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

by Clayton

You want customers who have long wanted your product but were not able to get one until you arrived on the scene. You want to be able to easily delight these customers, and you want them to need you.

“What do we need to master today, and what will we need to master in the future, in order to excel on the trajectory of improvement that customers will define as important?”

The advantage, we have found, goes to integration when products are not good enough, and to outsourcing—or specialization and dis-integration—when products are more than good enough.

An architecture is interdependent at an interface if one part cannot be created independently of the other part—if the way one is designed and made depends on the way the other is being designed and made. When there is an interface across which there are unpredictable interdependencies, then the same organization must simultaneously develop both of the components if it hopes to develop either component. Interdependent architectures optimize performance, in terms of functionality and reliability. By definition, these architectures are proprietary because each company will develop its own interdependent design to optimize performance in a different way.

a modular interface is a clean one, in which there are no unpredictable interdependencies across components or stages of the value chain. Modular components fit and work together in well-understood and highly defined ways. A modular architecture specifies the fit and function of all elements so completely that it doesn’t matter who makes the components or subsystems, as long as they meet the specifications.

Modular architectures optimize flexibility, but because they require tight specification, they give engineers fewer degrees of freedom in design. As a result, modular flexibility comes at the sacrifice of performance.

Once their requirements for functionality and reliability have been met, customers begin to redefine what is not good enough. What becomes not good enough is that customers can’t get exactly what they want exactly when they need it, as conveniently as possible. Customers become willing to pay premium prices for improved performance along this new trajectory of innovation in speed, convenience, and customization.

Modular architectures help companies to compete on the dimensions that matter in the lower-right portions of the disruption diagram. Companies can introduce new products faster because they can upgrade individual subsystems without having to redesign everything.

Modularity has a profound impact on industry structure because it enables independent, nonintegrated organizations to sell, buy, and assemble components and subsystems.

Ultimately, the specifications for modular interfaces will coalesce as industry standards. When that happens, companies can mix and match components from best-of-breed suppliers in order to respond conveniently to the specific needs of individual customers.

The progression from integration to modularization plays itself out over and over as products improve enough to overshoot customers’ requirements.

What drives this process is this predictable causal sequence:

The pace of technological improvement outstrips the ability of customers to utilize it, so that a product’s functionality and reliability that were

The basis of competition changes.

those suppliers that get better and better at conveniently giving customers exactly what they want when they need it are able to earn attractive margins.

As competitive pressures force companies to be as fast and responsive as possible, they solve this problem by evolving the architecture of their products from being proprietary and interdependent toward being modular.

A population of nonintegrated firms can now outcompete the integrated firms that ha...

On occasion there can be a discontinuous shift in the functionality that customers demand, essentially shifting the dotted line in figure 5-1 upward. This flips the industry back toward the left side of the diagram and resets the clock into an era in which integration once again is the source of competitive advantage.

To succeed with a nonintegrated, specialist strategy, you need to be certain you’re competing in a modular world.

These three conditions—specifiability, verifiability, and predictability—constitute an effective modular interface.

When there are complex, reciprocal, unpredictable interdependencies in the system, a single organization’s boundaries must span those interfaces.

a company can begin with a proprietary architecture when disruptive circumstances mandate it, and then, when the basis of competition changes, open its architecture to become a supplier of key subsystems to low-cost assemblers.

A bedrock set of concepts in understanding why organizational integration is critical when the conditions of modularity are not met is developed in the transaction cost economics (TCE) school of thought, which traces its origins to the work of Ronald Coase

Coase argued that firms were created when it got “too expensive” to negotiate and enforce contracts between otherwise “independent” parties.

The reciprocality of these processes means that the locus of the ability to differentiate shifts continuously in a value chain as new waves of disruption wash over an industry. As this happens, companies that position themselves at a spot in the value chain where performance is not yet good enough will capture the profit.

First, the interdependent, proprietary architecture of their products makes differentiation straightforward. Second, the high ratio of fixed to variable costs that often is inherent in the design and manufacture of architecturally interdependent products creates steep economies of scale that give larger competitors strong cost advantages and create formidable entry barriers against new competitors.

When your world becomes modular, you’ll need to look elsewhere in the value chain to make any serious money.

As a new market coalesces, a company develops a proprietary product that, while not good enough, comes closer to satisfying customers’ needs than any of its competitors. It does this through a proprietary architecture, and earns attractive profit margins.

it eventually overshoots the functionality and reliability that customers in lower tiers of the market can utilize.

change in the basis of competition in those ti...

precipitates an evolution toward modular arch...

facilitates the dis-integration of the industry, wh...

makes it very difficult to differentiate the performance or c...

This condition begins at the bottom of the market, where functional overshoot occurs first, and then moves up inexorably to affect the higher tiers.

A company that finds itself in a more-than-good-enough circumstance simply can’t win: Either disruption will steal its markets, or commoditization will steal its profits.

The low-cost strategy of modular product assemblers is only viable as long as they are competing against higher-cost opponents.

they must move up-market to take them on again in order to continue to earn attractive profits.

Because the mechanisms that constrain or determine how rapidly they can move up-market are the performance-defining subsystems, these elements become not good enough

Competition among subsystem suppliers causes their engineers to devise designs that are increasingly p...

providers of these subsystems therefore find themselves selling differentiated, proprietary products with attractive profitability.

creation of a profitable, proprietary product is the beginning, of course, of the next cycle of commoditization and decommoditization.

What makes an industry appear to be attractively profitable is the circumstance in which its companies happen to be at a particular point in time,

For many suppliers, eating their way up the value chain creates opportunities to design subsystems with increasingly optimized internal architectures that become key performance drivers of the modular products that its customers assemble.

Core competence, as it is used by many managers, is a dangerously inward-looking notion. Competitiveness is far more about doing what customers value than doing what you think you’re good at. And staying competitive as the basis of competition shifts necessarily requires a willingness and ability to learn new things rather than clinging hopefully to the sources of past glory.

When overshooting occurs, the ability to command attractive profitability through a valuable brand often migrates to those points in the value-added chain where things have flipped into a not-yet-good-enough situation.

the law of conservation of attractive profits states that in the value chain there is a requisite juxtaposition of modular and interdependent architectures, and of reciprocal processes of commoditization and decommoditization, that exists in order to optimize the performance of what is not good enough. The law states that when modularity and commoditization cause attractive profits to disappear at one stage in the value chain, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.

We noted previously that when the functionality and reliability of a product become more than good enough, the basis of competition changes. What becomes not good enough are speed to market and the rapid and responsive ability to configure products to the specific needs of customers in ever-more-targeted market segments. The customer interface is the place in the value chain where the ability to excel on this new dimension of competition is determined. Hence, companies that are integrated in a proprietary way across the interface to the customer can compete on these not-good-enough dimensions

management skills and intuition that enable people to succeed in new assignments were shaped through their experiences in previous assignments in their careers.

One problem with predicting future success from past success is that managers can succeed for reasons not of their own making—and we often learn far more from our failures than our successes.

a process that defines a capability in executing a certain task concurrently defines disabilities in executing other tasks.10 In contrast to the flexibility of many resources, processes by their very nature are meant not to change.