Clayton M. Christensen's Blog, page 12

How to Break Up with an Innovation Project

Breaking up isn’t easy — especially if you are a leader “breaking up with” an innovation project that one of your teams still believes in passionately. It is a critical part of the innovation journey however, and done well can produce a positive outcome across the board.

Consider a conversation that might start like this:

“We need to talk,” she says.

There’s only one way this conversation ends, you think, but you paste a smile on your face and reply, “Sure. What’s up?”

“We seem to be stuck,” she says. “When we started it all seemed so perfect. But now every time we talk it is about the problems we face.”

“We just need more time,” you say. “We will get through this and come out the other side stronger. Remember why we started this in the first place?”

“Absolutely,” she says. “The story. Our story. It gave me chills the first time I heard it. I believed. And I still believed after you told me to wait and have faith six months ago. And three months ago. But we have to come to grips with reality. That vision we both believed in is an illusion. The data doesn’t lie. Think of the other things we both could be doing instead. We had some great times, and I don’t regret them at all.”

“But,” she finishes with authority, “it is time.”

And the project breakup process has begun.

Investors in startups have it comparatively easy. Breakup happens by default because the cash coffers run dry. Sure, investors need to have tough conversations about the need to change directions or make personnel changes, but there is no ambiguity when the end comes.

In contrast, rhythms inside organizations mean that ideas that are sanctioned tend to take on lives of their own. Further, strong penalties for failing to deliver against commitments make it in everyone’s interest to keep pushing ahead.

Any time you commission an innovative project, failing to achieve your commercial objectives is a real possibility. The more innovative the idea, the more it by definition rests on assumptions that may or may not pan out.

Read the rest at Harvard Business Review.

Scott D. Anthony is the managing partner of Innosight.

How Industrial Systems Are Turning into Digital Services

To some, ball bearings are boring, even though these small steel spheres are what keep everything from factory machines and wind turbines as well as cars, trucks, planes, and trains moving smoothly and safely. But to Sweden-based SKF Group — the leading company in the $76 billion global market for ball bearing systems — these objects are heroic, destined to become the “brains of rotating machinery” by transmitting data to boost performance, reduce downtime, and prevent accidents.

Yet even though SKF has a century-long track record of keeping the wheels of industry turning, this new vision of bearings with brains by no means assures that SKF will prosper in the changeover in technology represented by the internet of things, in which every conceivable object can become a node on the net.

So far, much of the attention around smart, connected products has been around consumer-facing goods like watches and thermostats. Industrial companies have tended to be among the last to create digital strategies that harness the new opportunities arising from the proliferation of smart products. That lag poses dangers. Tech titans such as Google and Amazon are working to connect more and more types of objects to the web by offering mobile interfaces for managing just about anything. If someone else designs the apps and software that allow customers to monitor machines, the ripple effects across value chains could force industrial giants into the role of being mere suppliers of commodities.

Building an industrial internet strategy. In this respect, creating an industrial internet of things is an even more urgent endeavor, because industrial systems represent huge capital expenditures, have longer lifecycles, and are placed in mission-critical and often hostile environments that can cause costly and dangerous systems failures. “In some offshore wind applications, changing the main bearing on a turbine is so expensive that it undermines the business case for building the turbine in the first place,” said Filippo Zingariello, director of global strategic development at SKF.

Such challenges, he says, require industrial companies to take a fresh approach to strategy. After all, the technology now enables a different kind of relationship with customers.

Recognizing this, SKF two years ago announced SKF Insight, a way to turn its industrial products into digital services. The first step involved hardware — installing tiny sensors into bearings that are powered by the kinetic motion of the machines themselves.

Read the rest at Harvard Business Review.

Joe Sinfield is a senior partner at Innosight. Ned Calder is a principal in Innosight’s Boston office. Ben Geheb is an Analyst at Innosight’s Boston office.

What the Media Industry Can Teach Us About Digital Business Models

It has been a great 20 years for U.S. media innovators, with hundreds of billions of dollars created by companies that are helping democratize content production and distribution while developing new ways to connect advertisers and customers. Google and its disruptive advertising model leads the pack with a $370 billion market capitalization, but consider also companies like Facebook ($225 billion), LinkedIn ($25 billion), Twitter ($24 billion), TripAdvisor ($11 billion), and Yelp ($3 billion).

Of course, for most traditional publishing incumbents, “great” is not the word that springs to mind. The U.S. newspaper industry has seen widespread bankruptcies and significant job losses. Only a handful of companies that primarily focus on traditional print publications still exist, such as The New York Times Company, E.W. Scripps, McClatchy, and A.H. Belo. The combined market value of those four companies? Less than $5 billion.

Why has this been the best of times for some in media and the worst of time for others? The answer reveals the critical role business models play in determining competitive winners in times of disruptive change.

Media executive Jeffrey Zucker once famously quipped that media companies embracing online disruption faced the unappealing prospect of “trading analog dollars for digital pennies” (Zucker now says it’s closer to quarters than pennies). The basic point was that online advertising was too small, and that transaction sizes were too insignificant to be anything other than a step down for companies used to rich cash flows.

But there is nothing inherently wrong with digital pennies, if you have the right business model. After all, media disruptors have shown paths to profits by amalgamating large numbers of small transactions – from Google Adwords to Facebook’s hypertargeted ads. Zucker’s dilemma only exists if digital pennies, nickels, dimes, or quarters are running through analog business models.

And that’s the crux of the challenge that traditional media has faced: grappling with digital disruption requires reframing the challenge from a technological challenge to a business model one. Unfortunately, that makes the problem harder, not easier, as business models are often hard-wired in what our colleague Mark Johnson dubs an organization’s rules, norms, and metrics, making shifts difficult to execute.

Read the rest at Harvard Business Review.

Scott D. Anthony is the managing partner of Innosight. 

Innovation Isn’t the Answer to All Your Problems

What should leaders do to boost their organization’s ability to innovate? There’s a seemingly endless list of options to consider. Set up a new-growth group. Launch an idea contest. Change the reward systems. Run an action-learning program to develop the top leadership team’s ability to confront ambiguity. Form a venture investment fund. Take a road trip to Israel or Silicon Valley. Build an open innovation platform. Bring in outside speakers. Hire seasoned innovators. Paint the walls blue. Buy a lot of books.

And what’s the point of all these approaches?  To infuse innovation into day-to-day activities of your company so your frontline workers will identify customers’ problems and solve them in novel ways? To create an elite squad of business builders that can launch a disruptive business? To change the way senior leaders think so they are more comfortable with ambiguity? To developing a structured approach to rolling out a series of new-growth ventures? Some combination of all of the above?

Too frequently, companies decide what they’re going to do before determining why they’re going to do it. That’s challenging, because developing innovations that have a lasting impact requires going beyond doing one single thing. Improving innovation is a system-level issue, requiring a coherent and consistent set of organizational interventions. To begin to determine what set of interventions makes the most sense for your company, first you need to step back and answer a fundamental question: What problem does innovation need to solve?

The answer to this question matters substantially because it determines in which part of the organization a company needs to intervene, what resources leaders need to be ready to commit to, and how long it will take before any impact is felt.

One clear problem innovation can solve is creating new growth. An executive who has this problem recognizes that the company needs to push the boundaries of today’s business to achieve its financial objectives. Perhaps competitive intensity has increased, a new disruptive development has emerged, or a company’s core business has begun to slow. Hitting growth and profit objectives, then, requires boosting the ability to create new businesses that wouldn’t naturally result from day-to-day operations.

Read the rest at Harvard Business Review.

Scott D. Anthony is the managing partner of Innosight. David Duncan is a Senior Partner at Innosight. Pontus M.A. Siren is a principal in Innosight’s Singapore office.

Tesla’s New Strategy Is Over 100 Years Old

Contrary to popular belief, Thomas Edison did not invent the lightbulb.  Twenty or so inventors and labs had already come up with similar designs when he patented his in 1879.  What Edison really invented was affordable and accessible electric light.

Edison’s breakthrough was guided by a fundamental insight: any given product is only as powerful as the system in which it is deployed.  As he set out to design his lightbulb, he simultaneously sketched out an integrated set of plans for generators, wiring, meters, light switches, and more.  An electric lightbulb without ready access to electricity is a novelty; with it, it’s a world changer.

Edison’s insight provides a useful frame for viewing Tesla’s splashy launch of Tesla Energy and its battery systems — Powerwall for residential use and Powerpack for commercial, industrial, and utility customers.  The new products promise to store locally sourced energy and manage its dispatch, helping to mitigate one of the major shortcomings of harvesting power from the sun: the intermittency challenge (in other words, you need the sun to shine). This proposition could make a rooftop solar array less dependent on the grid, while also smoothing the flow of excess electricity back into it. Solar panels without integrated storage are not much more valuable than lightbulbs without an electric grid; Tesla Energy, then, is an aggressive move toward creating the energy system of the future.

This insight resonates with our work on disruption across industries: disruptive innovations create new systems or “value networks” that eventually displace the old ones. It follows, then, that the pursuit of potentially disruptive new technologies and business models requires systems thinking, often calling for the innovator to go well beyond the invention of the product itself.  This is as true for entrepreneurs contemplating how smart sensors and cloud computing will reshape the way patients interact with the health care system as it is for retailers pondering how services like Uber could change the way consumers access products as it was for Thomas Edison and his lightbulb.

Read the rest at Harvard Business Review.

Josh Suskewicz is partner at Innosight.

Whole Foods’ Misguided Play for Millennials

The news that Whole Foods will open a separate chain of stores designed to appeal to millennials stopped me mid-aisle. According to Whole Foods co-CEO Walter Robb, these future stores will feature “modern, streamlined design, innovative technology, and a curated selection” of lower-priced organic and natural foods.

As millennials would write—facepalm.

My dismay is not about the concept. After all, who wouldn’t love to shop for lower-priced, organic, and natural foods in a store that boasts a clean and modern design?  My dismay is about how this new chain is being communicated to the public and designed to win in the marketplace.

By describing this new concept as “geared toward millennial shoppers,” Whole Foods is essentially saying one (or both) of the following:

Gen X and Baby Boomer shoppers are fine with or even prefer old, cluttered stores that sell a confusing array of stuff at high prices.
We (Whole Foods) need to create new stores because our current ones are old and cluttered and sell all sorts of poorly organized stuff at high prices.

To be fair, communicating the statements above was probably the last thing Whole Foods intended, but it was what I, and many of my Gen X and Baby Boomer friends and colleagues, heard.

This is the problem with traditional segmentation approaches.  By relying on demographics to define a consumer base, executives are implicitly, or explicitly, saying that all people of a certain demographic (in this case the same age cohort) are the same and that they are also distinctly different from everyone in other demographics. As most people will tell you from their own experience, this thinking is fundamentally flawed. This flawed approach applies not just to Whole Foods but to any business.

A better approach is to target and design for consumers based on what my colleagues and I call their “jobs-to-be-done” – the fundamental problems they are trying to solve or goals they are trying to achieve. By understanding consumers’ jobs, companies can identify what drives their behavior and their buying decisions—and then create offerings that resolve their most important and unsatisfied jobs.

Read the rest at Harvard Business Review.

Robyn Bolton is partner at Innosight.

 

What to Do When Your Future Strategy Clashes with Your Present

From time to time, the basis of competition in an industry shifts so dramatically that shifting with it requires a new long-term vision that calls for the organization to do things it never would have done in the past. The hardest part is connecting long-term goals to near-term actions — especially when those new actions directly threaten the way you make money right now.

Consider the case of MedStar Health, the largest nongovernment health care provider in the Baltimore-Washington, D.C., region, as it navigates a dramatic shift from competing by offering integrated, comprehensive medical services to offering lower cost preventive care. Back before the passage of the Affordable Care Act, MedStar’s leaders decided they needed a strategic plan to reimagine the company in 2020. MedStar operated nine hospitals, but realized that its long-held objective of increasing revenue and profits at those venues was unsustainable, given the outcries over runaway medical costs.

Instead, it mapped out a future in which more and more care was delivered outside its hospitals at a fraction of the cost. Doing that required developing a new business model in which MedStar would get paid to keep patients well. “We needed an enduring strategy independent of any legislation,” recalls MedStar executive vice president Eric R. Wagner.

As in any large organization, the biggest challenge was how to keep this kind of long-range plan on track for a decade or more. After all, diverting investments away from core hospital budgets might be unpopular across an organization that is the largest private employer in the region. The new-growth areas MedStar mapped out included entering the general-population health insurance business as well as creating a major presence in ambulatory care – that is, outpatient locations aimed at preempting visits to the places where nearly all of its 30,000 employees currently worked.

These new ventures would operate separately from the core hospital assets and would compete in new ways in the health care marketplace. CEO Kenneth Samet, along with Wagner and the six other executives on the leadership team, set a long-term goal of building a major growth business from these new areas.

Read the rest at Harvard Business Review.

Mark W. Johnson is cofounder and senior partner at Innosight.

When Disruption is Not an Option: Dire Straits for the Shipping Business

Corporate leaders generally view the emergence of disruptive technologies with dread. After all, disruption has led to the downfall of many a great company ranging from Kodak to Nokia, and even the most sophisticated companies struggle to respond to disruption. For those that have survived industry disruption, such as IBM and Intel, the experience has been a crucible. However, there is less discussion about another type of crucible, namely the one caused by the absence of disruptive change. In many ways it is as challenging, if slower to manifest, as the threat of disruption itself.

So what happens to companies and industries that suffer from too little, rather than too much, disruption?

Consider two major trends in the container shipping business. One is the growing size of container ships. The largest ones now carry   19,000 twenty foot containers (TEUs, in industry parlance), and ships with a carrying capacity of 24,000 containers are on the drawing boards. These vessels are becoming so large that some don’t fit through the Panama Canal. Harbors are struggling to resolve the congestion crisis that arises when ships are off-loading ten thousand or more containers onto one pier.

The challenges associated with operating such huge vessels at sea and in constrained harbors are obvious. Just last month, in the Suez, two massive container ships collided, a slow-motion accident caught on video.

But the other trend is the continuing wave of M&A activity as companies seek to increase not only the scale of their vessels but also the reach of their networks.

It’s all part of the relentless drive to reduce the cost of ocean-going freight that has made transportation very cheap indeed. In a private conversation, a shipping executive noted that the cost to ship a pair of sneakers from Vietnam to Europe is two cents. Another executive noted that the container shipping business is a near perfect market with highly standardized products (the ships, the containers, the routes). “It’s an impossible business,” he concluded. Rather ominously, another executive observed that it’s also an impossible business to exit.

Caught in dire straits

The consequences involve being caught in dire straits: commoditization, overcapacity, low margins, and very slow growth. Many ships are now operating at half speed just to save fuel and alleviate the fact that there are too many for the market.

Yet naval engineers are planning and building ever bigger ships for the very reason that there’s been no fundamental disruption in the container shipping business itself. As the ships grow, their engines have become vastly more efficient and sophisticated, the fuel mix has changed, and complex IT infrastructure has been put in place to coordinate the movement of the containers and ships.

But fundamentally the underlying cost structure of the business has not changed from 1950 when the first container ships carried a mere 500 to 800 containers across the world.

The basis of competition in the industry continues to be the efficiency of moving a metal box from harbor to harbor, and the technology used to move that metal box has been characterized by sustaining innovation over the past fifty years.

Disruptions on the horizon?

Still, we need to ask: are there any technologies or business models that could disrupt the container shipping business?

There are at least two technologies on the horizon. One is the advances in robotics that could reduce the global wage arbitrage and move some manufacturing closer to the end consumer—from Asia to America, for instance. Likewise,3D printing could have a similar impact if it becomes vastly more sophisticated and accessible. If manufacturing moves closer to the end user, the need to ship goods halfway around the world would be reduced.

However, it seems that these technologies are still far from causing meaningful disruption. Before shipping executives worry too much about the challenges of disruptive technology, they need to remember that a sector that is not immediately threatened by disruption is caught in a relentless quest for scale and efficiency. To shrink from these imperatives would mean to effectively exit the industry and to confront the difficult task of auctioning off some very large ships (that were not quite large enough).

Yet it takes much greater creative thinking to escape the grasp of such a static basis of competition. To do so, it helps to realize that the technologies that cause disruption are often initially in the realm of science fiction (for example holograms and advanced robots) and thus difficult to take seriously at first. After all, who would have thought 20 years ago that we would do so much of our shopping online and fighting so many of our wars with drones?

Pontus Siren is a partner with Innosight based in Singapore.

Circumstances for the Success of the Apple Watch

First, a confession. I am not a member of the Cult of Apple.

Yes, I own an iPhone and an iMac and use a MacBook Pro and, occasionally, an iPad. But I own them primarily for practical reasons – I needed a portable device (iPod then iPhone) to listen to my playlists, and my husband insisted we have a home computer (iMac) in addition to our work-issued laptops (MacBook Pro) and tablets (iPad). The fact that each device is beautifully designed simply made it easier to accept the price tag.

So I wasn’t exactly foaming at the mouth to be one of the first Apple Watch owners. Especially since I love the 3 watches I already own.

But, after watching Apple’s Spring Forward Event, I’ve marked April 10 on my calendar so that I can head straight to an Apple store after work and pick out and pre-order my watch.

What changed?

There a three things that are endlessly annoying about my iPhone and the watch resolves two of them (the other one is that sometimes my iPhone’s screen gets stuck in landscape mode even after I turn it upright).

First, text messages. People know that if they urgently need me, they should text me. But I HATE carrying my phone around when I’m just wandering around the office or the house. In those circumstances, I like to focus on the people that are there right in front of me and enjoy actual face-to-face communication without feeling the need to constantly glance at a screen (an action which unfortunately delivers the message that “you’re important but someone else who is not here is more important” to the actual human being you’re actually talking to). This problem (missing important texts) only happens in very specific circumstances (at work but not in my office, and at home) and happens very rarely so it hasn’t risen to the level of a problem that requires behavior change. Happily, because I always wear a watch, the Apple watch solves this problem in all circumstances with the added benefit of fitting into an existing habit.

Second, travel. I travel a lot for work and, as a result, have developed very specific habits, especially related to air travel. Check-in happens 24 hours in advance, digital boarding passes are downloaded to Passbook, boarding passes are accessed by swiping my home screen when I reach security and the gate, Uber is called from the plane, and the car is tracked as I walk through the airport. Except for checking-in and downloading the boarding pass, all of these other actions occur at the airport and in circumstances when I am carrying a purse, a suitcase and (more often than not) a coat, cup of tea/bottle of water, and bag of food. The last thing I want is to have to also carry a phone (or worse, fish it out of my purse) which can easily be dropped and broken, taking away all the info that runs my life as it dies. But a watch is strapped securely to my wrist and my wrist is always accessible because its attached to my hand which is holding (or pulling) any number of items. Again, the Apple watch solves my problems in very specific circumstances and saves all my life running data.

Now, the moment of truth – even though is resolves my frustrations in these two frequently encountered circumstances, is the Apple watch really worth the $350 – $10,000+ it will sell for when it begins shipping on April 24? For me, the answer is Yes. A quick look at Fitbit’s product line-up shows that its Surge device has most of the same activity level, continuous heart beat, and text message notification functionality of the Apple watch for only $250. So I just need $100 in extra utility. Given the amount of money I have spent on spilled tea (and dry cleaning the things that it was spilled on), I can easily get at least halfway there. As for justifying the remaining $50 premium, well, I’ll just chalk that up to the price of fulfilling some of my emotional and social jobs-to-be-done.

Social Jobs which may even include “Look like I’m a member of the Cult of Apple.”

Zombie Projects: How to Find Them and Kill Them

“You will never find them,” said a senior leader in a multibillion-dollar IT company.

The “them” the leader was referring to were zombie projects: the nefarious enemies of well-intentioned innovation efforts around the globe. Zombies are projects that, for any number of reasons, fail to fulfill their promise and yet keep shuffling along, sucking up resources without any real hope of having a meaningful impact on the company’s strategy or revenue prospects.  

We had suggested that at least one reason why the company was struggling to successfully commercialize innovative ideas was that zombies were draining its resources and clogging its pipeline. The leader was skeptical.

He thought we wouldn’t find any given the company’s highly rigorous planning process. Every year scores of people spent months reviewing recent performance and sanity-checking future projections. Every project went under the proverbial microscope. So how could a zombie project possibly exist?

A zombie project spawns in predictable ways. The project certainly makes sense when first sanctioned by leadership. Its financial projections, while always uncertain, look reasonable. Market assumptions seem plausible. The development timeline looks achievable.

But somewhere along the line, something happens. The technology doesn’t quite work as planned. A competitor does something unanticipated. A key partner decides not to participate. Customers react in an unexpected way.

Project team members know that what’s happened isn’t good, but it’s hard for them to acknowledge when a project has come off the rails. Psychologists have pointed out how we suffer from confirmation bias, paying more attention to the things we expect and ignoring the things we don’t. And even when we’re aware of setbacks, we’re prone to using the affect heuristic — when we believe in something, we play up good news and ignore bad news.

At some point the data do become overwhelming, and if you gave team members truth serum, they’d admit that the project will never contribute meaningfully to the company’s financial and strategic goals.

Read the rest at Harvard Business Review.

Scott D. Anthony is the managing partner of Innosight. David Duncan is a Senior Partner at Innosight. Pontus M.A. Siren is a principal in Innosight’s Singapore office.