The Innovator's Solution: Creating and Sustaining Successful Growth (Creating and Sustainability Successful Growth)

by Clayton

I have spent much of the past decade puzzling over two questions. The first: It is easy to explain why poorly run companies fail; but many of history’s most successful and best-run firms have lost their positions of leadership, too. Why is it so hard to sustain success?

The Innovator’s Dilemma summarized what I learned about this puzzle. It’s not just management mistakes that cause failure. Certain practices that are essential to a company’s success—like catering to the needs of your best customers and focusing investments where profitability is most attractive—can cause failure too.

The second centered on the opportunity in the dilemma: If I wanted to start a company that could become significant and successful and ultimately topple the firms that now lead an industry, how could I do it? If indeed there are predictable reasons why businesses stumble, we might then help managers avoid those causes of failure and help them ...

Mark and Matt, through our firm Innosight, have translated these concepts into practical tools and processes to help managers build businesses that will be significant and successful—and in so doing have taught me how our findings can interface with managerial reality.

When I read The Innovator’s Dilemma, I, like so many others, felt that a mote had been removed from my eye, and that what I had previously seen only dimly, if at all, was suddenly brought into the light. Clayton’s work has become for me a standard to which I continue to aspire, and so it is truly a privilege to have had the opportunity to contribute to and be part of the continued development and elaboration of those ideas.

This is a book about how to create new growth in business. Growth is important because companies create shareholder value through profitable growth. Yet there is powerful evidence that once a company’s core business has matured, the pursuit of new platforms for growth entails daunting risk. Roughly one company in ten is able to sustain the kind of growth that translates into an above-average increase in shareholder returns over more than a few years.

most executives are in a no-win situation: equity markets demand that they grow, but it’s hard to know how to grow. Pursuing growth the wrong way can be worse than no growth at all.

We could cite many cases of companies’ similar attempts to create new-growth platforms after the core business had matured. They 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.

Investors have a pesky tendency to discount into the present value of a company’s stock price whatever rate of growth they foresee the company achieving. Thus, even if a company’s core business is growing vigorously, the only way its managers can deliver a rate of return to shareholders in the future that exceeds the risk-adjusted market average is to grow faster than shareholders expect.

Changes in stock prices are driven not by simply the direction of growth, but largely by unexpected changes in the rate of change in a company’s earnings and cash flows. Hence, one company that is projected to grow at 5 percent and in fact keeps growing at 5 percent and another company that is projected to grow at 25 percent and delivers 25 percent growth will both produce for future investors a market-average risk-adjusted rate of return in the future.

A company must deliver the rate of growth that the market is projecting just to keep its stock price from falling. It must exceed the consensus forecast rate ...

The magnitude of the market’s bet on growth from unknown sources is, in general, based on the company’s track record. If the market has been impressed with a company’s historical ability to leverage its strengths to generate new lines of business, then the component of its stock price based on growth from unknown sources will be large. If a company’s past efforts to create new-growth businesses have not borne fruit, then its market valuation will be dominated by the projected cash flow from known, established businesses.

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.

This is the conclusion of a remarkable study, Stall Points, that the Corporate Strategy Board published in 1998.8 It examined the 172 companies that had spent time on Fortune’s list of the 50 largest companies between 1955 and 1995. Only 5 percent of these companies were able to sustain a real, inflation-adjusted growth rate of more than 6 percent across their entire tenure in this group. The other 95 percent reached a point at which their growth simply stalled, to rates at or below the rate of growth of the gross national product (GNP).

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

Managers cannot escape the mandate to grow.9 Yet the odds of success, if history is any guide, are frighteningly low.

Why is achieving and sustaining growth so hard? One popular answer is to blame managers for failing to generate new growth—implying that more capable and prescient people could have succeeded.

The solve-the-problem-by-finding-a-better-manager approach might have credence if failures to restart growth were isolated events. Study after study, however, concludes that about 90 percent of all publicly traded companies have proved themselves unable to sustain for more than a few years a growth trajectory that creates above-average shareholder returns.

A second common explanation for once-thriving companies’ inability to sustain growth is that their managers become risk averse.

Creating new-growth businesses is simply unpredictable. Many believe that the odds of success are just that—odds—and that they are low. Many of the most insightful management thinkers have accepted the assumption that creating growth is risky and unpredictable, and have therefore used their talents to help executives manage this unpredictability.

Recommendations about letting a thousand flowers bloom, bringing Silicon Valley inside, failing fast, and accelerating selection pressures are all ways to deal with the allegedly irreducible unpredictability of successful innovation.

The structure of the venture capital industry is in fact a testament to the pervasive belief that we cannot predict which new-growth businesses will succeed. The industry maxim says that for every ten investments—all made in the belief they would succeed—two will fail outright, six will survive as the walking wounded...

Because of this belief that the process of business creation is unfathomable, few have sought to pry open the black box to study the process by ...

You cannot say, just by looking at the result of the process, whether the process that created those results is capable of generating predictable output. You must understand the process itself.

What can make the process of innovation more predictable? It does not entail learning to predict what individuals might do. Rather, it comes from understanding the forces that act upon the individuals involved in building businesses—forces that powerfully influence what managers choose and cannot choose to do.

Rarely does an idea for a new-growth business emerge fully formed from an innovative employee’s head. No matter how well articulated a concept or insight might be, it must be shaped and modified, often significantly, as it gets fleshed out into a business plan that can win funding from the corporation.

Along the way, it encounters a number of highly predictable forces. Managers as individuals might indeed be idiosyncratic and unpredictable, but they all face forces that are similar in their mechanism of action, their timing, and their impact on the character of the prod...

Understanding and managing these forces can make innovation more predictable. The action and impact of these forces in shaping ideas into business plans is illustrated in a case study of the Big Idea Group (BIG), a compan...

BIG invites mothers, children, tinkerers, and retirees who have ideas for new toys to attend “Big Idea Hunts,” which it convenes in locations across the country. These guests present their ideas to a panel of experts whose intuition BIG executives have come to trust. When the panel sees a good idea, BIG licenses it from the inventor and over the next several months shapes the idea into a business plan with a working prototype that they believe will sell. BIG then licenses the product to a toy company, which produces and markets it through its own channels.

The company has been extraordinarily successful at finding, developing, and deploying into the market a sequence of truly exciting growth products.

Midlevel managers play a crucial role in every company’s innovation process, as they shepherd partially formed ideas into fully fledged business plans in an effort to win funding from senior management. It is the middle managers who must decide which of the ideas that come bubbling in or up to them they will support and carry to upper management for approval, and which ideas they will simply allow to languish. This is a key reason why companies employ middle managers in the first place. Their job is to sift the good ideas from the bad and to make good ideas so much better that they readily secure funding from senior management.

companies’ management development programs rarely leave their most talented middle managers in a position for longer than a few years—they move them to new assignments to broaden their skills and experience. What this means, however, is that middle managers who want a reputation for delivering results will be inclined to promote only those new-growth ideas that will pay off within the time that they reside in that particular job.

The process of sorting through and packaging ideas into plans that can win funding, in other words, shapes those ideas to resemble the ideas that were approved and became successful in the past. The processes have in fact evolved to weed out business proposals that target markets where demand might be small. The problem for growth-seeking managers, of course, is that the exciting growth markets of tomorrow are small today.

We believe that many of the ideas that emerge from this packaging and shaping process as me-too innovations could just as readily be shaped into business plans that create truly disruptive growth. Managers who understand these forces and learn to harness them in making key decisions will develop successful new-growth businesses much more consistently than historically has seemed possible.

What brings predictability to any field is a body of well-researched theory—contingent statements of what causes what and why. Executives often discount the value of management theory because it is associated with the word theoretical, which connotes impractical. But theory is consummately practical. The law of gravity, for example, actually is a theory—and it is useful. It allows us to predict that if we step off a cliff, we will fall.

Even though most managers don’t think of themselves as being theory driven, they are in reality voracious consumers of theory. Every time managers make plans or take action, it is based on a mental model in the back of their heads that leads them to believe that the action being taken will lead to the desired result.

The problem is that managers are rarely aware of the theories they are using—and they often use the wrong theories for the situation they are in. It is the absence of conscious, trustworthy theories of cause and effect...

To help executives to know whether and when they can trust the recommendations from management books or articles (including this one!) that they read for guidance as they build their businesses, we describe in the followi...

The process of building solid theory has been researched in several disciplines, and scholars seem to agree that it proceeds in three stages. It begins by describing the phenomenon that we wish to understand. In physics, the phenomenon might be the behavior of high-energy particles.

In the building of new businesses, the phenomena of interest are the things that innovators do in their efforts to succeed, and what the results of those actions are. Bad management theory results when researchers impatiently observe one or two success stories and then assume that they have seen enough.

Vertical and horizontal integration are categories of corporate diversification. Researchers need to categorize in order to highlight the most meaningful differences in the complex array of phenomena.

In the third stage, researchers articulate a theory that asserts what causes the phenomenon to occur, and why. The theory must also show whether and why the same causal mechanism might result in different outcomes, depending on the category or situation. The process of theory building is iterative, as researchers and managers keep cycling through these three steps, refining their ability to predict what actions will cause what results, under what circumstances.

The middle stage in this cycle—getting the categories right—is the key to developing useful theory.

When something has worked for a few “excellent” companies, they readily advise all other companies that taking the same medicine will be good for them as well. One reason why the outcomes of innovation appear to be random is that many who write about strategy and management ignore categorization. They observe a few successful companies and then write a book recommending that other managers do the same things to be successful too—without regard for the possibility that there might be some circumstances in which their favorite solution is a bad idea.

The authors of “best practices” gospels such as these are no better than the doctor we introduced previously. The critical question that these researchers need to resolve is, “What are the circumstances in which being integrated is competitively critical, and when is a strategy of partnering and outsourcing more likely to lead to success?”

Early studies almost always sort researchers’ observations into categories defined by the attributes of the phenomena themselves. Their assertions about the actions or events that lead to the results at this point can only be statements about correlation between attributes and results, not about causality. This is the best they can do in early theory-building cycles.

Getting beyond correlative assertions such as “Big companies are slow to innovate,” or “In our sample of successful companies, each was run by a CEO who had been promoted from within,” the breakthrough researcher first discovers the fundamental causal mechanism behind the phenomena of success.

This allows those who are looking for “an answer” to get beyond the wings-and-feathers mind-set of copying the attributes of successful companies. The foundation for predictability only begins to be built when the researcher sees the same causal mechanism create a different outcome from what he or she expected—an anomaly. This prompts the researcher to define what it was about the circumstance or circumstances in which the anomaly occurred that caused the identical mechanism to result in a different outcome.

If the same statement of cause and effect leads to the same outcome in two circumstances, then the distinction between those circumstances is not meaningful for the purposes of predictability.

To know for certain what circumstances they are in, managers also must know what circumstances they are not in. When collectively exhaustive and mutually exclusive categories of circumstances are defined, things get predictable: We can state what will cause what and why, and can predict how that statement of causality might vary by circumstance.