The Innovator’s Solution
Tags: #business #innovation #technology #strategy #growth
Authors: Clayton M. Christensen, Michael E. Raynor
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Overview
This book is about how managers can create new growth in their organizations. It is addressed primarily to executives in established companies who are seeking to develop new products, services, and businesses that can become engines of profitable growth, and also to the venture capitalists who seek to back disruptive innovations. We argue that many attempts to create successful new-growth businesses fail not because of management error, but because of management success: The very practices that help companies succeed in sustaining circumstances can cause them to fail when confronting disruption. There are powerful and predictable forces at work that cause managers to make seemingly rational decisions that can predictably lead to failure. By understanding these forces, managers can make resource allocation and other key strategic decisions in a way that greatly improves their probability of success. The book culminates in a process for creating a ‘disruptive growth engine’—an organization within which the capability to create new growth is embedded in processes.
Book Outline
1. The Growth Imperative
This chapter establishes that sustained, profitable growth is the ultimate source of shareholder value. However, it is exceptionally difficult to achieve. A major reason is that investors discount into the present value of a company’s stock the rate of growth they expect the company to achieve. To boost share price, a company has to grow faster than investors expect. Once a company’s growth stalls, restarting it has historically proven nearly impossible.
Key concept: “Financial markets relentlessly pressure executives to grow and keep growing faster and faster…[but] 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.”
2. How Can We Beat Our Most Powerful Competitors?
This chapter reviews the disruptive innovation model. Sustaining innovations make good products better in ways that mainstream customers value and for which they will pay. Disruptive innovations, in contrast, bring to market simpler, more convenient, and less expensive products that appeal to new or less-demanding customers. This pattern of innovation explains why large, successful companies often get killed by seemingly insignificant new entrants.
Key concept: “Few technologies or business ideas are intrinsically sustaining or disruptive in character. Rather, their disruptive impact must be molded into strategy as managers shape the idea into a plan and then implement it.”
3. What Products Will Customers Want to Buy?
This chapter focuses on the question of what products to make. It introduces the idea of jobs to be done as the fundamental basis upon which customers make purchasing decisions. Rather than segmenting markets by product categories or customer demographics, the best way to segment markets is on the basis of the different jobs that customers are trying to get done, and to design products that do those specific jobs perfectly. This approach can help companies uncover opportunities for disruptive innovation as well.
Key concept: “Customers—people and companies—have “jobs” that arise regularly and need to get done…When customers become aware of a job that they need to get done in their lives, they look around for a product or service that they can “hire” to get the job done.”
4. Who Are the Best Customers for Our Products?
This chapter addresses the question of whom to target as a company’s initial customers. For low-end disruptions, the best initial customers are those at the low-end of the mainstream market who are overserved by the functionality of the leading products. For new-market disruptions, the best customers are those who historically have not consumed the product because they lacked the money or skill. These are the customers companies compete against when attacking nonconsumption.
Key concept: “It’s relatively straightforward to find the ideal customers for a low-end disruption. They are current users of a mainstream product who seem disinterested in offers to sell them improved-performance products…It is much trickier to find the new-market customers (or “nonconsumers”) on the third axis of the disruptive innovation model.”
5. Getting the Scope of the Business Right
This chapter addresses the question of what to make and what to buy. In circumstances when a company is competing to make the best possible product because performance is not yet good enough, the company needs to control the design and manufacture of every critical component of the system; that is, it needs to be vertically integrated with an interdependent architecture. As performance overshoots what customers can use, however, companies need to modularize their architectures and outsource components in order to compete on speed, convenience, and customization.
Key concept: “Because evidence from the past can be such a misleading guide to the future, the only way to see accurately what the future will bring is to use theory. In this case, we need a circumstance-based theory to describe the mechanism by which activities become core or peripheral.”
6. How to Avoid Commoditization
This chapter explores how commoditization and de-commoditization are reciprocal processes. Commoditization occurs as a company overshoots the functionality and reliability that customers in a given tier of the market can use. When that happens, the basis of competition in that tier changes, and the architecture of the product evolves toward modularity. This enables a host of nonintegrated companies to compete, driving down profit margins. However, this same process of commoditization increases the performance demands placed on subsystems. Hence, as end-use products become modular, the subsystems become interdependent. In essence, attractive profits migrate like a wave from tier to tier in the market, and from stage to stage in the value chain.
Key concept: “One of the most exciting insights from our research about commoditization is that whenever it is at work somewhere in a value chain, a reciprocal process of de-commoditization is at work somewhere else in the value chain.”
7. Is Your Organization Capable of Disruptive Growth?
This chapter introduces the RPV framework: Resources, Processes, and Values, which helps managers understand what an organization is and is not capable of accomplishing. An organization’s capabilities reside in its resources (such as people and cash), its processes (the ways it routinely gets things done), and its values (the criteria by which decisions are made). As organizations become large and successful, their capabilities shift from resources toward processes and values. This shift has important implications in building new-growth businesses.
Key concept: “Of all the resource choices required to successfully build new-growth businesses, the one that most often trips a venture up is the choice of its managers.”
8. Managing the Strategy Development Process
This chapter explores the strategy development process. There are two fundamentally different processes for developing a winning strategy—deliberate and emergent. The deliberate strategy process, which is analytical and often based on sophisticated market research, works well when the strategy needs to encompass all the important details required for success, and when the strategy must make as much sense to all employees as it does to top management. The emergent strategy process, in contrast, works well when it is not clear what the right strategy is—when the strategy needs to emerge from a series of trial-and-error experiments.
Key concept: “Innovative ideas always emerge in a half-baked, partially formed condition…They subsequently go through a shaping process that transforms them into the fully fleshed-out business plan, complete with strategy, that is required to win funding.”
9. There Is Good Money and There Is Bad Money
This chapter looks at the nature of good and bad capital to fund the creation of new-growth businesses. Money that is patient for growth but impatient for profit is good because it accelerates the emergent strategy process, forcing managers to confront early the critical question of whether customers will pay profitable prices for the product. Conversely, money that is impatient for growth but patient for profit is bad because it forces managers prematurely to declare a strategy, often before one can be known, and compels them to ramp up expenses before revenues have materialized.
Key concept: “We have concluded that the best money during the nascent years of a business is patient for growth but impatient for profit.”
10. The Role of Senior Executives in Leading New Growth
This chapter outlines the critical role of senior executives in leading new growth. Because companies don’t launch disruptive businesses frequently enough to have developed processes for doing it well, the job of disrupting must often be done by the senior executives themselves. The reason: Disruptive innovations cannot naturally be prioritized by the processes and values of established businesses, and a senior executive is the only one with the power and credibility to force the organization to pursue them.
Key concept: “Because the processes and values of the mainstream business by their very nature are geared to manage sustaining innovation, there is no alternative at the outset to the CEO or someone with comparable power assuming oversight responsibility for disruptive growth.”
Essential Questions
1. Why is sustained, profitable growth so difficult to achieve, and how can companies overcome this challenge?
Sustained, profitable growth is the ultimate source of shareholder value but is hard to achieve, because investors bake growth expectations into a company’s share price. Consequently, companies must grow faster than expected to boost their share price. Once growth stalls, restarting it is nearly impossible. To overcome this, companies must engage in disruptive innovation, bringing to market simpler, more convenient, and less expensive products that appeal to new or less-demanding customers, allowing them to capture emerging markets while established competitors focus on sustaining innovation in their existing markets.
2. What is the most effective way to segment markets and design products that customers will embrace?
Instead of segmenting markets by product categories or customer demographics, companies should segment based on ‘jobs to be done’. This approach focuses on the fundamental problems customers are trying to solve when they ‘hire’ a product or service. By understanding these jobs, companies can design products that perfectly address specific needs, increasing customer satisfaction and uncovering disruptive innovation opportunities.
3. What is ‘nonconsumption’, and why is it such a powerful source of growth?
Nonconsumption is a powerful source of growth. New-market disruptions succeed by targeting customers who historically have not consumed a product because they lacked the money or skills to do so. These customers become ‘nonconsumers’ because existing solutions are too expensive, complicated, or inconvenient. By making products simpler, more affordable, and accessible, companies can unlock these vast untapped markets and create significant new growth.
4. Why do large companies often miss disruptive opportunities, and how can they overcome this organizational challenge?
Large companies often miss disruptive opportunities because their resources, processes, and values are optimized for sustaining innovation in their established businesses. They are structured to pursue large, profitable markets and are often blind to small, emerging opportunities with disruptive potential. To overcome this, companies must create separate organizational units with processes and values specifically aligned to disruptive innovation, allowing them to operate with greater agility and focus.
5. What type of funding is most conducive to the success of disruptive businesses, and why?
Money that is ‘patient for growth but impatient for profit’ is ideal for disruptive businesses. This type of funding encourages rapid experimentation and learning, forcing companies to validate their assumptions and adapt their strategies quickly. Conversely, money that is ‘impatient for growth but patient for profit’ can be detrimental as it compels companies to prematurely declare a strategy and invest heavily in large, uncertain markets, increasing the risk of failure.
Key Takeaways
1. Target Disruptive Opportunities
Disruptive innovations often start by targeting niche markets with less-demanding customers, offering ‘good enough’ solutions at lower prices. This allows them to gain a foothold and refine their products without facing direct competition from established players. Over time, as the disruptive innovation improves, it can capture larger market segments and eventually displace the incumbents.
Practical Application:
An AI startup developing a novel language model could initially target researchers or independent developers who need a more powerful and flexible tool, even if it’s less user-friendly than existing solutions. As the technology improves, the company can then move up-market to larger customers.
2. Understand the Jobs to be Done
Focusing on the specific ‘jobs’ that customers are trying to get done with your product or service provides a powerful lens for innovation. It helps to define the right target audience, identify the most relevant features and functionalities, and differentiate your offering from the competition.
Practical Application:
Instead of building a generic chatbot, focus on a specific job-to-be-done, like scheduling meetings. This clarity will guide product design, marketing, and customer acquisition efforts, increasing the chances of success.
3. Leverage Disruptive Channels
Established players often have processes and values that make it difficult to embrace disruptive innovations. Partnering with or creating new channels that are aligned with the disruptive model, such as smaller, more agile organizations, can significantly increase the chances of success.
Practical Application:
A company developing a new AI-powered diagnostic tool could partner with smaller clinics or independent physicians who are eager to adopt new technologies and are less constrained by existing processes and infrastructure. As the technology matures and proves its value, it can then be adopted by larger hospitals.
Suggested Deep Dive
Chapter: Chapter 3: What Products Will Customers Want to Buy?
This chapter’s ‘jobs-to-be-done’ framework has significant implications for AI product engineers. Understanding the specific jobs that customers hire AI products to do can drive the design of more effective and successful products. It can also highlight opportunities to create disruptive new products and applications of AI that address jobs that are not currently being done well.
Memorable Quotes
Chapter 1. 10
“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.”
Chapter 2. 46
“Disruption works because it is much easier to beat competitors when they are motivated to flee rather than fight.”
Chapter 3. 76
“Predictable marketing requires an understanding of the circumstances in which customers buy or use things…customers—people and companies—have ‘jobs’ that arise regularly and need to get done.”
Chapter 5. 124
“Instead of asking what their company does best today, managers should ask, ‘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?’”
Chapter 9. 227
“We have concluded that the best money during the nascent years of a business is patient for growth but impatient for profit.”
Comparative Analysis
This book, a sequel to Christensen’s groundbreaking ‘The Innovator’s Dilemma’, provides a practical roadmap for established companies to not only survive but thrive in the face of disruption. While ‘The Innovator’s Dilemma’ focused on explaining why large companies fail to capitalize on disruptive innovations, ‘The Innovator’s Solution’ offers a set of guiding principles and frameworks for capturing these opportunities. This approach contrasts with other works that emphasize agility, adaptability, and ‘failing fast’ as the primary means of navigating disruption. By grounding its recommendations in a deep understanding of how markets and companies work, ‘The Innovator’s Solution’ offers a more predictable and systematic approach to innovation than other, more intuition-based frameworks.
Reflection
The Innovator’s Solution provides a compelling framework for understanding and navigating disruptive innovation, particularly valuable for executives in established companies. However, its focus on large corporations may limit its applicability to smaller businesses or startups with different resource constraints and operating environments. While the book emphasizes predictability, innovation inherently involves uncertainty, and the success of any strategy depends on multiple factors beyond those outlined in the RPV framework. Additionally, the book’s emphasis on the role of the CEO in driving disruption may oversimplify the complex dynamics of organizational change, potentially overlooking the importance of empowering and enabling individuals at all levels to contribute to innovation. Nonetheless, its insights into market segmentation, resource allocation, and organizational capabilities offer valuable tools for anyone seeking to create and sustain new growth in a rapidly evolving business landscape.
Flashcards
What is the key difference between sustaining and disruptive innovations?
Sustaining innovations target demanding, high-end customers with better performance, while disruptive innovations target new or less-demanding customers with simpler, more convenient, and less expensive products.
What is the most effective way to segment markets for innovation?
Segmenting markets based on the ‘jobs to be done’—the fundamental problems customers are trying to solve—rather than by product categories or customer demographics.
What is ‘nonconsumption’ and why is it a valuable target for disruptive innovation?
Nonconsumption represents a large untapped market of customers who have not been able to get a job done because existing solutions are too expensive, complicated, or inconvenient.
What are the three components of the RPV framework?
Resources, Processes, and Values. Resources are people and things, processes are how things get done, and values are the criteria by which decisions are made.
Why are large companies typically bad at disruptive innovation?
Because their established processes and values are optimized for sustaining innovations in existing markets and customers.
What type of funding is best for disruptive businesses?
Money that is ‘patient for growth but impatient for profit’ allows companies to experiment, learn, and adapt their strategies in the early stages.
What is the reciprocal process of commoditization and decommoditization?
When the functionality and reliability of a product overshoot what customers can use, leading to modularization and commoditization of the end product. However, this creates opportunities for differentiation and higher profits in the underlying subsystems, as they become performance-limiting and interdependent.
How can established companies create an environment conducive to disruptive growth?
Create separate, autonomous organizational units with processes and values specifically aligned to disruptive innovation.