporation’s growth for an extended period, senior executives need to play the third role masterfully, because launching new disruptive businesses needs to become a rhythmic, recurrent task. This entails repeated training for the employees involved, so that they can instinctively identify potentially disruptive ideas and shape them into business plans that will lead to success. The fourth task, which is to stand astride the boundary between disruptive and mainstream businesses, actively monitoring the appropriate flow of resources, processes, and values from the mainstream business into the new one and back again, is the ongoing essence of managing a perpetually growing corporation.

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