The Innovators Solution

An excellent business book by Clayton Christenson and Michael Raynor is an excellent business book on innovation in business and the forces that drive companies to take certain business actions that nearly insure their demise unless they constantly innovate. The book covers both the issues and the methods to combat the problems.

The book opens with some remedial coverage of "The Innovators Dilemma". As companies become successful, the natural drive is to move "up market" where profits are better. They focus on the high end, really listen to and provide for those customers, and eventually lose the lower end of the market as their products are "too good" (expensive, complicated, large, etc) for the bulk of the market, and they are focused only on their most profitable customers.

The business becomes expert at "sustaining innovation"--better performance, added features, new hardware, more options, different models, etc. all of which hone the product, and are generally very predictable. The business forgets completely about messy "disruptive innovation", that DOESN'T bring better products to customers in known markets, but rather attempts to provide products that are not as good as existing products, but provide advantages in cost, ease of use, scale, targeting, or other areas that will enable the product to compete against non-consumption (completely new customers), or less demanding customers. PC, Linux, etc. A nice case history of integrated mills vs mini mills is presented.

There was a discussion about people and companies having "jobs" that need to get done and they are looking for a product or service that they can "hire" to do that job. The item for the market researcher to go after is the CIRCUMSTANCE, not the CUSTOMER. "Innovations that make it easier for customers to do what they weren't trying to do before must compete against customers' priorities. This is very hard to do."

"Managers often segment markets along the lines for which the data are available, rather than in ways that reflect the things that customers are trying to get done." (think of the drunk that lost his billfold in a field looking for it under a street-lamp because the light is better there!) Rather than doing that, look at four keys to new market disruption (competition against non-consumption):

1. Target customers are trying to do a job but they lack money or skill.
2. The customer will compare your product against having no solution.
3. You can deploy a solution that is simple, convenient and foolproof (relative to what they have)
   
4. The product creates a whole new value network. (new consumers purchase the product through new channels)

There is an interesting discussion of modular vs interdependent architectures. As technologists, this makes pretty easy sense--a "fully custom solution" that has a lot of dependencies can be faster, BUT, it is much less flexible, and requires more to be done in a single organization. A modular approach is more one size fits all, and not as heavily optimized. Companies that build specialized integrated things will "overshoot", and their products will become "too good" for the mass market. One will hear employees cursing customers with: "Why can't they see that our product is better than the competition? They are treating it like a commodity!" IBM's PC experience is used as an example of a big company getting burned on dealing with modular vs interdependent architecture.

"Whenever commoditization is at work somewhere in the value chain, a reciprocal process of de-commoditization is at work somewhere else in the value chain." When your product is commoditized, you lose the ability to differentiate, and thus revenue--the company has to follow Gretzky and "develop the intuition for skating not to where the money presently is in the value chain, but to where the money will be.". The six steps of commoditization are:

1. Company creates a product with a proprietary architecture that is a hit.
2. Company overshoots the lower tier customers in market.
3. Basis of competition changes to "good enough"
4. Modular architecture solutions arise that better meet needs
5. The industry DIS-integrates (meaning products made up of modular commodities)
   
6. No longer possible to differentiate products on other than price.

De-Commoditization:

1. Low-cost commodity producers drive out high-cost incumbents -- moving ever up-market.
2. Because key performance defining subsystems become the constraint, they become important non-commodities
   • EG PC OS for MS, Processor for Intel, Graphics cards for ATI, vs "Computer" for IBM
3. Specialization / differentiation moves to the module level (graphics card)
4. Leading sub-system providers now differentiated
5. This sets up the next round of commoditization.

"Companies that are positioned at a spot in the value chain where performance is not yet good enough will capture the profit." ..."To the extent that an integrated company such as IBM can flexibly couple and de-couple it's operations, rather than irrevocably sell off operations, it has a greater potential to thrive profitably for an extended period than does a non-integrated firm such as Compaq."

"Core competence, as it is used by many managers, is a dangerously inward looking notion. Competitiveness is far more about doing what customers value than dong what you think you are good at. Staying competitive necessarily requires a willingness to learn new things rather than clinging hopefully to the sources of past glory. The challenge for incumbent companies is to rebuild their ships at while at sea, rather than dismantling themselves plank by plank while someone else builds a new, faster boat with what they cast overboard as detritus."

"We don't even question who makes the dresses in Talbot's, the sweaters for Abercrombie&Fitch, or the jeans at Gap and Old Navy. Much of the apparel sold in these channels carries the brand of the channel, the the manufacturer."

The RPV Framework:

• Resources - The people that can successfully lead sustaining innovation are almost certainly the wrong people to lead disruptive innovation. The issue isn't so much "success" as the history of willingness to wrestle with nasty problems and learn the right answers.
• Processes - "How an organization transforms inputs into things of greater value". "If that organization has not repeatedly formulated plans for competing in markets that do not yet exist, it is safe to assume that no processes for making such plans exist."
• Values - "An organizations values are the standards by which employees make prioritization decisions". "values often define constraints--they define what the organization cannot do.". The key value is overhead/financial model. Money is the fuel of business just like gas is the fuel of your car. So much of it is required for the business to operate as it currently does, and THIS business can't operate in a cost structure that won't support that (but one with a different cost structure CAN, and even be very profitable. Think Wal-Mart vs local hardware store)
  

"The requirements of an innovation need to fit with the host organizations processes and values or the innovation will not succeed." It is a bit like "transplant rejection" in medicine. "Organizations cannot disrupt themselves." A sobering thought for business organizations, since disruption is inevitable, they MUST break off units with different financial models if they seek to survive.

"Be patient for growth, not for profit.". Big companies with the wrong cost structure tend to do the reverse with disruptive business. It CAN work (Amazon is the counter example), but in general it is the model to be profitable that is what needs to be arrived at, not just "growth". It is too easy for the people to kid themselves by "losing a bit on each unit and assuming they will make it up in volume."

A principal refrain of this book is that blindly copying the best practices of successful companies without the guidance of circumstance-contingent theory is akin to fabricating feathered wings and flapping hard. Replicating their success is not about duplicating their attributes; it's about understanding how to generate lift (profit)."

This is a top tier business book--not a lot of filler, pretty concrete and easy to understand. Good way to get some insight into some of the core issues that build and destroy huge corporations.