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

by Clayton

No matter how fast the growth treadmill is going, it is not fast enough. The reason: 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.

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

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.

Middle managers typically hesitate to throw their weight behind new product concepts whose market is not assured.

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.

Because theory-building scholars struggle to define the right and relevant categorization of circumstances, they rarely can define the circumstances immediately.

We can trust a theory only when its statement of what actions will lead to success describe how this will vary as a company’s circumstances change.

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.

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.

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.

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.

Although new-market disruptions initially compete against non-consumption in their unique value network, as their performance improves they ultimately become good enough to pull customers out of the original value network into the new one, starting with the least-demanding tier.

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

Many disruptions are hybrids, combining new-market and lowend approaches,

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 service, do customers need to go to an inconvenient, centralized 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 profits at the discount prices required to win the business of these overserved customers at the low end?

Often, 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 manufacturing or business processes that turn assets faster.

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 the odds will be stacked in that firm’s favor, and the entrant is unlikely to win.

TABLE 2 - 1

The research of disruption adds a dynamic dimension to Porter’s work. Essentially, a low-cost strategy yields attractive profitability only until the higher-cost competitors have been driven from a tier in the market. Then, the low-cost competitor needs to move up so that it can compete once again against higher-cost opponents. Without the ability to move up, a low-cost strategy becomes an equal-cost strategy.

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.

disruption is a process and not an event. The forces are operating all of the time in every industry. In some industries it might take decades for the forces to work their way through an industry. In other instances it might take a few years. But the forces—which really are the pursuit of the profit that is associated with competitive advantage—are always at work.

Low-end disruptions are a direct example of what economist Joseph Schum-peter termed “creative destruction.” Low-end disruptions create a step-change cost reduction within an industry—but it is achieved by entrant firms destroying the incumbents. New-market disruption, in contrast, entails a period of substantial creative creation—new consumption—before the destruction of the old occurs

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.

We believe that this approach, based on the notion that customers “hire” products to do specific “jobs,” can help managers segment their markets to mirror the way their customers experience life.

Their thought processes originate with an awareness of needing to get something done, and then they set out to hire something or someone to do the job as effectively, conveniently, and inexpensively as possible. The functional, emotional, and social dimensions of the jobs that customers need to get done constitute the circumstances in which they buy. In other words, the jobs that customers are trying to get done or the outcomes that they are trying to achieve constitute a circumstance-based categorization of markets.

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.

Who is the quick-service chain really competing against in the morning? Its statistics compare its sales with the milkshake sales of competing chains. But in the customers’ minds, the morning milkshake competes against boredom, bagels, bananas, doughnuts, instant breakfast drinks, and possibly coffee. In the evening, milkshakes compete against cookies, ice cream, and promised purchases in the future that parents hope their children won’t remember.

Knowing what job a product gets hired to do (and knowing what jobs are out there that aren’t getting done very well) can give innovators a much clearer road map for improving their products to beat the true competition from the customer’s perspective—in every dimension of the job.

Competing against nonconsumption often offers the biggest source of growth in a world of one-size-fits-all products that do no jobs satisfactorily.

When managers position a disruptive product squarely on a job that has been poorly addressed in the past that a lot of people are trying to get done, they create a launch pad for subsequent growth through sustaining innovations that build on the initial platform.

The way to get as close as possible to this target is to develop hypotheses by carefully observing what people seem to be trying to achieve for themselves, and then to ask them about it.

The low-end disruptor’s marketing task is to extend the lower-cost business model up toward products that do the jobs that more profitable customers are trying to get done. With new-market disruptions, in contrast, the challenge is to invent the upward path, because nobody has been up that trajectory before.

defining market segments in a product-based way actually causes a headlong, arms race–like rush toward undifferentiable, one-size-fits-all products that perform poorly any specific jobs that customers might hire them to do.

There are at least four reasons or countervailing forces in established companies that cause managers to target innovations at attribute-based market segments that are not aligned with the way that customers live their lives. The first two reasons—the fear of focus and the demand for crisp quantification—reside in companies’ resource allocation processes. The third reason is that the structure of many retail channels is attribute focused, and the fourth is that advertising economics influence companies to target products at customers rather than circumstances.

customers define quality within the context of the job to be done.

Customers don’t just “change jobs” because a new product becomes available. Rather, the new product will succeed to the extent it helps customers accomplish more effectively and conveniently what they’re already trying to do.

The key to success with low-end disruptions is to devise a business model that can earn attractive returns at the discount prices required to win business at the low end.

product that purports to help non-consumers do something that they weren’t already prioritizing in their lives is unlikely to succeed.

Another kind of nonconsumption occurs, however, when people are trying to get a job done but are unable to accomplish it themselves because the available products are too expensive or too complicated. Hence, they put up with getting it done in an inconvenient, expensive, or unsatisfying way. This type of nonconsumption is a growth opportunity. A new-market disruption is an innovation that enables a larger population of people who previously lacked the money or skill now to begin buying and using a product and doing the job for themselves.

The target customers are trying to get a job done, but because they lack the money or skill, a simple, inexpensive solution has been beyond reach.

The performance hurdle required to delight such new-market customers is quite modest.

The technology that enables the disruption might be quite sophisticated, but disruptors deploy it to make the purchase and use of the product simple, convenient, and foolproof.

The disruptive innovation creates a whole new value network. The new consumers typically purchase the product through new channels and use the product in new venues.

The solution is twofold: First, get top-level commitment by framing an innovation as a threat during the resource allocation process. Later, shift responsibility for the project to an autonomous organization that can frame it as an opportunity.

In contrast to the dilemma facing the incumbents, threat framing isn’t a vexing issue for entrant firms. For them, the disruption is pure opportunity.

Fit constitutes a much more reliable predictor of success than do numbers in the uncertain environment of new-market disruption.

because it gave those retailers a chance to migrate toward higher-margin product lines. In each of the most successful disruptions we have studied, the product and its channel to the customer formed this sort of mutually beneficial relationship.

Disruptive products require disruptive channels.