8 Principles of The Innovator’s Solution

The Innovator’s Dilemma gets more of the headlines, but the follow-up book by Clayton Christensen, The Innovator’s Solution, is a far more useful piece of work. The Innovator’s Solution starts out by describing the ‘dilemma’, and in one chapter removes the need to even read the original work. It then proceeds to offer an array of approaches to handling disruptive innovation in large organizations. In the following post, we’ll look at eight of the valuable principles Christensen highlights.

1. Never target an incumbent with a sustaining solution

A sustaining innovation is one that improves the product for existing customers, giving them better features, better performance, more options, and so on. Sustaining innovation is the most common and it enables companies to take a product from being not good enough in early market stages to being more than good enough in later stages.

If you enter a market and try to compete with an incumbent, you should not do it with a sustaining solution. Incumbent organizations are the ones with the resources, the customer base, and - crucially - the motivation to fight any threat from a new competitor. In almost all cases, an incumbent will win if they are threatened by a sustaining technology. They will simply do more of what they’re good at, serving their customers with product improvements.

The solution is to enter the market from below. Create a product that is not as good as the incumbents', but is cheaper, easier, or more convenient. It’s important to begin with targeting a lower profit margin. Incumbents would rather let a low-margin business go and concentrate on high-margin growth (flee, not fight).

“That is why shaping a business idea into a disruption is an effective strategy for beating an established competitor. Disruption works because it is much easier to beat competitors when they are motivated to flee rather than fight.”

2. Customers ‘hire’ products to get specific ‘jobs’ done

According to Christensen, most attempts to launch new products fail, with over 60% of all new product development efforts never reaching the market. Of the remaining ones that do make it, 40% fail to make an impact and are withdrawn. Three-quarters of all the money spent to bring new products to market is wasted.

Marketers must take some of the blame, due to their market segmentation approach of looking at customers according to product type, price point, demographics, and psychographics. These are attribute-based categorizations of products and customers, but marketers must offer a circumstance-based approach: what is the circumstance in which a customer needs a product, which causes them to buy it? This is the jobs-to-be-done theory.

"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."

3. Core competence is a dangerously inward-looking notion

What should we do in-house and what should we outsource? The common answer to this question in business theory is that you should consider what your core competencies are and keep those in-house, outsource the rest. It’s a very prevalent idea, but the consequences of categorizing this way can be severe.

In the early 1980s, IBM made the decision to stick to its core competencies of assembling and marketing computers then outsourced the microprocessor to Intel and the operating system to Microsoft. At the time, the business press praised the decision highly, particularly because it dramatically reduced the cost and time for development. IBM however, inadvertently put into business two companies who went on to capture the majority of the profits in the industry.

The problem is that what you might deem a core competence today, may not be important to the customer in the future. Instead of looking inward at what we are good at, we should be looking outward at the trajectory the customer is on and asking "What will they need in the future"?

Christensen likens this to Wayne Gretzky's notion of "skating not to where the puck presently is, but to skate to where it is going to be’". Companies must focus on what jobs the customer is trying to get done and therefore, what skills they must master to support those jobs. What improvements will the customer seek in the future and what skills we you need to fulfill those?

"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 doing what you think you’re good at. And staying competitive as the basis for competition shifts necessarily requires a willingness and ability to learn new things rather than clinging hopefully to the sources of past glory."

4. Proprietary architectures lead to overshooting what the market needs

We need a theory that helps us understand when activities will become core or peripheral. Christensen’s theory for this begins by looking at product architecture. In the early stages of market development, products are generally not good enough for customer needs. The companies most likely to succeed in this scenario are those that have integrated and proprietary architecture. These companies own and build all of the parts of the product themselves, providing the engineers with the flexibility needed to make the product absolutely right for the customer's needs.

Over time, continuous product improvements eventually take the product to where it overshoots the needs of the market. When functionality and reliability are met in this way, customers then redefine what is now the basis for competition in the market. It shifts to price, speed, convenience, and customization. In this scenario, the best architecture is no longer proprietary, but modular.

Modular product architectures rely on standards so that different companies can produce separate modular parts of the overall system and each module can plug and play together. Modular means companies can introduce products faster and the overall cost for the customer is lower, but it means less freedom for engineers. Thus, when products become more than good enough for customers, it is best to have a modular-based product architecture.

An industry is always in a state of flux and never completely one or the other. The trick for senior managers is to build up the instinct for where the market is moving and to move towards it.

"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."

5. Use the emergent strategy to develop disruptive innovations

What should the strategy be for launching a new-growth business? This is a question every leader will ask, but an even more important question can be missed altogether: what is the process we will use to formulate the strategy? Because innovative ideas are often nebulous and need shaping and transforming, the question of how to define strategy becomes important.

There are two fundamentally different processes for strategy formation: deliberate and emergent. Deliberate is common. It is analytical, rigorous, and formulated after a deep review of factors like market segment sizing, customer needs, competition, projected returns, and so on. Deliberate strategies are the appropriate way to organize action if three conditions are met:

1. The strategy must encompass all the important details required for success and those implementing it must fully understand these details.
2. If the organization is required to take collective action, then it must also make as much sense as possible to every employee, from their perspective and context.
3. Outcomes should be realized with as little external influence from political, technological, or market forces as possible.

In reality, meeting all three of those is unlikely. The emergent strategy process assumes that you cannot and that the strategy will and must adapt from the original plan.

Emergent strategy is the cumulative effect of all the day-to-day decisions made to invest and prioritize resources. These decisions are made by middle management and at the individual employee level. You can tell what a company’s strategy is by looking at what comes out of the resource allocation process and not what goes into it. This scenario should dominate when the future is hard to forecast and it is not yet clear which direction the business should take.

Intel originally made DRAM chips, but in the 70s they serendipitously invented the microprocessor. As Japanese manufacturers began to exert pressure on Intel in the DRAM business, profit margins on microprocessors started to look attractive, which in turn pulled more and more resources to help drive their production, but only in an ad-hoc incremental fashion. When Intel had its financial crisis in 1984, it became clear that DRAMs were no longer supporting the business, and in fact, Intel had morphed into a microprocessor company. At that point, Gordon Moore and Andy Grove switched into deliberate strategy mode, shifting resources in a deliberate fashion to support a microprocessor-oriented future.

"A viable strategic direction had to coalesce from the emergent side of the process because nobody could foresee clearly enough the future of microprocessor-based desktop computers. But once the winning strategy became apparent, it was just as critical to Intel’s ultimate success that the senior management then seized control of the resource allocation process and deliberately drove the strategy from the top."

6. Appoint people for their ability to learn, not their track record

Appointing people to run a new-growth business normally involves looking for people with the "right stuff" and a string of previous successes, assuming that more success will be in store. With new-growth businesses, however, Christensen believes that at least half of the cases he has examined failed because the wrong people had been chosen to lead them.

As so often in The Innovator's Solution, the problem of miscategorization appears. What looks to be the "right stuff", is actually not the stuff needed for the particular circumstance of disruptive new-growth businesses.

Professor Morgan McCall influences Christensen’s thinking here. McCall describes how management skills and a person's developed intuition come from previous experiences in their career. Their ability to succeed in a new assignment is thus dependent upon what kind of experiences they’ve had and how they match the new assignment. Consider a business unit as a "school", and the problems faced while working there as the "curriculum" that was offered.

Managers who have progressed through stable business units will have developed key skills for that scenario: operational management, process improvement, cost-controlling, and so on. But even the best of those may struggle when the scenario is to run a new-growth business, where the skills needed are radically different.

“It is not as important that managers have succeeded with the problems as it is for them to have wrestled with it and developed the skills and intuition for how to meet the challenge successfully the next time around … Failure and bouncing back from failure can be critical courses in the school of experience.”

7. Be patient for growth and impatient for profit

The challenge for funding a disruptive innovation is that the market size is by definition small so the returns also look small. This is because disruptive innovations must start at the low end of the market and work their way up, eventually disrupting the incumbents. In this scenario, there is good money and there is bad money.

Money invested by a company into new-growth initiatives is good money, as long as the core of the business is healthy. However, if that situation changes and the core business is under pressure to perform, the good money turns to bad money. The pipeline for growth now becomes increasingly vital and new-growth initiatives must now grow very big, very fast. This pressure prevents the innovators from taking the time to iterate over their strategy' to find and grow the disruptive innovation.

This problem occurs in almost every company. A study cited by Christensen, called Stall Points, highlights that of 172 companies that spent time on the Fortune 50 largest companies list, 95% saw their growth stall to rates at or below the GNP growth rate. Only 4% of that list of companies were able to reignite their growth again to even a rate of 1% above GNP. When growth stalls, companies become impatient for their investments to show growth, which creates an impossible environment for innovation to succeed.

The recommendation is three-fold:

1. Launch new-growth businesses regularly, when the core business is in healthy shape. When financial results signal the need to do it, it is probably too late.
2. As an organization grows, continue to divide up business units so that each unit can launch new ventures and be patient for growth, as they are small enough to benefit from small opportunities (disruptive innovations will start out small).
3. Minimize the use of profit from the core business to subsidize losses in the new-growth ventures. Be impatient for profit and patient for growth. If a venture is profitable, it remains likely to continue even when the core business is struggling.

“...financial outcomes of the most recent period actually reflect the results of investments that were made years earlier to improve processes and to create new products and businesses. Financial results measure how healthy the business was, not how healthy the business is. Financial results are a particularly bad tool to manage disruption, because moving up-market feels good financially, as we have noted previously.”

8. Launching disruptive businesses can be a repeatable process

Christensen acknowledges that there are no examples of a company handling disruptive innovation recurrently, but he does believe it is possible if the right rhythmic process is put in place. There are four critical aspects:

1. Start before you need to. The best time to invest in growth is when the company is growing. It can take five years for a single initiative to fully develop. So budget not for the capital investment, but rather for the sheer number of new-growth businesses to launch each year. Christensen does not believe this is like a corporate venture fund because venture funds make blind bets hoping one will pay off big. A new-growth business is significantly more predictable, using the theories described in this book to shape ideas properly.
2. Appoint a senior executive to shepherd ideas and resource allocation. The CEO and other executives must be coached in disruptive innovation so that they have the confidence to exempt a venture from established financial measurements. They must also be able to spot the difference between a disruptive and a sustaining innovation.
3. Create a team and a process for shaping ideas. A lack of good ideas is rarely a problem for companies. The problem is that they frequently lose their disruptive potential in the shaping process because of the way ideas must be presented to win funding. A team should be created to collect disruptive innovation ideas and mold those ideas into propositions that fit the theories of disruptive innovation. The team must know these theories deeply, they must stick together, and they must frequently work together on testing the theories on ideas.
4. Train the troops. Sales, marketing, and engineering, in particular, must be trained to spot disruptive ideas because these individuals are most likely to encounter them and see the opportunities. They need to know what kind of ideas they can channel into the sustaining route and the disruptive route.

“Launching a single successful disruptive business can create years of profitable growth for a company, as GE Capital did for its parent during the years when Jack Welch was at its helm. Disruption blessed Johnson & Johnson’s medical devices and diagnostics group, as we noted in Chapter 9. Hewlett-Packard’s disruptive ink-jet printer is now the profit driver of the entire corporation. If it feels so good to disrupt once, why not do it again and again?”

The Innovator's Solution is one of those books that is required reading for innovation managers. We've only provided a brief summary and superficially touched on the insights from it here. The goal of the book is not really to provide exact answers, but more to provide a theory that can develop a better intuition for what disruptive innovation is, and how best to handle it.