Innovators Solution

by Clayton Christensen, ISBN:1578518520

some of it reminds me a great deal of Crossing The Chasm

ch2

The 3 elements of disruption:

• there is a rate limiting how much product improvement customers can absorb

• companies generate improvements at a higher rate than this, therefore they will inevitably innovate faster than customers can absorb/value those improvements

• distinction between Sustaining Innovation and Disruptive Innovation

  • sustaining targets high-end demanding customers

    • established competitors win this battle: they have the motivation and the resources

  • disruptive products/services are not as good as existing offerings (in some perceived-as-primary criterion), yet offer other benefits (cheaper, simpler, more convenient - see Crossing The Chasm's Whole Product concept) (Worse Is Better)

    • since disruptive products head up that same steeper-than-customers trajectory, they will eventually catch up with more-demanding customers' requirements (be "Good Enough"), while being better in those "side" dimensions.

    • existing competitors are motivated to go up-market (explained in later chapters), not to go after new lower-end markets that are less well defined. Ergo these innovations are typically introduced by new entrants. This is the Innovators Dilemma.

Implications for new companies

• this doesn't mean a new company shouldn't be started on the basis of a sustaining innovation; but it does mean that once the viability of that offering/market has been proven, they should sell out to the established competitors.

• If you want to build and keep a high-growth business, you need to focus on disruptive innovation.

• innovation must be disruptive to all established competitors (e.g. online purchasing of computers was disruptive to Compaq, but not to Dell Computer, so that would be a bad market for a post-Dell startup to go after)

Three dimensions of disruption

• performance (along main functional criteria)

• passage of time

• category change - new Context-s for consumption, new Value Network (Business Web)

Two types of disruptions

• new-market disruption: compete with Non Consumption (significantly more affordable, convenient, simple Whole Product - makes consumption reasonable to whole new group of people)

• low-end disruption: be good-enough for existing customers who are over-served, at a better price/convenience

  • established competitors tend to flee up-market, but eventually they run out of room

• (many disruptions are hybrid - pull both types of customers)

Three sets of questions defining whether an innovation is disruptive

• can it become a new-market disruption?

  • is there a large market of non-consumers?

  • is current consumption seriously inconvenient?

• can it be a low-end disruption?

  • are there a significant number of existing customers who would be satisfied with lower performance in return for lower price?

  • can you make a profit at that lower price?

• is the innovation disruptive to all established competitors?

ch 3 - what products customers will want to buy

Market Segmentation is a process of predictive Theory Building.

Apr'2003 talk on the same contents

from 2004-03-20-ChristensenCapturingTheUpside

Clayton Christensen talk about the Theory Building mature companies need to do to successfully grow through Innovation. Christensen has developed a set of theories to help guide managers as they seek to answer seven critical questions when trying to build new growth businesses, again and again...

Jun'2014: Horace Dediu has a full transcript.

And so Andy Grove said, “So really, the decision the (DEC) management had to make was, “Should we invest our money to make better products that our best customers could use that would improve our profit margins, or should we invest our money to make worse products that none of our customers could use that would ruin our profit margins? What should we do?” And I’m pretty quick, and so what I said was, “Andy, since you’re in this situation, my advice is to bale out and become a professor.” But then I realized that the very same thing is happening to the Harvard and Stanford Business School-s. We have become very good and very expensive, and we’re getting disrupted by crummy, low — end, on — the –job learning experiences like you’re having today!

“What happens once the functionality and reliability become more than good enough for what customers in the less demanding tiers of the market can use? What do you do to get traction with these kinds of customers if you want to build a new business serving them?” And the answer is that what’s not good enough now changes, and what begins to matter to these customers is, “I can’t get what I need fast enough, and I can’t get exactly what I need as fast as possible.” And so improvements in speed to market and the ability responsively to give every customer exactly what they need, that constitutes a new trajectory of innovation along which improvements are rewarded with attractive prices and increases in market share. And in order to compete in this way to be fast and flexible and responsive, the architecture of the product has to evolve towards a modular architecture (Loosely Coupled), because modularity enables you to upgrade one piece of the system without having to redesign everything, and you can mix and match and plug and play best of breed components (InterOp) to give every customer exactly what they need.

The money tends to be made by the company that designs the architecture, the system, that solves what is not Good Enough.

I want to try to walk into how you can use this way of thinking in a concept that’s called the “law of conservation of modularity.”

And the core concept of the law of conservation of modularity is that — if you can just visualize — if you are writing a software application to run on Windows, you might go to Redmond and knock on the door and say, “Would you please just let me into Windows? And if I could just change these 25 lines of code, the application would run so much better!” But Windows doesn’t dare open the door, do they? because it has an interdependent architecture, and if you change a couple of lines, who knows what else would get screwed up!... And so the application has to be suboptimized and conform itself to Windows so that Windows could be optimized... in order to fuel Dell moving up market so that it could keep competing against Sun Microsystems... And so the microprocessor and the operating systems have a proprietary and interdependent architecture even while Dell’s product has a modular architecture. And so, back to the software analogy. The application has to be suboptimized so that Windows could be optimized. But if you’re writing an application to run on Linux, because Linux has a modular architecture, you don’t even have to knock on the door... And so one side or the other needs to be modular and conformable to allow what’s not good enough to be optimized.

The microprocessor is going through a process of commoditization as it overshoots and becomes modular and undifferentiable. But, whenever that happens at one layer of value added that there is a process of commoditization, it initiates a reciprocal process of decommoditization at the next level of value added.

I had a student write an article about Cell Phone-s and where the value migrates there because, in many ways, a Nokia and a Motorola phone have been over on the left hand side where the proprietary architectures, then they do their own processors, they do their own operating system optimized, but now those cellphones have so many features that the limitations on the system are not in the handset themselves, it’s elsewhere in the system. And so we wrote a couple of things that forecast that the handsets are going to become modular, and because of that then, where the money is made in that value chain is going to migrate to the back end... the way to make money would be for Motorola to sell its chip sets to a thousand Chinese assemblers and for Nokia to sell its operating system to a thousand Chinese assemblers, and all of those guys colliding against each other in commodities would then drive the pricing of those things down and so on, and that’s the way the world would work... But then Nokia announced that it was almost giving its operating system away, and I thought, “Those idiots! That’s where the money is going to be made,” but then my student said, “No, they’re a lot smarter than you, Clay, because of the law of conservation of modularity. By opening up their operating system and making it essentially free,” he asserted, “what that then allows is the operating system becomes modular and conformable so that Nokia could keep optimizing hardware and keep the hardware part of the system proprietary.”

They’re just one other set of concepts that I wanted to go over... “How do I know who are the right customers to target with my new technology?”

I had written an article about the disruption of the Harvard Business School, and what it asserts is that our MBA’s have become extremely expensive... Now, the operating companies aren’t getting lower quality talent; they’re just going into undergraduate programs and raking out the best engineers and others that they can find, putting them to work, and then two years later at the time when many of them would leave to get an MBA, the companies are saying, “Nope, you don’t need an MBA!” “We have GE Crotonville or we have Motorola University... So anyway, I wrote a case about how on — the — job training is disrupting the Harvard Business School, and one of the students raised her hand and, in a very polite way, she said, Well, excuse me, but I think you can only be disrupted if you have overshot what the market needs, and frankly I am not overserved by your teaching.” So I was convinced that Harvard was getting it, and yet it was very clear that she wasn’t overserved. And so it helped me think through that there are actually two different kinds of disruption.

Now, one type of disruption we called a “low — end disruption,” it just takes root in the very same market where the incumbent leaders are, but it just picks it off at the low end, and they build a business model that can make money at the discount prices that’s required to steal the business down here. So it doesn’t create a new growth market, but it does create a new growth business.

But the other type of disruption, and this is what corporate education is, we called the “new market disruption,” and it comes out in a new context, and so it’s almost like you have a third plane of competition out here. And by bringing a product that is so simple and inexpensive, a whole new population of people can now afford to own and use a product who historically couldn’t do it... The Personal Computer was one of these, right?... they competed against Non Consumption.

It was not that they (the Vacuum Tube Radio makers) weren’t aggressive and visionary. They invested far more money trying to make the (Transistor Radio) technology Good Enough than did Sony as they were building these growth businesses. The punishing thing is that they targeted the wrong customers. They targeted consumers, and the only way the customers here would have adopted the new technology is if it were better than the old technology and more cost effective.

Now, where you see this happening today is voice recognition software... IBM Via Voice. Now don’t buy it, but just look at it! They have a picture of the customer on the box, and it’s an administrative assistant who is sitting in front of her computer wearing a headset... This is not an attractive proposition to this customer... Lego comes up with these robots that recognize “stop,” “go,” “left,” “right,” and the kids are thrilled with the four word vocabulary... I bet maybe the next place it takes route is in chatrooms because the kids don’t spellcheck or capitalize anyway, and they would rather speak than type.

I’ve asked myself, “Why would the IBM engineers have picked off the most demanding application conceivable for this technology,” and it probably resides in the Resource Allocation process of the company... the people who had the idea knew that they just couldn’t stand up in front of senior management without MsPowerpoint and just say, “I’m sure there’s going to be a lot of ‘press or say’ when stuff happens some time... But they have to do a MsPowerpoint presentation that has financial projections, and they have to be able to say that we hired a consulting firm and they did a market study and, there are 37.9 million administrative assistants who spend this many hours a day word processing.

And the Digital Camera people like Kodak fell victim to the same process.

I’d always wondered whether Solar Energy was ever going to be commercially viable... Then in Mongolia, our daughter took us to this big open — air market in the capital city Ulaan Baatar. There was this big line of stalls in this market where the vendors are selling dirt — cheap solar cells shrink wrapped with 6” televisions and rabbit ears antennas, and they’re just walking out of marketplace! Because half the population of Mongolia doesn’t have access to power over a grid.

... any attempt to deploy Linux right onto a DeskTop, there are just so many complicated and unforeseeable interdependencies... But because of the law of conservation of modularity, as it takes root out in the new plane of competition with wireless handheld devices, because the modularity of Linux allows the device to become optimized.

We were having this case discussion about the disruption of Harvard Business School... “So any of the rest of you, imagine you were dean. Could you give me data that would convince you that it was time to take action?” And actually, every piece of data that they could come up with was evidence that the game was over. And the idiot-simple insight that we got is that data is only available about the past... And so we enshrine the virtues of data — driven analytical decision making in the way we teach at our business schools, and the our students go to work for McKinsey and they carry data driven analytics to the nth degree, but in many ways the very ways we teach them condemns our managers to take action when the game is over.

...his question is. “Does the theory predict that the profits will disappear in every market or that they will just be made by different parties?” And it’s very much the latter. In fact, for marketing purposes, we called this concept the “law of conservation of modularity.” In the book, we called that “law of conversation of attractive profits.”

How does this apply to Intel? So they were getting killed at the lower end, and they then developed what they call the Celeron chip and tried to sell it through the sales force. The problem was the sales force had a problem... So they set up a separate marketing organization out of Israel and gave it the responsibility to sell the Celeron... the evidence that the incumbents actually don’t need to get killed, but they actually they’ve got to set up their separate organization that can focus on the new thing.

Her question is. “What happens if these market disruptors get bought by big players and by the incumbents?” It actually is a great strategy. I want to say two things. Companies like Johnson & Johnson (J And J) as the HealthCare industry is getting disrupted in a pretty big way — we don’t have time to talk about it — but they’ve decided, “We’re not good at getting these things off the ground,” but they’ve got a team of people that have these lenses on going around the healthcare industry, identifying little companies that are new market disruptors... now every year they get about $9 billion of revenue from disruptive companies that they bought a decade ago. (M And A)

... if Harvard Business School could become the Intel Inside of every corporate university (Job Training)...