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

by Clayton

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.

Financial markets relentlessly pressure executives to grow and keep growing faster and faster. Is it possible to succeed with this mandate? Don’t the innovations that can satisfy investors’ demands for growth require taking risks that are unacceptable to those same investors? Is there a way out of this dilemma?

The most high valued CEO led-companies often push back against the market pressure and do their own thing by controlling the narrative - Amazon, Google, FB, etc.

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.

Pursuing growth the wrong way can be worse than no growth at all.

Consider AT&T. In the wake of the government-mandated divestiture of its local telephony services in 1984, AT&T became primarily a long distance telecommunications services provider. The break-up agreement freed the company to invest in new businesses, so management almost immediately began seeking avenues for growth and the shareholder value that growth creates. The first such attempt arose from a widely shared view that computer systems and telephone networks were going to converge. AT&T first tried to build its own computer division in order to position itself at that intersection, but was able to do no better than annual losses of $200 million. Rather than retreat from a business that had proved to be unassailable from the outside, the company decided in 1991 to bet bigger still, acquiring NCR, at the time the world’s fifth-largest computer maker, for $7.4 billion. That proved only to be a down payment: AT&T lost another $2 billion trying to make the acquisition work. AT&T finally abandoned this growth vision in 1996, selling NCR for $3.4 billion, about a third of what it had invested in the opportunity. But the company had to grow. So even as the NCR acquisition was failing, AT&T was seeking growth opportunities in technologies closer to its core. In light of the success of the wireless services that several of its spun-off local telephone companies had achieved, in 1994 the company bought McCaw Cellular, at the time the largest national wireless carrier in the United...

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.

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.

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 of growth in order to boost its share price.

also discounts the growth from new, yet-to-be-established lines of business that they expect the management team to be able to create in the future.

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.

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.

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). Stalling is understandable, given our expectations that all growth markets become saturated and mature. What is scary is that of all these companies whose growth had stalled, only 4 percent were able to successfully reignite their growth even to a rate of 1 percent above GNP growth. Once growth had stalled, in other words, it proved nearly impossible to restart it.

Twenty-eight percent of them lost more than 75 percent of their market capitalization. Forty-one percent of the companies saw their market value drop by between 50 and 75 percent when they stalled, and 26 percent of the firms lost between 25 and 50 percent of their value. The remaining 5 percent lost less than 25 percent of their market capitalization.

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. But the facts refute this explanation, too.

Corporate executives often bet the future of billion-dollar enterprises on an innovation. IBM bet its farm on the System 360 mainframe computer, and won. DuPont spent $400 million on a plant to make Kevlar tire cord, and lost. Corning put billions on the line to build its optical fiber business, and won big. More recently it sold off many of its other businesses in order to invest more in optical telecommunications, and has been bludgeoned. Many of the executives who have been unable to create sustained corporate growth have evidenced a strong stomach for risk.

we also believe does not hold water: 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.

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, and two will hit the home runs on which the success of the entire portfolio turns.

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.

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 product and business plan that the company ultimately attempts to implement.12 Understanding and managing these forces can make innovation more predictable.

case study of the Big Idea Group (BIG), a company that identifies, develops, and markets ideas for new toys.13 After quoting a senior executive of a multibillion-dollar toy company who complained that there have been no exciting new toy ideas for years, the case then chronicles how BIG attacks this problem—or rather, this opportunity. 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. How can there be such a flowering of high-potential new product opportunities in BIG’s system, and such a dearth of opportunities in the large toy company? In discussing the case, students often suggest that the product developers in the toy company just aren’t as creative, or that the executives of the major company are just too risk averse. If these diagnoses were true, the company would simply need to find more creative managers who could thi...

process by which the ideas get shaped. 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.

Middle managers typically hesitate to throw their weight behind new product concepts whose market is not assured. If a market fails to materialize, the company will have wasted millions of dollars. The system therefore mandates that midlevel managers support their proposals with credible data on the size and growth potential of the markets that each idea targets. Opinions and feedback from significant customers add immeasurably to the credibility of claims that an idea has potential. Where does this evidence come from, given that the product hasn’...

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.

problem for growth-seeking managers, of course, is that the exciting growth markets of tomorrow are small today.

In every sizable company, not just in the toy business, the set of ideas that has been processed and packaged for top management approval is very different from the population of ideas that is bubbling at the bottom.

A dearth of good ideas is rarely the core problem in a company that struggles to launch exciting new-growth businesses. The problem is in the shaping process. Potentially innovative new ideas seem inexorably to be recast into attempts to make existing customers still happier. 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.

quixotic.

What brings predictability to any field is a body of well-researched theory—contingent statements of what causes what and why.

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 that makes success in building new businesses seem random.

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. After the phenomenon has been thoroughly characterized, researchers can then begin the second stage, which is to classify the phenomenon into categories. Juvenile-onset versus adult-onset diabetes is an example from medicine. 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.18

getting the categories right—is the key to developing useful theory.

thirty years ago many writers asserted that vertical integration was the key to IBM’s extraordinary success. But in the late 1990s we read that non-integration explained the triumph of outsourcing titans such as Cisco and Dell.

When the mechanism did not result in successful flight, researchers had to carefully decipher why—what it was about the circumstances in which the unexpected result occurred that led to failure.

Understanding the mechanism (what causes what, and why) made flight possible; understanding the categories of circumstances made flight predictable.

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. Theories built on categories of circumstances become easy for companies to employ, because managers live and work in circumstances, not in attributes.

In our studies, we have observed that industry-based or product/ service-based categorization schemes almost never constitute a useful foundation for reliable theory.

The circumstances that mattered were not what industry you were in. Rather, there was a mechanism—the resource allocation process—that caused the established leaders to win the competitive fights when an innovation was financially attractive to their business model. The same mechanism disabled the established leaders when they were attacked by disruptive innovators—whose products, profit models, and customers were not attractive.

It is the ability to begin thinking and acting in a circumstance-contingent way that brings predictability to our lives.

written this book from the perspective of senior managers in established companies who have been charged to maintain the health and vitality of their firms.

The Innovator’s Dilemma summarized a theory that explains how, under certain circumstances, the mechanism of profit-maximizing resource allocation causes well-run companies to get killed. The Innovator’s Solution, in contrast, summarizes a set of theories that can guide managers who need to grow new businesses with predictable success—to become the disruptors rather than the disruptees—and ultimately kill the well-run, established competitors. To succeed predictably, disruptors must be good theorists. As they shape their growth business to be disruptive, they must align every critical process and decision to fit the disruptive circumstance.

How can we know in advance of the battle whether we’re going to be able to beat the competition? Why has disruption proven to be such a consistently effective strategy for causing strong incumbent competitors to flee from their entrant attackers, rather than fight them? How can we shape our business idea into one of these disruptive strategies? Can we really predict the winners in a race for innovative growth? What if we could choose our competitive battles knowing we could win nearly every time? What if we knew in advance which growth strategies would succeed, and which would fail?

predict the outcome of competitive fights. Some have looked at the attributes of the companies involved, predicting that larger companies with more resources to throw at a problem will beat the smaller competitors. It’s interesting how often the CEOs of large, resource-rich companies base their strategies upon this theory, despite repeated evidence that the level of resources committed often bears little relationship to the outcome.

considered the attributes of the change: When innovations are incremental, the established, leading firms in an industry are likely to reinforce their dominance; however, compared with entrants, they will be conservative and ineffective in exploiting breakthrough innovation.

Our ongoing study of innovation suggests another way to understand when incumbents will win, and when the entrants are likely to beat them. The Innovator’s Dilemma identified two distinct categories—sustaining and disruptive—based on the circumstances of innovation. In sustaining circumstances—when the race entails making better products that can be sold for more money to attractive customers—we found that incumbents almost always prevail. In disruptive circumstances—when the challenge is to commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customer set—the entrants are likely to beat the incumbents. This is the phenomenon that so frequently defeats successful companies. It implies, of course, that the best way for upstarts to attack established competitors is to disrupt them.

review the disruptive innovation model from the perspective of both the disruptee and the disruptor in order to help growth builders shape their strategies so that they pick disruptive fights they can win.

three critical elements of disruption, as depicted in figure 2-1. First, in every market there is a rate of improvement that customers can utilize or absorb, represented by the dotted line sloping gently upward across the chart. For example, the automobile companies keep giving us new and improved engines, but we can’t utilize all the performance that they make available under the hood. Factors such as traffic jams, speed limits, and safety concerns constrain how much performance we can use.

To simplify the chart, we depict customers’ ability to utilize improvement as a single line. In reality, there is a distribution of customers around this median:

in every market there is a distinctly different trajectory of improvement that innovating companies provide as they introduce new and improved products. This pace of technological progress almost always outstrips the ability of customers in any given tier of the market to use it, as the more steeply sloping solid lines in figure 2-1 suggest.