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

by Clayton

We would not expect an organization to have developed a process for accomplishing a particular task if it has not repeatedly addressed a task like that before.

resources and processes are often enablers that define what an organization can do, values often represent constraints—they define what the organization cannot do.

As companies upgrade their products and services to capture more attractive customers in premium tiers of their markets, they often add overhead cost. As a result, gross margins that at one point were quite attractive will seem unattractive at a later point. Companies’ values change as they migrate up-market.

The second dimension along which values can change relates to how big a business has to be in order to be interesting.

An opportunity that excites a small organization simply isn’t large enough to be interesting to a very large one.

In the start-up stages of a business, much of what gets done is attributable to its resources—particularly its people. The addition or departure of a few key people can have a profound influence on its success. Over time, however, the organization’s capabilities shift toward its processes and values.

Success is easier to sustain when the locus of the capability to innovate successfully migrates from resources to processes and values.

potential should not be measured by attributes, but rather by the ability to acquire the attributes and skills needed for future situations.

Launching growth business after growth business creates a set of rigorous, demanding schools in which next-generation executives can learn how to lead disruption.

Heavyweight teams are tools to create new processes, or new ways of working together. In contrast, lightweight or functional teams are tools to exploit existing processes.

Companies can create new prioritization criteria, or values, only by setting up new business units with new cost structures.

new, disruptive game almost always must begin while the established business still has substantial, profitable sustaining potential.

The key dimensions of autonomy relate to processes and values. The disruptive business needs to have the freedom to create new processes and to build a unique cost structure in order to be profitable as it makes and sells even its earliest products.

If the acquired company’s processes and values are the real drivers of its success, then the last thing the acquiring manager wants to do is to integrate the company into the new parent organization.

The deliberate strategy-making process is conscious and analytical.

Deliberate strategies are the appropriate tool for organizing action if three conditions are met.

address correctly all of the important details required to succeed, and those responsible for implementation must understand each important detail

strategy needs to make as much sense to all employees

little unanticipated influence from outside political, technological, or market forces.

Emergent strategy, which as depicted in figure 8-1 bubbles up from within the organization, is the cumulative effect of day-to-day prioritization and investment

Emergent strategies result from managers’ responses to problems or opportunities that were unforeseen in the analysis and planning stages

Emergent processes should dominate in circumstances in which the future is hard to read and in which it is not clear what the right strategy should be.

deliberate strategy process should be dominant once a winning strategy has become clear, because in those circumstances effective execution often spells the difference between success and failure.

a company’s strategy is what comes out of the resource allocation process, not what goes into it.

This practice is critical in management development, but its effect is to influence midlevel managers to accord priority to projects that will pay off within the typical tenure that they expect in their jobs. They want to produce improved results that will merit attractive promotions.

Salespeople’s decisions about which customers to focus on and which products to emphasize are critical elements of the diffused resource allocation process and are heavily influenced by how they are compensated.

Customers also exert a powerful influence on the sorts of initiatives that survive the resource allocation process. You can’t build a business around a product that your customers don’t want,

Competitors’ actions likewise exert powerful influence. When a competitor’s action threatens to steal customers or growth opportunities away, managers have almost no choice but to push a response through the resource allocation filter.

companies each saw a viable strategy emerge that was substantially different than their founders had envisioned. But once the model was clear, they executed that strategy aggressively.

defining and implementing strategy entails managing the conditions under which the strategy and resource allocation processes operate so that the strategy process can work efficiently,

Carefully control the initial cost structure of a new-growth business, because this quickly will determine the values that will drive the critical resource allocation decisions in that business. Actively accelerate the process by which a viable strategy emerges by ensuring that business plans are designed to test and confirm critical assumptions using tools such as discovery-driven planning. Personally and repeatedly intervene, business by business, exercising judgment about whether the circumstance is such that the business needs to follow an emergent or deliberate strategy-making process.

TABLE 8 - 1

disruptiveness can only be expressed relative to the business model of a company and its competitors.

A business model that can make money at low costs per unit is a crucial strategic asset in both new-market and low-end disruptive strategies, because the cost structure determines the type of customers that are and are not attractive. The lower it can start, the greater its upside.

Anything that would divert resources from the crucial, deliberate focus on growing the core business is stomped out. Such focus is an essential requirement for success at this stage.4 However, it means that no new-growth businesses are launched while the core business is still thriving.

Sustaining innovation is therefore critical to maintaining a company’s share price.6 It is the creation of new disruptive businesses that allows companies to exceed investor expectations, and therefore to create unusual shareholder value.

When the corporation’s investment capital becomes impatient for growth, good money becomes bad money because it triggers a subsequent cascade of inevitable incorrect decisions. Innovators who seek funding for the disruptive innovations that could ultimately fuel the company’s growth with a high probability of success now find that their trial balloons get shot down because they can’t get big enough fast enough.

steep revenue ramp, these costs are substantial. But overfunding is hazardous to a new venture’s health, because heavy expense levels in turn define the sorts of customers and market segments that will and will not provide adequate revenues to cover those costs.

Financial results measure how healthy the business was, not how healthy the business is.

We suggest three particular policies for keeping the growth engine running. Taken together, the policies force the organization to start early, start small, and demand early success.

A decentralized company can maintain the values required to see and enthusiastically pursue disruptive innovations far longer than can a monolithic, centralized one, because the size that a new disruptive venture must reach to make a difference to a small business unit is more consistent with the revenue ramp of a new disruptive business.

The drivers of the benefits of a GBF strategy are strong network effects in customer usage

on occasion venture capital investors en masse conclude that a “category” is going to be “big”—even while there is no consensus which firms within that category are going to succeed. This results in a massive inflow of capital into the nascent industry, which funds more start-ups than can possibly survive, at illogical valuations. He notes that when investors and entrepreneurs are caught up in such a whirlwind, they almost have no alternative but to race to out-invest the competition. When the bubble pops, most of these investors and entrepreneurs will lose—and in fact in the aggregate, the venture capital industry loses money in these whirlwinds. The only way not to lose everything is to out-invest and out-execute the others.

Professor William Sahlman of the Harvard Business School has studied the phenomenon of venture capital “bubble” investing for two decades. He observes that when many venture investors conclude that they need to have strong investment positions in a “category,” investors develop “capital market myopia”—a view that does not consider the impact that other firms’ investments will have on the probability that their individual investment will succeed. When massive amounts of available venture capital are focused on an industry where investors perceive steep scale economies and strong network effects, the funds and the companies in which they invest are compelled to engage in “racing” behavior. Firms seek to dramatically outspend the competition, because it is a company’s relative spending rate and its relative execution capability that drive success. Sahlman notes that once a race like this has started, venture funds have no option but to engage in that behavior if they want to participate in that investment category.

Because the senior-most executives in reality cannot participate when and where these decisions actually get made, decision-making processes that work well without senior attention are critical to success in circumstances of sustaining innovation. In the sustaining circumstance when capable processes exist—even in many big-ticket decisions—senior executives typically cannot improve the quality of the decision because of the asymmetry of information that exists.

For those decisions that the mainstream processes and values were designed to make effectively (sustaining innovations, primarily), less senior executive involvement is needed. It is when senior executives sense that the processes and values of the mainstream organization were not designed to handle important decisions in an organization (which is typically the case in disruptive circumstances) that a senior executive needs to participate. Because the plans for disruptive businesses by definition need to be shaped by different criteria, and because the values of the mainstream business have evolved to weed out the very sorts of ideas that have disruptive potential, disruptive innovation is the category of circumstance in which powerful senior managers must personally be involved.

If a company launches a sequence of growth businesses, if its leaders repeatedly use the litmus tests for shaping ideas or acquiring nascent disruptions, and if they repeatedly use sound theories to make the other key business-building decisions well, we believe that a predictable, repeatable process for identifying, shaping, and launching successful growth can coalesce. A company that embeds the ability to do this in a process would own a valuable growth engine.

First, it needs to operate rhythmically and by policy, rather than in response to financial developments.

Second, the CEO or another senior executive who has the confidence and the authority to lead from the top when necessary must lead the effort.

Third, it would establish a small corporate-level group—movers and shapers—whose members develop a practiced, repeatable system for shaping ideas into disruptive business plans that are funded and launched.