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

by Clayton

Disruptive innovations, in contrast, don’t attempt to bring better products to established customers in existing markets. Rather, they disrupt and redefine that trajectory by introducing products and services that are not as good as currently available products. But disruptive technologies offer other benefits—typically, they are simpler, more convenient, and less expensive products that appeal to new or less-demanding cu...

And because the pace of technological progress outstrips customers’ abilities to use it, the previously not-good-enough technology eventually improves enough to interse...

Disruption has a paralyzing effect on industry leaders. With resource allocation processes designed and perfected to support sustaining innovations, they are constitutionally unable to respond. They are always motivated to go up-market, and almost never motivated to defend the new or low-end markets that the disruptors find attractive. We call this phenomenon asymmetric motivation. It is the core of the innovator’s dilemma, and the beginning of the innovator’s solution.

The Innovator’s Dilemma, offers a classic example of why established leaders are so much easier to beat if the idea for a new product or business is shaped into a disruption.

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.

Indeed, when we use the term technology in this book, it means the process that any company uses to convert inputs of labor, materials, capital, energy, and information into outputs of greater value. For the purpose of predictably creating growth, treating “high tech” as different from “low tech” is not the right way to categorize the world. Every company has technology, and each is subject to these fundamental forces.

But this is the source of the dilemma: Sustaining innovations are so important and attractive, relative to disruptive ones, that the very best sustaining companies systematically ignore disruptive threats and opportunities until the game is over.

Sustaining innovation essentially entails making a better mousetrap. Starting a new company with a sustaining innovation isn’t necessarily a bad idea: Focused companies sometimes can develop new products more rapidly than larger firms because of the conflicts and distractions that broad scope often creates.

Starting a company with a sustaining innovation can provide the funding for experiments that can create disruptive innovation.

If executed successfully, getting ahead of the leaders on the sustaining curve and then selling out quickly can be a straightforward way to make an attractive financial return. This is common practice in the health care industry, and was the well-chronicled mechanism by which Cisco Systems “outsourced” (and financed with equity capital, rather than expense money) much of its sustaining-product development in the 1990s.

A sustaining-technology strategy is not a viable way to build new-growth businesses, however. If you create and attempt to sell a better product into an established market to capture established competitors’ best customers, the competitors will be motivated to fight rather than to flee.9 This advice holds even when the entrant is a huge corporation with ostensibly deeper pockets than the incumbent.

An idea that is disruptive to one business may be sustaining to another. Given the stark odds that favor the incumbents in the sustaining race but entrants in disruptive ones, we recommend a strict rule: If your idea for a product or business appears disruptive to some established companies but might represent a sustaining improvement for others, then you should go back to the drawing board. You need to define an opportunity that is disruptive relative to all the established players in the targeted market, or you should not invest in the idea. If it is a sustaining innovation relative to the business model of a significant incumbent, you are picking a fight you are very unlikely to win.

investors poured billions into Internet-based companies, convinced of their “disruptive” potential. An important reason why many of them failed was that the Internet was a sustaining innovation relative to the business models of a host of companies.

A disruptive business model that can generate attractive profits at the discount prices required to win business at the low end is an extraordinarily valuable growth asset.

When a company tries to take a higher-cost business model down-market to sell products at lower price points, almost none of the incremental revenue will fall to its bottom line. It gets absorbed into overheads.

established firms that hope to capture the growth created by disruption need to do so from within an autonomous business with a cost structure that offers as much headroom as possible for subsequent profitable migration up-market.

Moving up the trajectory into successively higher-margin tiers of the market and shedding less-profitable products at the low end is something that all good managers must do in order to keep their margins strong and their stock price healthy. Standing still is not an option, because firms that stop moving up find themselves in a rebaresque situation, slugg...

This ultimately means that in doing what they must do, every company prepares the way for its own disruption. This is the innovator’s dilemma.

The Innovator’s Dilemma showed that following a strategy of disruption increased the odds of creating a successful growth business from 6 percent to 37 percent.

Because the established company’s course of action is mandated so clearly, it is also clear what executives who seek to create new-growth businesses should do: Target products and markets that the established companies are motivated to ignore or run away from.

In reality, there are two different types of disruptions, which can best be visualized by adding a third axis to the disruption diagram, as shown in figure 2-3. The vertical and horizontal axes are as before: the performance of the product on the vertical axis, with time plotted on the horizontal dimension. The third axis represents new customers and new contexts for consumption.

In geometric terms, this application and set of customers reside in a plane of competition and consumption, which The Innovator’s Dilemma called a value network. A value network is the context within which a firm establishes a cost structure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers. Within a value network, each firm’s competitive strategy, and particularly its cost structure and its choices of markets and customers to serve, determines its perceptions of the economic value of an innovation. These perceptions, in turn, shape the rewards and threats that firms expect to experience through disruptive versus sustaining innovations.

The third dimension that extends toward us in the diagram represents new contexts of consumption and competition, which are new value networks. These constitute either new customers who previously lacked the money or skills to buy and use the product, or different situations in which a product can be used—enabled by improvements in simplicity, portability, and product cost.

Different value networks can emerge at differing distances from the original one along the third dimension of the disruption diagram.

We say that new-market disruptions compete with “nonconsumption” because new-market disruptive products are so much more affordable to own and simpler to use that they enable a whole new population of people to begin owning and using the product, and to do so in a more convenient setting.

When Canon made photocopying so convenient, people ended up making a lot more copies. New-market disruptors’ challenge is to create a new value network, where it is nonconsumption, not the incumbent, that must be overcome.

Because new-market disruptions compete against nonconsumption, the incumbent leaders feel no pain and little threat until the disruption is in its final stages. In fact, when the disruptors begin pulling customers out of the low end of the original value network, it actually feels good to the leading firms, because as they move up-market in their own world, for a time they are replacing the low-margin revenues that disruptors steal, with higher-margin revenues from sustaining innovations.

We call disruptions that take root at the low end of the original or mainstream value network low-end disruptions.

Although they are different, new-market and low-end disruptions both create the same vexing dilemma for incumbents. New-market disruptions induce incumbents to ignore the attackers, and lowend disruptions motivate the incumbents to flee the attack.

The discounters did not accept lower levels of profitability—their business model simply earned acceptable profit through a different formula.

Southwest Airlines is actually a hybrid disruptor, for example. It initially targeted customers who weren’t flying—people who previously had used cars and buses. But Southwest pulled customers out of the low end of the major airlines’ value network as well. Charles Schwab is a hybrid disruptor. It stole some customers from full-service brokers with its discounted trading fees, but it also created new markets by enabling people who historically were not equity investors—such as students—to begin owning and trading stocks.

Japanese companies in the 1990s, for example, explain a lot about why Japan’s economy has stagnated. Many of its most influential companies grew dramatically by disrupting others; but the structure of Japan’s economic system inhibits the creation of new waves of disruptive growth, in part because they might threaten those companies today.

few technologies or product ideas are inherently sustaining or disruptive when they emerge from the innovator’s mind. Instead, they go through a process of becoming fleshed out and shaped into a strategic plan in order to win funding.

Executives must answer three sets of questions to determine whether an idea has disruptive potential.

The first set explores whether the idea can become a new-market disruption. For this to happen, at least one and generally both of two questions must be answered affirmatively:

Is there a large population of people who historically have not had the money, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them? To use the product or se...

If the technology can be developed so that a large population of less skilled or less affluent people can begin owning and using, in a more convenient context, something that historically was available only to more skilled or more affluent people in a centralized, inconvenient location...

The second set of questions explores the potential for a low-end disruption. This is possible if these two questions can be answered affirmatively: Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price? Can we create a business model that enables us to earn attractive prof...

the innovations that enable low-end disruption are improvements that reduce overhead costs, enabling a company to earn attractive returns on lower gross margins, coupled with improvements in manufa...

Once an innovation passes the new-market or low-end test, there is still a third critical question, or litmus test, to answer affirmatively: Is the innovation disruptive to all of the significant incumbent firms in the industry? If it appears to be sustaining to one or more significant players in the industry, then...

If an idea fails the litmus tests, then it cannot be shaped into a disruption. It may have promise as a sustaining technology, but in that case we would expect that it could not constitute the b...

three strategies that firms might pursue in creating new-growth businesses: sustaining innovations, low-end disruptions, and new-market disruptions. It compares the targeted product performance or features, the targeted customers or markets, and the business model implications that each route entails. We hope that managers can use this as a template so that they can categorize and see the implications of different plans that might be presented to them for approval.

Disruption is a theory: a conceptual model of cause and effect that makes it possible to better predict the outcomes of competitive battles in different circumstances. The asymmetries of motivation chronicled in this chapter are natural economic forces that act on all businesspeople, all the time. Historically, these forces almost always have toppled the industry leaders when an attacker has harnessed them, because disruptive strategies are predicated upon competitors doing what is in their best and most urgent interest: satisfying their most important customers and investing where profits are most attractive. In a profit-seeking world, this is a pretty good bet. Not all innovative ideas can be shaped into disruptive strategies, however, because the necessary preconditions do not exist; in such situations, the opportunity is best licensed or left to the firms that are already established in the market. On occasion, entrant companies have simply caught the leaders asleep at the switch and have succeeded with a strategy of sustaining innovation. But this is rare. Disruption does not guarantee success: It just helps with an important element in the total formula. Those who create new-growth businesses need to get on the right side of a number of other challenges, to which we will now turn.

The concept of value networks was introduced in Clayton M. Christensen, “Value Networks and the Impetus to Innovate,” chapter 2 in The Innovator’s Dilemma.

In many ways, the situation in a value network corresponds to a “Nash equilibrium,” developed by Nobel laureate John Nash (who became even more renowned through the movie A Beautiful Mind). In a Nash equilibrium, given Company A’s understanding of the optimal, self-interested (maximum-profit) strategy of each of the other companies in the system, Company A cannot see any better strategy for itself than the one it presently is pursuing. The same holds true for all other companies in the system. Hence, none of the companies is motivated to change course, and the entire system therefore is relatively inert to change. Insofar as the companies within a value network are in a Nash equilibrium, it creates a drag that constrains how fast customers can begin utilizing new innovations. This application of Nash equilibriums to the uptake of innovations was recently introduced in Bhaskar Chakravorti, The Slow Pace of Fast Change (Boston: Harvard Business School Press, 2003). Although Chakravorti did not make the linkage himself, his concept is a good way to visualize two things about the disruptive innovation model. It explains why the pace of technological progress outstrips the abilities of customers to utilize the progress. It also explains why competing against nonconsumption, creating a completely new value network, is often in the long run an easier way to attack an established market.

disruption is a process and not an event. The forces are operating all of the time in every industry.

The right question to ask is whether customers will be willing to pay higher prices for further improvements in functionality, reliability, or convenience. As long as customers reward improvements with commensurately higher prices, we take it as evidence that the pace of performance improvement has not yet overshot what customers can use.

When the marginal utility that customers receive from additional improvements on any of these dimensions approaches zero, then cost is truly the basis of competition.

What products should we develop as we execute our disruptive strategy? Which market segments should we focus upon? How can we know for sure, in advance, what product features and functions the customers in those segments will and will not value? How should we communicate the benefits of our products to our customers, and what brand-building strategy can best create enduring value?

All companies face the continual challenge of defining and developing products that customers will scramble to buy. But despite the best efforts of remarkably talented people, most attempts to create successful new products fail. Over 60 percent of all new-product development efforts are scuttled before they ever reach the market.

By the time you add it all up, three-quarters of the money spent in product development investments results in products that do not succeed commercially.