Being a follow up book does not impede the relevance of this book. In the first book the author illustrates how innovations failed in large corporations, while it succeeded in smaller companies in a very lucid way and backed with right amount of examples. In this book Christensen uses the same lucid way of illustrating how innovations, read disruptions, can happen in organizations. He gives solid reasoning on why it does not happen and a solution on how it can be made to happen.
In the first chapter titled "The Growth Imperative" the authors highlights how the need to satisfy the share market drives the executives to concentrate on what gives a high rate of growth in the current quarter, current financial year, rather than concentrating on something that will potentially provide more growth after the next few years.
The second reason he says is that people get carried away by appearances. The example he quotes is that originally people thought that by having wings it will be possible for them to fly. What they did not know is fluid dynamics which is actually the science that helps humans fly today. Similarly companies tend to assume that aping others who succeeded they will also succeed. Instead they should understand the science or reasoning behind the success before attempting what other successful companies are doing.
Many company's today would tend to follow Steve Jobs' example and say I do not want to ask the people what they want, I will give them what they want. A company that blindly follows this technique is bound to fail. They need to understand what the users really want to do.
The author goes back to the example quoted in the Innovator's Dilemma of how the mini steel mills upended the Integrated Steel Companies. Initially most of the steel companies were Integrated Steel Companies which were giant installations and could create all types of steel products required from rebars to sheets to beams and the whole lot. When the mini mills were launched they first were capable of making only rebars. The companies that purchased these mini mills made a lot of profit in making rebars as their cost of running the company was much less than the Integrated steel mills. These large mills were glad to let go off the rebar production to these small companies. Soon all the large companies stopped making rebars and the small companies felt in a drop in their profit levels as now they were competing with their peers.]
As a next step the mini mills became capable of producing Bars and Rods. This was again a low margin game for the large manufacturers and they let go off this. It followed the same cycle and soon the smaller companies found themselves in the same low profit situation. They now upgraded themselves to manufacture structural steel and it followed the same cycle and then they upgraded themselves to manufacture sheets which has followed the same route.
In the 70s the Integrated Steel Companies accounted for practically 100% of the steel production in the US. Today they account for only 50% of the output, the rest is produced by the companies using mini mills.
The author highlights that in most cases the executives tend to flee rather than fight when they are faced with a disruption in what they consider "low profit" market in their definition. They tend to concentration on innovation which leads to sustaining their current profit levels.
The authors stress that while it is important to have "sustaining" innovations that will help the sustenance of the current business of an organization, it would be wrong to ignore the disruptive innovations which may appear low margin game from the perspective of the company, but can turn out to be big winners in the long run.
The authors classify disruptions into two types
a) Low End Disruptions. These are the ones like the mini steel mills which tend to serve the over served customers
b) New Market Disruptions. These are the ones that address the non-consumers of a product or service by making it more attractive and by improving the performance.
Not all innovative ideas can be shaped into disruptive strategies, however, because the necessary preconditions do not exist; in such situations, the opportunity is best licensed or left to the firms that are already established in the market. On occasion, entrant companies have simply caught the leaders asleep at the switch and have succeeded with a strategy of sustaining innovation. But this is rare. Disruption does not guarantee success: It just helps with an important element in the total formula. Those who create new-growth businesses need to get on the right side of a number of other challenges, to which we will now turn.
The key aspect that the authors point towards in this chapter is that it is not sufficient to know what the customers want, it is to understand what problem are they trying to solve and which will be the best way to solve the problem. The authors cite a very very good example to illustrate this. The case study is about a quick service restaurant that sells milk shakes. This quick service restaurant wished to improve its sales. The first approach by the marketers was to segment the milkshakes based on its attributes and the customers based on their profile and try and find out which category of customers would buy milk shakes. Now they tried to figure out how they could change the milkshakes to satisfy the different profiles of customers. The possible options were to make the milkshakes thicker, more chunkier, or thinner, or less costly or more chocolatier etc. On the face of it, the approach seems fool proof. When implemented it did not yield any results. The sales continued to be flat.
The Restaurant then hired a new set of researchers to look into what can be done to improve the sales. These researchers tried to answer the query "Why are the customers buying the milkshakes? The answer they got was something as follows:
1. In the morning a customer buys a milkshake so that they can drink something on the way to their workplace. They need the milkshake such that it lasts them till they reach their destination which would typically be about half an hour. They were not hungry enough but would be so by the time they have been at work for an hour or two. They needed something that would sustain them till a reasonable lunch time. The container should be such that it is easy to handle in vehicle with one hand and should not create any mess as most of them would be in their work clothes.
2. Most of the other times it was found that the buyers of milkshakes were parents who were buying it for their children as an alternate to junk food. It was also found that in many cases these were dumped half finished as the children could not finish the drink fast enough for their parents to wait or were full by the time they finished it.
This indicated that the milkshakes need to be of two different natures depending on the time of the day and not based on the type of customer who purchased the drink. It needed to be based the "purpose" it was expected to serve. Based on this the restaurant started making thicker milks shakes in the morning and started adding fruit bits in the morning period and later made it lighter and packaged in in a smaller containers to cater to, potentially the same or similar customers, but to serve a different purpose.
Thus it is important to understand the problem that the product or service is to solve and not just the demographics of the people buying them. The same product or service may need to be packaged different depending on the purpose for which the customer is buying it.
The authors go on to say there are four reasons on why the managers fall back on attribute based segmentation of the customers:
1. Fear of Focus: When one is focussing on making a product or service a particular job well, it starts becoming obvious that it cannot be used to address other problems. And when this happens the audience that it can address becomes narrower which in turn means that the growth is going to be limited. So the only way seems to be to pack as many attributes as possible so that it can address a larger and larger audience. While focus helps make the product/service better it is also scary as it may narrow the set of customers who will be interested in the product or service.
2. Demand for Crisp Quantification: Most executives hire market research to streamline resource allocation based on the size of the opportunity, and not to understand how customers and markets work. IT systems gives teh ability to collect, aggregate and summarize data in various ways to help managers make better decisions. Typically these reports show how much if each product is being sold, how profitable each is, which customers are buying which products, and what costs and revenues are associated with servicing each customer. IT systems also report revenues and costs by business units, so that managers can measure the success if the organization for which they have responsibility. When managers look at this data and start building products and services the tendency is to build one-size-fits-all type of products and services. It does not take into account the variety of ways the product/service is being used under different conditions by the customer. The product/service tend to get feature rich which may still not be able to serve the purpose for which the customer is buying the product/service. The basic problem is that managers are fixated on understanding the 'size of the opportunity' rather than the customer.
3. Structure of Retail Channels: Many retail and distribution channels are organized by product categories rather than by the nature of jobs that the customer is trying to address. E.g. to make a shelf a person needs drills, sanders, hammers and saws. When the customer walks into a hardware shop they are looking for drills, sanders, hammers and saws. Now if an inventive company where to come up with a tool which serves as all of the above the retailer will be at a loss on which shelf to put it in. It will not fit either of the shelves that they are accustomed to. Also the customer has not been trained to ask, give me a tool to build a shelf. This limits the innovations to a certain extent.
4. Advertising Economics influence people to target products at customers rather than at circumstances: Advertisements are expensive and every company tries to use a cost effective way of advertising. It seems easier to device a communications strategy and to choose the most cost-effective marketing media if consumer markets are sliced along dimensions such as age, gender, lifestyle, or product category. The same seems true if the marketers slice commercial markets by geography, industry, or size of business. If one were to attempt to communicate to the needs of the customer it can get confusing. E.g. if the quick service restaurant were to advertise to the "office goer" to pick up the thick milkshake in the morning for the commute, and to pick up the "smaller and thinner" milkshake for the kids in the afternoon or evening and to pick up the "hamburger" for a quick lunch, the message can be confusing as the same restaurant is advertising different aspects to the same customer. Also it can end up sullying the brand value of the organization. On way the organizations address this is by creating different brands to indicate and mean different things. One example that the authors quote is that of the Marriott Corporation. They have created a brand architecture which tells the customer to hire a Marriott Hotel when the job is to convene a major business meeting, and to choose a Courtyard by Marriott when the job is to get a clean, quiet place to work into evening. We learned to hire a Fairfield Inn my Marriott when job is to find an inexpensive place to stay as a family, and Residence Inn by Marriott to find a home away from home. The Marriott brand remains unsullied by all of this, because the "purpose" brands make the job clear. If they had positioned "Courtyard" as a cheaper, lower-quality solution to the same job then it could have sullied the brand of Marriott.
a) Low End Disruptions. These are the ones like the mini steel mills which tend to serve the over served customers
b) New Market Disruptions. These are the ones that address the non-consumers of a product or service by making it more attractive and by improving the performance.
The first type of disruptions target the over served customers while the new has to try and find new customers. The first one is relatively easy while the later one is not so easy.
The authors give three examples of how the nonconsumer market was captured. The first example is of how transistor radios from Sony captured the market over the tube radios from RCA even though the transistors began its life in hearing aid then moved on to low end radio receivers. The low end radio receivers from Sony caught the fancy of the consumers who could not afford the expensive to buy and expensive to maintain tube radios. It was also attractive to carry around your radio. Soon the quality of these radios improved sufficiently enough to beat the tube radios and to drive RCA to shut shop.
The second example that is provided is the advent of angioplasty which is today preferred to an open heart bypass surgery as it is equally effective. Initially angioplasty was suggested only for patients with limited blockages and the process itself was carried out by relatively low end surgeons and not the cardio specialists. Over a period of time it has come to become the dominating technique.
The third example which the authors suggest is something that they are predicting and not something that has happened so far. It is the usage of solar based equipment over electricity dependent equipment. The authors suggest if the makers of solar powered devices target the nonconsumers in Africa and other developing countries there is a potential that they could attract a mass market. This is yet to be seen although there is some traction.
The authors have indicated that most companies shy away from capturing the nonconsumer market and try to make inroads into areas where there are already well established players. The authors suggest that taking on well established players is foolhardiness as they quite entrenched with their customers and it requires a lot of money power to steal the customers from them. One of the established players fail to take notice of the disruptions is that they are so smug in their current profit and the growth rate they feel that any low end disruption is not worth worrying about and when it gets worrisome, the phenomenon called "threat rigidity" sets in. The instinct of threat rigidity is to cease being flexible and to become "command and control" oriented - to focus everything on countering the thread in order to survive. This rigidity ultimately leads to the downfall of the organization. Instead if they see it as an opportunity there are chances that they will succeed in taking the right steps and thrive. As a solution to avoiding this "threat-rigidity" the authors suggest that the first way to get commitment the management is to use the threat as a lever to get resources and funding for the start up of countering the disruptive forces and then slowly present the opportunity and sustain the resources. The example quoted is the reaction of the newspaper publications to online publishing. The first course of action was to publish scanned copies of their newspapers so that their consumers could read the same newspaper online instead of the physical newspaper. Soon they realized the opportunity and spun off companies which would manage the online publications and now most of the publications are comfortable with online publications.
The other suggestion that the authors make is that reaching new markets requires disruptive channels. The example they quote is of how Sony's distribution channel of using discount stores to sell their transistor radios drove out the appliance stores. The appliance stores sold premium goods had a good after sales service channel while the discount stores had no such after sales servicing capability. But the low cost of the goods meant that the consumers did not expect an after sales service.
The other example of a failure that is quoted involves join venture between Intel and SAP which tried to provide lower-priced, easier-to-implement ERP package to the market through the same channel that sold the high end ERP system which required complex implementation and provided high returns. This sales channel completely ignore the low end package as it felt that the returns were not commensurate to the effort that they would put in.
The search for customers like this is not a quixotic quest. These are the kinds of customer that you find when you shape innovative ideas to fit the four elements of pattern of competing against nonconsumption.
Despite how appealing these kind of customers appear to be on paper, the resource allocation process forces the companies, when faced with an opportunity like this, to pursue exactly the opposite kinds of customers: They target customers who already are using a product to which they have become accustomed. To escape this dilemma, managers need to frame the disruption as a threat in order to secure resource commitments, and then switch the framing for the team charged with building the business to be one of a search for growth opportunities. Carefully managing this process in order to focus on these ideal customers can give new growth ventures a solid foundation for future growth.
The four elements that can be used to determine the right kind of customers for nonconsumption market are as follows:
1. 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.
2. These customers will compare the disruptive product to having nothing at all. As a result, they are delighted to but it even though it may not be as good as other products available at high prices to current users with deeper expertise in the original value network. The performance hurdle required to delight such newmarket customers is quite modest.
3. 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. It is the "foolproofedness" that creates new growth by enabling people with less money and training to begin consuming.
4. 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 example given is that of IBM which invented the Personal Computer. For a long time IBM had the largest share of the mainframe market. The manufacturers who manufactured components for the mainframe had lived a miserable, profit-free existence while IBM rolled in profits precisely because they had outsourced the manufacturing of the components. IBM did what it was best at, assembly of the mainframes. When it invented the Personal Computer it adopted a similar strategy and it outsourced the microprocessor manufacturing to Intel and the development of the Operating to Microsoft. The rest, as they say, is history for everyone to see. Since manufacturing of the PC became so commoditized, IBM was superceded by others and it became a loss making venture for IBM.
The authors indicate that the two factors that determine this are the concept of "interdependence" and "modularity". To quote the authors
"The architecture of any product determines its constituent components and subsystems and defines how they must interact - fit and work together - in order to achieve the targetted functionality. The place where any two components fit together is called an interface. Interfaces exist within a product, as well as between stages in the value added chain. E.g., there is an interface between the design and manufacturing, and another between manufacturing and distribution.
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. This architecture may also be deemed to be proprietary.
In contrast, 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 of 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 flexibilty comes at the sacrifice of performance.
For success authors say that in a situation where the product is not yet "good enough" a proprietary architecture helps success as one can optimize the components to perform better and better. But once the product reaches a stage where the product has become too good for its own good, it is time to modularize and hand over the manufacturing of components to others who can manufacture it at a lower cost bringing down the overall cost of the product.
By the time this happens the company should have created another product which it can now take through the same cycle so as to sustain its revenue and profitability.
At the beginning of a ware of new-market disruption, the companies that initially will be most successful will be integrated firms whose architectures and proprietary because the product isn't yet good enough. After a few years of success in performance improvement, those disruptive pioneers themselves become susceptible to hybrid disruption by a faster and more flexible population of nonintegrated companies whose focus gives them lower overhead costs.
For a company that serves customers in multiple tiers of the market, managing the transition is tricky, because the strategy and business model that are required to successfully reach unsatisfied customers in higher tiers are very different from those that are necessary to compete with speed, flexibility, and low cost in lower tiers of market. Pursuing both ends at once and in the right way often requires multiple business units - a topic that we address in the next two chapters.
The authors give the example of the PC assembly market. Some profits stayed with the assembler, while most of it flowed to Microsoft, Intel, the Disk Manufacturers and the DRAM manufacturers. Amongst the Disk Manufacturers IBM was in the forefront as the 3.5" disk manufacturers. The performance of these disks were more than sufficient for the PCs in the 90s. This meant that disk assemblers like Maxtor and Quantum started dominating this field as the profits to be made in these disks dropped to such a level that IBM found it unsustainable. But IBM moved to 2.5" disks which were to be used in notebook computers and these disks had not become as commoditized. Soon the makers of the disk found that improving capacity of the disks and bettering the read write head in the disk will yield more profit. Soon a set of companies which specialized in these two fields came up and provided the desired improvement. This lead to the reduction of profits of the disk assemblers and the head and disk manufacturers started profiting more. In similar lines Bloomberg started off as a company that provided simple data on securities prices, subsequently they integrated forward, automating much of the analytics associated with the security prices. By doing this they enabled a large set of people to access insights which formerly only highly experienced securities analysts could derive. They further integrated forwards by allowing portfolio managers to now execute trades from their terminals over their owned Electronic Communications Network without needing a broker or a stock exchange.
Intel adopted a reverse strategy. They started off as a microprocessor company, but soon found that it would be better if they created integrated mother boards as that would be a larger chunk of the profit and as there was demand for more performance from the motherboards Intel found it easy to grow up the chain to become a board manufacturer in addition to be a microprocessor manufacturer.
The authors highlight once again and say that "core competence" as is used by many managers, is a dangerous inward-looking notion. "Competitiveness is far more about doing what customers value than doing what you think you're good at".
The authors quote the "The Law of Conservation of Attractive Profits" postulated by Chris Rowen. This law states that in the value chain there is a requisite juxtaposition of modular and interdependent architectures, and of reciprocal process of commoditization and de-commditization, 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.
The three key aspects that can enable or become a bottleneck in the development of a disruptive product in an organization are "Resources", "Processes" and "Values".
"Resources" are human resources, equipment, technology, product designs, brands, information, cash and relationship with suppliers, distributors and customers. These tend to be flexible and can be easily transported across boundaries within the organization and also across organizations.
The authors stress that in growing a disruptive product the key is to identify the right manager. The authors go on state that typically when a CEO is looking for somebody to lead a new disruption the person picked up is somebody who has had a string of successes in the past, has been "decisive", has "good communication", has "good people's skill" and is "result oriented". The assumption is that past successes will translate into future successes too.
The authors argue while these skills may count for something these are not the only things that should be considered. They liken the experience that the managers have been through to an education that one has in the schools and colleges. They stress that it is important to understand what the managers have learnt from their past and see if that is good enough and sufficient for them to lead a new disruptive product rather than looking at if they have been successful at what they have attempted to do.
They argue that managers who have been very successful in a stable business unit are likely to have gained skills in sustaining and bettering the business unit. They will be ill-fit in a starting up something new because they have not had experience in doing something like that in the past and the skills required to setup something afresh requires a separate skill set.
As the companies grow the patterns of interaction, coordination, communication and decision making through which they accomplish the tasks in the company are "Processes". These processes will a mix of formal documented processes and a set of informal undocumented processes which are unconsciously followed. These processes would have evolved based on the nature of the tasks that the organization carries out and these would have refined and honed over a period of time and would have reached a stage where anybody following these processes would be able to accomplish the task and the human factor takes a lesser importance in the accomplishment of the task.
Now when a new-growth businesses is to be started the tendency will be to reuse the processes that have been successful so far in running the mainstream business. This more often than not will turn out to be a disability than a capability for the new-growth business. The processes that are good for sustaining and growing an existing business are very unlikely to be suited for a new-growth business. So it is important to come up with the right set of "Processes" for a new-business growth to succeed rather than trying to use the existing processes.
The authors wish to stress that by "Values" they mean more than "Ethical Values". By "Values" they man the standards by which the employees make prioritization decisions - Those by which they judge whether an order is attractive or unattractive, whether a particular customer s is more important or less important than another, whether a idea for a new product is attractive or marginal, and so on.
While Resources and Processes are enablers that define what an organization can do, "Values" are constraints which define what an organization cannot do. E.g. if the structure of the company's overhead costs requires it to achieve a gross profit margins of 40 percent, a powerful value or decision rule will have evolved that will encourage employees not to propose, and senior managers to kill, ideas that promise gross margins below 40 percent.
Typically the values of successful firms get defined in two dimensions, the first one is along the profitability and the second is around the size of the returns or how big is the business. For a large company both these numbers would tend to be on the larger side. For a company with such values, it will be very difficult to launch a disruptive product as these will find it difficult to yield those profit margins and more importantly will not be able to show large revenues in the initial stages.
Given this fact the authors stress that it is important that disruptive business be given the right home where the "Resources", "Processes" and "Values" are conducive to grow such a business are are not bulldozed by the existing "Resources", "Processes" and "Values".
A primary reason successful innovation seems difficult and unpredictable is that firms often employ talented people whose management skills were honed to address stable companies' problems. And often, managers are set to work within processes and values that weren't designed for the new task. Instead of accepting one-size-fits-all policies, if executives will spend time ensuring that capable people work in organizations with processes and values that match the task, they will create major point of leverage in successfully creating new growth.
The authors describe that there are two ways that strategies develop in any organization; the first one is the deliberate strategy and second is the emergent strategy. The first one as the name indicates is the dwell defined consciously defined strategy. The second strategy come based on the day to day experiences of the employees carrying out the tasks. These employees knowingly or unknowingly define these strategies based on day to day challenges that they keep facing.
The authors suggest that the Role of Resource Allocation is a key driver of Strategy Development. They suggest that as the employees take decisions to shuffle the resource allocation, be it cash, or human resources, or equipment, based on the daily situation, a new strategy emerges which transforms and refines the current strategy.
The authors illustrate this by giving example of Intel which manufactured DRAMS and EPROMS and microprocessors. Intel based its resource allocation based on the products that brought the largest profit margins. This was the process that was followed by Intel. Initially DRAMs were the ones that earned the maximum profit, but over a period of time the profit margins of DRAMs dropped due to competition from the Japanes manufacturers. Slowly the managers started allocating more resources to microprocessors. This was despite the fact that Senior management never mandated this and were in fact investing two thirds of the R & D dollars into DRAM business. It was only when crisis the company that the senior management realized their mistake and formally changed their strategy and evolved as a microprocessor company.
The advice that the authors have with respect to strategy is that while it is important to have a strategy for a new growth business, it is important this should not be too rigid. It should be flexible and should flex based on the feedback and the market reaction. The authors quote Mintzberg and Waters "Openness to emergent strategy enables management to act before everything is fully understood - to respond to an evolving reality rather than having to focus on a stable fantasy .... Emergent strategy itself implies learning what works - taking one action at a time in a search for a viable pattern or consistency".
The two reasons why start up fail are; organizations spend money aggressively implementing a deliberate strategy in the nascent stages when the right strategy cannot be known; the second reason is once the strategy becomes known organizations that do not seize deliberate control of resource allocation and focus all investments in executing the race up-market.
To succeed the authors suggest following policies
1. 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 the business.
2. 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.
3. Personally and repeatedly intervene, business by business, exercising judgement about whether the circumstance is such that the business needs to follow an emergent or deliberate strategy making process. CEOs must not leave the choice about strategy process to policy, habit, or culture.
While the all points apply to an established organization the first two apply to a new startup as well.
There are three points of executive leverage in strategy making. The first is to manage the cost structure, or values of the organization, so that orders of disruptive products from ideal customers, can be prioritized. The second is discovery-driven-planning - a disciplined process that accelerates learning what will and won't work. The third is to vigilantly ensure that deliberate and emergent strategy process are being followed in the appropriate circumstances for each business in the corporation. This is a challenge that few executives have mastered, and is one of the most important contributors to innovative failure in established companies.
The authors advice that one should be impatient for profit. This will drive the organization to manage the resources efficiently and hence keep the costs within control. If one is impatient for growth and is patient for profits then one may never hit profits as the resource allocation is unlikely to be optimal given the expected growth. Most large organizations fail to grow a disruptive innovation within themselves because then tend to drive these business towards a fast pace of growth rather than looking at possibly a small but early profit.
The authors describe the steps through which an organization go. This again reflects "The Growth Imperative" outlined in the initial chapter. In the first stage the companies are successful. In the second stage they face Growth Gap which they try to bridge by trying to bring disruptive innovations and put money. In the third stage company starts becoming impatient for growth of this disruptive innovation and now the money that it is putting in becomes bad money for the innovation. In the fourth stage the disruptive innovation experiences losses as it tries to grow without a clear strategy emerging and the executives tolerate losses for some time. In the fifth stage the losses mount and this triggers retrenchment of resources in the disruptive innovation, in effect killing it and a new management is brought in to stop the bleeding.
To succeed the authors suggest to following principles:
1. Launch new growth business regularly even when the core is healthy.
2. Keep dividing the business units so that as the corporation becomes increasingly large, decisions to launch growth ventures continue to be made within organizational units that can be patient for growth because they are small enough to benefit from investing small opportunites.
3. Minimize the use of profit from established business to subsidize losses in new-growth business. Be impatient for profit: There is nothing like a profitability to ensure that a high-potential business can continue to garner the funding it needs, even when corporation's core business turn sour.
The central message of this chapter for those who invest and receive investment can be summed up in a single aphorism: Be patient for growth, not for profit. Because of the perverse dynamics of the death spiral from inadequate growth, achieving growth requires an almost Zen like ability to pursue growth when it is not necessary. The key to finding disruptive footholds is to connect with a job in what initially will be small, nonobvious market segments - ideally, market segments characterized by nonconsumption.
Pressure for early profit keeps investors willing to invest the cash needed to fuel the growth in a venture's asset base. Demanding early profitability is not only good discipline, it is critical to continued success. It ensures that you have truly connected with a job in markets that potential competitors are happy to ignore. As you seek out the early sustaining innovations that realize your growth potential, staying profitable requires that you stay connected with that job. This profitability ensures that you will maintain the support and enthusiasm of the senior management who have staked their reputation, and the employees who have staked their careers, on your success. There is no substitute. Ventures that are allowed to defer profitability never get there.
One point that the authors highlight is that in most organization senior management gets involved only when maqnitude of money at stake is beyond a particular level. It is believed that below this level the lower-level managers can take a decision. The authors state that in most organizations the senior management get answers for the questions that they ask. and sometimes senior management does not know what questiosn need to be asked. Senior people in organizations cannot know much beyond what the managers below them choose to divulge. Worse, when the midlevel managers have been through a few senior management decision cycles, they learn what the numbers must look like in order for senior management to approve proposals, and they learn what information ought not to be presented to senior management because it might "confuse" them. Hence a good portion of middle manager's effort is spent winnowing the full amount of information into the particular subset that is required to win senior approval for projects that middle managers already have decided are important. Initiatives that don't make sense to the middle managers rarely get packaged for the senior people's consideration. SENIOR EXECUTIVES ENVISION THEMSELVES AS MAKING THE BIG DECISIONS, BUT IN FACT THEY MOST OFTEN DO NOT.
The authors stress that since the senior executives cannot participate when decisions are taken, decision making processes that work well without senior attention are critical to success in circumstances of sustaining innovation. It is important to follow the gospel of "driving decisions down to the lowest level", and of "making the lowest level competent".
The authors suggest that the organizations should have "growth engines" embedded in them to be successful in an on going basis. They suggest the following four policies for creation of this growth engine.
1. Start before you need to. Again referring back to the earlier suggestion of not waiting till is really required to grow.
2. Appoint a Senior Manager to shepherd ideas into Appropriate shaping and resource allocation process: This executive should be trained to and empowered to take decisions counter to the current organizational processes when required.
3. Create a team and a Process for shaping ideas: It is important that is a team which will collect the disruptive innovation ideas and run them through the viability process and then if viable help them shape the future of the innovation.
4. Train the troops to identify disruptive ideas: The rank and file of the organization should be trained to watch out for disruptive innovations so that the they can be brought to the notice of the right set of people to be taken forward.
When an established company first undertakes the creation of a disruptive growth business, senior executives need to play the first and second roles. Disruption is a new task, and appropriate processes will not exist to handle much of the required coordination and decision making related to the initial projects. Certain of the mainstream organization's processes need to be pre-empted or broker because they will not facilitate the work that the disruptive team needs to do. To create a growth engine that sustains the corporation's growth for an extended period, senior executives need to play the third role masterfully, because launching new disruptive businesses need to become a rhythmic, recurrent task. This entails repeated training for the employees involved, so that they can instinctively identify potentially disruptive ideas and shape them into business plans that will lead to success. The fourth task, which is to stand astride the boundary between disruptive and mainstream businesses, actively monitoring the appropriate flow of resources, processes and values from the mainstream business into the new one and back again, is the ongoing essence of managing a perpetually growing corporation.
1. Adopt a strategy that will be unappealing to the competitor so that you have a smooth sailing. It should not be attractive enough for the competitor to copy.
2. Address nonconsumption rather than trying to improve something for the existing consumers.
3. If nonconsumptions is not an options try and find overserved customers.
4. Try and find out a way to help the customer do something that she is currently doing more conveniently and inexpensively.
5. Instead of segmenting the based on available data, try and figure out what the customers are trying to achieve and try and help them address that in a simple way.
6. Do not assume that the competition is always going to be the same.
7. Do not pursue modularization prematurely.
8. Do not swayed by an idea because it gels with the "core competency" of the organization. It is important to have resources that can help succeed. The processes that we have should not be an impediment to the development of the new idea. And our existing values should not hamper the development of the new idea.
9. Same questions must be asked about the venture's channels as well. If the channel company's processes, values and their methods and motivations do not gel it can cause the venture to fail.
10. Do not blindly trust the managers that you have trusted in the past. Consider the learning that the manager has been through before deciding who will lead the new venture.
11. Be sure that in the beginning years after a venture is launched, the development team remains convinced that they aren't sure what the best strategy is, in terms of products, customers, and applications. Insist that the team give you a plan to accelerate the emergence of a viable strategy. Call a halt to decisive plans to implement any strategy before there is evidence that it works.
12. Be impatient for profit and patient for growth.
13. Keep the company growing so that you can be patient for growth. Disruption - and competing against nonconsumption in particular - requires a longer runway before a steep ascent is possible.
The Growth Imperative
The second reason he says is that people get carried away by appearances. The example he quotes is that originally people thought that by having wings it will be possible for them to fly. What they did not know is fluid dynamics which is actually the science that helps humans fly today. Similarly companies tend to assume that aping others who succeeded they will also succeed. Instead they should understand the science or reasoning behind the success before attempting what other successful companies are doing.
Many company's today would tend to follow Steve Jobs' example and say I do not want to ask the people what they want, I will give them what they want. A company that blindly follows this technique is bound to fail. They need to understand what the users really want to do.
How can we beat out most powerful competitors?
In the second chapter the authors show how an innovative disruption takes place. The authors say that typically a product or a service initially goes through a phase when it is not sufficiently good for the end users. This is the phase of disruption when companies try to outdo each other and build proprietary models and earn a large profit. Slowly the product or service starts becoming better and better and soon it exceeds the expectations of a certain set of users. The users start getting a feeling that they are being overcharged for the product/service. Under these circumstance if a new product/service is launched which meets the functional and price points of these over served or other unserved customers then disruption of the earlier product or service has begun. The earlier company is to ignore this disruption as it is engrossed in refining its product or service further to suit the needs of its premier customers and it tends not be bothered by the disruptive product or service scrapping away at what it considers low revenue, low profit market from its perspective. Soon this disruptive product or service becomes better. The earlier product or service has reached a revenue plateau and growth becomes difficult. This sends the earlier company into a downward spiral. And the disruptive company now gets into the upward spiral following the same route the earlier one did when it started off.The author goes back to the example quoted in the Innovator's Dilemma of how the mini steel mills upended the Integrated Steel Companies. Initially most of the steel companies were Integrated Steel Companies which were giant installations and could create all types of steel products required from rebars to sheets to beams and the whole lot. When the mini mills were launched they first were capable of making only rebars. The companies that purchased these mini mills made a lot of profit in making rebars as their cost of running the company was much less than the Integrated steel mills. These large mills were glad to let go off the rebar production to these small companies. Soon all the large companies stopped making rebars and the small companies felt in a drop in their profit levels as now they were competing with their peers.]
As a next step the mini mills became capable of producing Bars and Rods. This was again a low margin game for the large manufacturers and they let go off this. It followed the same cycle and soon the smaller companies found themselves in the same low profit situation. They now upgraded themselves to manufacture structural steel and it followed the same cycle and then they upgraded themselves to manufacture sheets which has followed the same route.
In the 70s the Integrated Steel Companies accounted for practically 100% of the steel production in the US. Today they account for only 50% of the output, the rest is produced by the companies using mini mills.
The author highlights that in most cases the executives tend to flee rather than fight when they are faced with a disruption in what they consider "low profit" market in their definition. They tend to concentration on innovation which leads to sustaining their current profit levels.
The authors stress that while it is important to have "sustaining" innovations that will help the sustenance of the current business of an organization, it would be wrong to ignore the disruptive innovations which may appear low margin game from the perspective of the company, but can turn out to be big winners in the long run.
The authors classify disruptions into two types
a) Low End Disruptions. These are the ones like the mini steel mills which tend to serve the over served customers
b) New Market Disruptions. These are the ones that address the non-consumers of a product or service by making it more attractive and by improving the performance.
Summary of the Chapter
Disruption is a theory: a conceptual model of cause and effect that makes it possible to better predict the outcomes of competitive battles in different circumstances. The asymmetries of motivation chronicled in this chapter are natural economic forces that act on all business people, all the time. Historically, these forces almost always have toppled industry leaders when an attacker has harnessed them, because disruptive strategies are predicated upon competitors doing what is in their best and most urgent interest: satisfying their most important customers and investing where profits are most attractive. In a profit-seeking world, this is a pretty good bet.Not all innovative ideas can be shaped into disruptive strategies, however, because the necessary preconditions do not exist; in such situations, the opportunity is best licensed or left to the firms that are already established in the market. On occasion, entrant companies have simply caught the leaders asleep at the switch and have succeeded with a strategy of sustaining innovation. But this is rare. Disruption does not guarantee success: It just helps with an important element in the total formula. Those who create new-growth businesses need to get on the right side of a number of other challenges, to which we will now turn.
What products Customers will want to buy?
This is a question that every business has to keep asking itself time and again. The typical way to answer this question is to do a market survey, look at their consumption patterns of other similar or competing products or ask the audience what kind of product they wish to have then to base the product or service based on the answers to these surveys.The key aspect that the authors point towards in this chapter is that it is not sufficient to know what the customers want, it is to understand what problem are they trying to solve and which will be the best way to solve the problem. The authors cite a very very good example to illustrate this. The case study is about a quick service restaurant that sells milk shakes. This quick service restaurant wished to improve its sales. The first approach by the marketers was to segment the milkshakes based on its attributes and the customers based on their profile and try and find out which category of customers would buy milk shakes. Now they tried to figure out how they could change the milkshakes to satisfy the different profiles of customers. The possible options were to make the milkshakes thicker, more chunkier, or thinner, or less costly or more chocolatier etc. On the face of it, the approach seems fool proof. When implemented it did not yield any results. The sales continued to be flat.
The Restaurant then hired a new set of researchers to look into what can be done to improve the sales. These researchers tried to answer the query "Why are the customers buying the milkshakes? The answer they got was something as follows:
1. In the morning a customer buys a milkshake so that they can drink something on the way to their workplace. They need the milkshake such that it lasts them till they reach their destination which would typically be about half an hour. They were not hungry enough but would be so by the time they have been at work for an hour or two. They needed something that would sustain them till a reasonable lunch time. The container should be such that it is easy to handle in vehicle with one hand and should not create any mess as most of them would be in their work clothes.
2. Most of the other times it was found that the buyers of milkshakes were parents who were buying it for their children as an alternate to junk food. It was also found that in many cases these were dumped half finished as the children could not finish the drink fast enough for their parents to wait or were full by the time they finished it.
This indicated that the milkshakes need to be of two different natures depending on the time of the day and not based on the type of customer who purchased the drink. It needed to be based the "purpose" it was expected to serve. Based on this the restaurant started making thicker milks shakes in the morning and started adding fruit bits in the morning period and later made it lighter and packaged in in a smaller containers to cater to, potentially the same or similar customers, but to serve a different purpose.
Thus it is important to understand the problem that the product or service is to solve and not just the demographics of the people buying them. The same product or service may need to be packaged different depending on the purpose for which the customer is buying it.
The authors go on to say there are four reasons on why the managers fall back on attribute based segmentation of the customers:
1. Fear of Focus: When one is focussing on making a product or service a particular job well, it starts becoming obvious that it cannot be used to address other problems. And when this happens the audience that it can address becomes narrower which in turn means that the growth is going to be limited. So the only way seems to be to pack as many attributes as possible so that it can address a larger and larger audience. While focus helps make the product/service better it is also scary as it may narrow the set of customers who will be interested in the product or service.
2. Demand for Crisp Quantification: Most executives hire market research to streamline resource allocation based on the size of the opportunity, and not to understand how customers and markets work. IT systems gives teh ability to collect, aggregate and summarize data in various ways to help managers make better decisions. Typically these reports show how much if each product is being sold, how profitable each is, which customers are buying which products, and what costs and revenues are associated with servicing each customer. IT systems also report revenues and costs by business units, so that managers can measure the success if the organization for which they have responsibility. When managers look at this data and start building products and services the tendency is to build one-size-fits-all type of products and services. It does not take into account the variety of ways the product/service is being used under different conditions by the customer. The product/service tend to get feature rich which may still not be able to serve the purpose for which the customer is buying the product/service. The basic problem is that managers are fixated on understanding the 'size of the opportunity' rather than the customer.
3. Structure of Retail Channels: Many retail and distribution channels are organized by product categories rather than by the nature of jobs that the customer is trying to address. E.g. to make a shelf a person needs drills, sanders, hammers and saws. When the customer walks into a hardware shop they are looking for drills, sanders, hammers and saws. Now if an inventive company where to come up with a tool which serves as all of the above the retailer will be at a loss on which shelf to put it in. It will not fit either of the shelves that they are accustomed to. Also the customer has not been trained to ask, give me a tool to build a shelf. This limits the innovations to a certain extent.
4. Advertising Economics influence people to target products at customers rather than at circumstances: Advertisements are expensive and every company tries to use a cost effective way of advertising. It seems easier to device a communications strategy and to choose the most cost-effective marketing media if consumer markets are sliced along dimensions such as age, gender, lifestyle, or product category. The same seems true if the marketers slice commercial markets by geography, industry, or size of business. If one were to attempt to communicate to the needs of the customer it can get confusing. E.g. if the quick service restaurant were to advertise to the "office goer" to pick up the thick milkshake in the morning for the commute, and to pick up the "smaller and thinner" milkshake for the kids in the afternoon or evening and to pick up the "hamburger" for a quick lunch, the message can be confusing as the same restaurant is advertising different aspects to the same customer. Also it can end up sullying the brand value of the organization. On way the organizations address this is by creating different brands to indicate and mean different things. One example that the authors quote is that of the Marriott Corporation. They have created a brand architecture which tells the customer to hire a Marriott Hotel when the job is to convene a major business meeting, and to choose a Courtyard by Marriott when the job is to get a clean, quiet place to work into evening. We learned to hire a Fairfield Inn my Marriott when job is to find an inexpensive place to stay as a family, and Residence Inn by Marriott to find a home away from home. The Marriott brand remains unsullied by all of this, because the "purpose" brands make the job clear. If they had positioned "Courtyard" as a cheaper, lower-quality solution to the same job then it could have sullied the brand of Marriott.
Dangers of asking the customer to change jobs
The other aspect that the authors point out in this chapter is that "At a fundamental level, the things that people want to accomplish in their lives don't change quickly. The improvements in a product or service that a customer can utilize in any application or tier of market tend to be quite flat. Given this slow growth of usage of new features, an idea stands little chance of success if it requires customers to prioritize jobs they haven't created about in the past. Customers do not 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 are already trying to do.Summary
Identifying disruptive footholds means connecting with specific jobs that people - your future - customers - are trying to get done in their lives. The problem is that in an attempt to build convincing business cases for new products, managers are compelled to quantify the opportunities they perceive, and the data available to do this are typically case in terms of product attributes or the demographic or psychographic profiles of a given population of potential consumers,. This mismatch between the true needs of consumer and the data that shape most product development efforts leads most companies to aim their innovations at nonexistent targets. The important of identifying these jobs to be done goes beyond simply finding a foothold. Only by staying connected with a given job as improvements are made, and by creating a purpose brand so that customers know what to hire, can a disruptive product stay on its growth trajectory.Who are the best customers for our products?
In this chapter the authors try to give an idea of what kind of customers will be a good base to start with for a disruptive innovation. For this they refer to the earlier chapters where they have outlined the two types of disruptions:a) Low End Disruptions. These are the ones like the mini steel mills which tend to serve the over served customers
b) New Market Disruptions. These are the ones that address the non-consumers of a product or service by making it more attractive and by improving the performance.
The first type of disruptions target the over served customers while the new has to try and find new customers. The first one is relatively easy while the later one is not so easy.
The authors give three examples of how the nonconsumer market was captured. The first example is of how transistor radios from Sony captured the market over the tube radios from RCA even though the transistors began its life in hearing aid then moved on to low end radio receivers. The low end radio receivers from Sony caught the fancy of the consumers who could not afford the expensive to buy and expensive to maintain tube radios. It was also attractive to carry around your radio. Soon the quality of these radios improved sufficiently enough to beat the tube radios and to drive RCA to shut shop.
The second example that is provided is the advent of angioplasty which is today preferred to an open heart bypass surgery as it is equally effective. Initially angioplasty was suggested only for patients with limited blockages and the process itself was carried out by relatively low end surgeons and not the cardio specialists. Over a period of time it has come to become the dominating technique.
The third example which the authors suggest is something that they are predicting and not something that has happened so far. It is the usage of solar based equipment over electricity dependent equipment. The authors suggest if the makers of solar powered devices target the nonconsumers in Africa and other developing countries there is a potential that they could attract a mass market. This is yet to be seen although there is some traction.
The authors have indicated that most companies shy away from capturing the nonconsumer market and try to make inroads into areas where there are already well established players. The authors suggest that taking on well established players is foolhardiness as they quite entrenched with their customers and it requires a lot of money power to steal the customers from them. One of the established players fail to take notice of the disruptions is that they are so smug in their current profit and the growth rate they feel that any low end disruption is not worth worrying about and when it gets worrisome, the phenomenon called "threat rigidity" sets in. The instinct of threat rigidity is to cease being flexible and to become "command and control" oriented - to focus everything on countering the thread in order to survive. This rigidity ultimately leads to the downfall of the organization. Instead if they see it as an opportunity there are chances that they will succeed in taking the right steps and thrive. As a solution to avoiding this "threat-rigidity" the authors suggest that the first way to get commitment the management is to use the threat as a lever to get resources and funding for the start up of countering the disruptive forces and then slowly present the opportunity and sustain the resources. The example quoted is the reaction of the newspaper publications to online publishing. The first course of action was to publish scanned copies of their newspapers so that their consumers could read the same newspaper online instead of the physical newspaper. Soon they realized the opportunity and spun off companies which would manage the online publications and now most of the publications are comfortable with online publications.
The other suggestion that the authors make is that reaching new markets requires disruptive channels. The example they quote is of how Sony's distribution channel of using discount stores to sell their transistor radios drove out the appliance stores. The appliance stores sold premium goods had a good after sales service channel while the discount stores had no such after sales servicing capability. But the low cost of the goods meant that the consumers did not expect an after sales service.
The other example of a failure that is quoted involves join venture between Intel and SAP which tried to provide lower-priced, easier-to-implement ERP package to the market through the same channel that sold the high end ERP system which required complex implementation and provided high returns. This sales channel completely ignore the low end package as it felt that the returns were not commensurate to the effort that they would put in.
Summary
What kind of customers will provide the most solid foundation for future grown? 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 customer, and you want them to need you. You want customers whom you can have all to yourself, protected from the advances of competitors. And you want your customers to be so attractive to those who you work with that everyone in your value network is motivated to corporate in pursuing the opportunity.The search for customers like this is not a quixotic quest. These are the kinds of customer that you find when you shape innovative ideas to fit the four elements of pattern of competing against nonconsumption.
Despite how appealing these kind of customers appear to be on paper, the resource allocation process forces the companies, when faced with an opportunity like this, to pursue exactly the opposite kinds of customers: They target customers who already are using a product to which they have become accustomed. To escape this dilemma, managers need to frame the disruption as a threat in order to secure resource commitments, and then switch the framing for the team charged with building the business to be one of a search for growth opportunities. Carefully managing this process in order to focus on these ideal customers can give new growth ventures a solid foundation for future growth.
The four elements that can be used to determine the right kind of customers for nonconsumption market are as follows:
1. 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.
2. These customers will compare the disruptive product to having nothing at all. As a result, they are delighted to but it even though it may not be as good as other products available at high prices to current users with deeper expertise in the original value network. The performance hurdle required to delight such newmarket customers is quite modest.
3. 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. It is the "foolproofedness" that creates new growth by enabling people with less money and training to begin consuming.
4. 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.
Getting the Scope of Business Right
In this chapter the authors discuss the wont of the companies to outsource what they consider is not their "core competency". The authors argue that while this may be true in some cases, it need not be always true. They point out that while it may truly not be a "core competency" of the company it may be necessary for the company to make it, its "core competency" to maintain a healthy competitiveness the market.The example given is that of IBM which invented the Personal Computer. For a long time IBM had the largest share of the mainframe market. The manufacturers who manufactured components for the mainframe had lived a miserable, profit-free existence while IBM rolled in profits precisely because they had outsourced the manufacturing of the components. IBM did what it was best at, assembly of the mainframes. When it invented the Personal Computer it adopted a similar strategy and it outsourced the microprocessor manufacturing to Intel and the development of the Operating to Microsoft. The rest, as they say, is history for everyone to see. Since manufacturing of the PC became so commoditized, IBM was superceded by others and it became a loss making venture for IBM.
The authors indicate that the two factors that determine this are the concept of "interdependence" and "modularity". To quote the authors
"The architecture of any product determines its constituent components and subsystems and defines how they must interact - fit and work together - in order to achieve the targetted functionality. The place where any two components fit together is called an interface. Interfaces exist within a product, as well as between stages in the value added chain. E.g., there is an interface between the design and manufacturing, and another between manufacturing and distribution.
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. This architecture may also be deemed to be proprietary.
In contrast, 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 of 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 flexibilty comes at the sacrifice of performance.
For success authors say that in a situation where the product is not yet "good enough" a proprietary architecture helps success as one can optimize the components to perform better and better. But once the product reaches a stage where the product has become too good for its own good, it is time to modularize and hand over the manufacturing of components to others who can manufacture it at a lower cost bringing down the overall cost of the product.
By the time this happens the company should have created another product which it can now take through the same cycle so as to sustain its revenue and profitability.
Summary
There are few decisions in building and sustaining a new-growth business that scream more loudly for sound, circumstance-based theory than those addressed in this chapter. When the functionality and reliability of the product are not good enough to meet customers' needs, then the companies that will enjoy significant competitive advantage are those whose product architectures are proprietary and that are integrated across the performance-limiting interfaces in the value chain. When the functionality and reliability become more than adequate, so that speed and responsiveness are dimensions of competition that are not now good enough, then the opposite is true. A population of nonintegrated, specialized companies whose rules of interaction are defined by modular architectures and industry standards holds the upper hand.At the beginning of a ware of new-market disruption, the companies that initially will be most successful will be integrated firms whose architectures and proprietary because the product isn't yet good enough. After a few years of success in performance improvement, those disruptive pioneers themselves become susceptible to hybrid disruption by a faster and more flexible population of nonintegrated companies whose focus gives them lower overhead costs.
For a company that serves customers in multiple tiers of the market, managing the transition is tricky, because the strategy and business model that are required to successfully reach unsatisfied customers in higher tiers are very different from those that are necessary to compete with speed, flexibility, and low cost in lower tiers of market. Pursuing both ends at once and in the right way often requires multiple business units - a topic that we address in the next two chapters.
How to avoid commoditization?
History proves that all products become commoditized over a period of time and nothing much can be done about it. The authors indicate that history also shows that while commoditization is in progress somewhere in the value chain, a reciprocal process of decommodization is at work somewhere else in the value chain. They say that it is important to be able to figure out where in the value is commoditization is in progress and leverage that to reduce costs while at the same time identifying areas where decommoditization is in progress and catch the disruptive wave in that area.The authors give the example of the PC assembly market. Some profits stayed with the assembler, while most of it flowed to Microsoft, Intel, the Disk Manufacturers and the DRAM manufacturers. Amongst the Disk Manufacturers IBM was in the forefront as the 3.5" disk manufacturers. The performance of these disks were more than sufficient for the PCs in the 90s. This meant that disk assemblers like Maxtor and Quantum started dominating this field as the profits to be made in these disks dropped to such a level that IBM found it unsustainable. But IBM moved to 2.5" disks which were to be used in notebook computers and these disks had not become as commoditized. Soon the makers of the disk found that improving capacity of the disks and bettering the read write head in the disk will yield more profit. Soon a set of companies which specialized in these two fields came up and provided the desired improvement. This lead to the reduction of profits of the disk assemblers and the head and disk manufacturers started profiting more. In similar lines Bloomberg started off as a company that provided simple data on securities prices, subsequently they integrated forward, automating much of the analytics associated with the security prices. By doing this they enabled a large set of people to access insights which formerly only highly experienced securities analysts could derive. They further integrated forwards by allowing portfolio managers to now execute trades from their terminals over their owned Electronic Communications Network without needing a broker or a stock exchange.
Intel adopted a reverse strategy. They started off as a microprocessor company, but soon found that it would be better if they created integrated mother boards as that would be a larger chunk of the profit and as there was demand for more performance from the motherboards Intel found it easy to grow up the chain to become a board manufacturer in addition to be a microprocessor manufacturer.
The authors highlight once again and say that "core competence" as is used by many managers, is a dangerous inward-looking notion. "Competitiveness is far more about doing what customers value than doing what you think you're good at".
Summary
These findings have pervasive implications for managers seeking to build successful new-growth businesses and for those seeking to keep current businesses robust. The power to capture attractive profits will shift to those activities in the value chain where the immediate customer is not yet satisfied with the performance of available products. It is in these stages that complex, interdependent integration occurs - activities that create steeper scape economics and enable greater differentiabiltiy. Attractive returns shift away from activities where the immediate customer is more than satisfied, because it is here that standard, modular integration occurs. We hope that in describing this process in these terms, we might help managers to predict more accurately where new opportunities for profitable growth through proprietary products will emerge. These transitions begin on the trajectories of improvement where disruptors are at work, and proceed upmarket tier by tier. This process creates opportunities for new companies that are integrated across these not-good-enough interfaces to thrive, and to grow by "eating their way up" from the back end of an end-use system. Managers of industry-leading businesses need to watch vigilantly in the right places to spot these trends as they being because the process of commoditization and de-commoditization both begin at the periphery and the core.The authors quote the "The Law of Conservation of Attractive Profits" postulated by Chris Rowen. This law states that in the value chain there is a requisite juxtaposition of modular and interdependent architectures, and of reciprocal process of commoditization and de-commditization, 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.
Is your organization capable of disruptive growth?
In this chapter the authors discuss about how to create an atmosphere in the organization such that the employees can come up with disruptive products and these can be discovered, grown and sustained in the organization. They begin the chapter by stating that many innovations do not fail because of some fatal technological flaw or because the market isn't ready, but because the responsibility to build these businesses is given to managers or organizations whose capabilities aren't up to the task.The three key aspects that can enable or become a bottleneck in the development of a disruptive product in an organization are "Resources", "Processes" and "Values".
"Resources" are human resources, equipment, technology, product designs, brands, information, cash and relationship with suppliers, distributors and customers. These tend to be flexible and can be easily transported across boundaries within the organization and also across organizations.
The authors stress that in growing a disruptive product the key is to identify the right manager. The authors go on state that typically when a CEO is looking for somebody to lead a new disruption the person picked up is somebody who has had a string of successes in the past, has been "decisive", has "good communication", has "good people's skill" and is "result oriented". The assumption is that past successes will translate into future successes too.
The authors argue while these skills may count for something these are not the only things that should be considered. They liken the experience that the managers have been through to an education that one has in the schools and colleges. They stress that it is important to understand what the managers have learnt from their past and see if that is good enough and sufficient for them to lead a new disruptive product rather than looking at if they have been successful at what they have attempted to do.
They argue that managers who have been very successful in a stable business unit are likely to have gained skills in sustaining and bettering the business unit. They will be ill-fit in a starting up something new because they have not had experience in doing something like that in the past and the skills required to setup something afresh requires a separate skill set.
As the companies grow the patterns of interaction, coordination, communication and decision making through which they accomplish the tasks in the company are "Processes". These processes will a mix of formal documented processes and a set of informal undocumented processes which are unconsciously followed. These processes would have evolved based on the nature of the tasks that the organization carries out and these would have refined and honed over a period of time and would have reached a stage where anybody following these processes would be able to accomplish the task and the human factor takes a lesser importance in the accomplishment of the task.
Now when a new-growth businesses is to be started the tendency will be to reuse the processes that have been successful so far in running the mainstream business. This more often than not will turn out to be a disability than a capability for the new-growth business. The processes that are good for sustaining and growing an existing business are very unlikely to be suited for a new-growth business. So it is important to come up with the right set of "Processes" for a new-business growth to succeed rather than trying to use the existing processes.
The authors wish to stress that by "Values" they mean more than "Ethical Values". By "Values" they man the standards by which the employees make prioritization decisions - Those by which they judge whether an order is attractive or unattractive, whether a particular customer s is more important or less important than another, whether a idea for a new product is attractive or marginal, and so on.
While Resources and Processes are enablers that define what an organization can do, "Values" are constraints which define what an organization cannot do. E.g. if the structure of the company's overhead costs requires it to achieve a gross profit margins of 40 percent, a powerful value or decision rule will have evolved that will encourage employees not to propose, and senior managers to kill, ideas that promise gross margins below 40 percent.
Typically the values of successful firms get defined in two dimensions, the first one is along the profitability and the second is around the size of the returns or how big is the business. For a large company both these numbers would tend to be on the larger side. For a company with such values, it will be very difficult to launch a disruptive product as these will find it difficult to yield those profit margins and more importantly will not be able to show large revenues in the initial stages.
Given this fact the authors stress that it is important that disruptive business be given the right home where the "Resources", "Processes" and "Values" are conducive to grow such a business are are not bulldozed by the existing "Resources", "Processes" and "Values".
Summary
Managers whose organizations are confronting opportunities to grow must first determine that they first have the people and other resources required to succeed. They then need to ask two further questions: Are the processes by which work habitually gets done in the organization appropriate for this new project? And will the values of the organization give this initiative the priority it needs? Established companies can improve their odds for success in disruptive innovation if they use functionally oriented and heavy weight teams where each is appropriate, and if they commercialize sustaining innovations in mainstream organizations, but put disruptive ones in autonomous organizations.A primary reason successful innovation seems difficult and unpredictable is that firms often employ talented people whose management skills were honed to address stable companies' problems. And often, managers are set to work within processes and values that weren't designed for the new task. Instead of accepting one-size-fits-all policies, if executives will spend time ensuring that capable people work in organizations with processes and values that match the task, they will create major point of leverage in successfully creating new growth.
Managing the Strategy Development Process
In this chapter the authors describe how organizations can come up with the right strategy when building a new business. The authors argue that while executives are obsessed with finding the right strategy, they can actually wield greater leverage by managing the process used to develop the strategy - by making sure that the right process is used in the right circumstances.The authors describe that there are two ways that strategies develop in any organization; the first one is the deliberate strategy and second is the emergent strategy. The first one as the name indicates is the dwell defined consciously defined strategy. The second strategy come based on the day to day experiences of the employees carrying out the tasks. These employees knowingly or unknowingly define these strategies based on day to day challenges that they keep facing.
The authors suggest that the Role of Resource Allocation is a key driver of Strategy Development. They suggest that as the employees take decisions to shuffle the resource allocation, be it cash, or human resources, or equipment, based on the daily situation, a new strategy emerges which transforms and refines the current strategy.
The authors illustrate this by giving example of Intel which manufactured DRAMS and EPROMS and microprocessors. Intel based its resource allocation based on the products that brought the largest profit margins. This was the process that was followed by Intel. Initially DRAMs were the ones that earned the maximum profit, but over a period of time the profit margins of DRAMs dropped due to competition from the Japanes manufacturers. Slowly the managers started allocating more resources to microprocessors. This was despite the fact that Senior management never mandated this and were in fact investing two thirds of the R & D dollars into DRAM business. It was only when crisis the company that the senior management realized their mistake and formally changed their strategy and evolved as a microprocessor company.
The advice that the authors have with respect to strategy is that while it is important to have a strategy for a new growth business, it is important this should not be too rigid. It should be flexible and should flex based on the feedback and the market reaction. The authors quote Mintzberg and Waters "Openness to emergent strategy enables management to act before everything is fully understood - to respond to an evolving reality rather than having to focus on a stable fantasy .... Emergent strategy itself implies learning what works - taking one action at a time in a search for a viable pattern or consistency".
The two reasons why start up fail are; organizations spend money aggressively implementing a deliberate strategy in the nascent stages when the right strategy cannot be known; the second reason is once the strategy becomes known organizations that do not seize deliberate control of resource allocation and focus all investments in executing the race up-market.
To succeed the authors suggest following policies
1. 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 the business.
2. 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.
3. Personally and repeatedly intervene, business by business, exercising judgement about whether the circumstance is such that the business needs to follow an emergent or deliberate strategy making process. CEOs must not leave the choice about strategy process to policy, habit, or culture.
While the all points apply to an established organization the first two apply to a new startup as well.
Summary
Simply seeking to have the right strategy doesn't go deep enough. The key is manage the process by which strategy is developed. Strategic initiatives enter the resources allocation process from two sources - deliberate and emergent. In circumstances of sustaining innovation and certain low-end disruptions, the competitive landscape is clear enough that strategy be deliberately conceived and implemented. In the nascent stages of a new-market disruption, however it is almost impossible to get the details of strategy right. Rather than executing a strategy, managers in this circumstance need to implement a process through which a viable strategy can emerge.There are three points of executive leverage in strategy making. The first is to manage the cost structure, or values of the organization, so that orders of disruptive products from ideal customers, can be prioritized. The second is discovery-driven-planning - a disciplined process that accelerates learning what will and won't work. The third is to vigilantly ensure that deliberate and emergent strategy process are being followed in the appropriate circumstances for each business in the corporation. This is a challenge that few executives have mastered, and is one of the most important contributors to innovative failure in established companies.
There is Good Money and There is Bad Money
The authors stress in this chapter that neither money from within the organization or from a venture capitalist is good or bad. It is only the circumstances that make the money good or bad. The expectations of the investor plays a big role in determining if the money is good or bad. If the investor drives the new business to grow fast then the money is a bad money. If the investor drives the new business towards early profits then it is good money. Note that profits do not necessarily mean growth and vice-versa.The authors advice that one should be impatient for profit. This will drive the organization to manage the resources efficiently and hence keep the costs within control. If one is impatient for growth and is patient for profits then one may never hit profits as the resource allocation is unlikely to be optimal given the expected growth. Most large organizations fail to grow a disruptive innovation within themselves because then tend to drive these business towards a fast pace of growth rather than looking at possibly a small but early profit.
The authors describe the steps through which an organization go. This again reflects "The Growth Imperative" outlined in the initial chapter. In the first stage the companies are successful. In the second stage they face Growth Gap which they try to bridge by trying to bring disruptive innovations and put money. In the third stage company starts becoming impatient for growth of this disruptive innovation and now the money that it is putting in becomes bad money for the innovation. In the fourth stage the disruptive innovation experiences losses as it tries to grow without a clear strategy emerging and the executives tolerate losses for some time. In the fifth stage the losses mount and this triggers retrenchment of resources in the disruptive innovation, in effect killing it and a new management is brought in to stop the bleeding.
To succeed the authors suggest to following principles:
1. Launch new growth business regularly even when the core is healthy.
2. Keep dividing the business units so that as the corporation becomes increasingly large, decisions to launch growth ventures continue to be made within organizational units that can be patient for growth because they are small enough to benefit from investing small opportunites.
3. Minimize the use of profit from established business to subsidize losses in new-growth business. Be impatient for profit: There is nothing like a profitability to ensure that a high-potential business can continue to garner the funding it needs, even when corporation's core business turn sour.
Summary
The experience and wisdom of the men and women who invest in and then oversee the building of a growth business are always important, in every situation. Beyond that, however, the context from which the capital is invested has a powerful influence on whether the start-up capital that they provide is good or bad for growth. Whether they are corporate capitalists or venture capitalists, when their investing context shifts to one that demands that their ventures become very big very fast, the probability that the venture will succeed falls markedly. And when capitalists of either sort follow sound theory - whether consciously or by intuition or happenstance - they are much more likely to succeed.The central message of this chapter for those who invest and receive investment can be summed up in a single aphorism: Be patient for growth, not for profit. Because of the perverse dynamics of the death spiral from inadequate growth, achieving growth requires an almost Zen like ability to pursue growth when it is not necessary. The key to finding disruptive footholds is to connect with a job in what initially will be small, nonobvious market segments - ideally, market segments characterized by nonconsumption.
Pressure for early profit keeps investors willing to invest the cash needed to fuel the growth in a venture's asset base. Demanding early profitability is not only good discipline, it is critical to continued success. It ensures that you have truly connected with a job in markets that potential competitors are happy to ignore. As you seek out the early sustaining innovations that realize your growth potential, staying profitable requires that you stay connected with that job. This profitability ensures that you will maintain the support and enthusiasm of the senior management who have staked their reputation, and the employees who have staked their careers, on your success. There is no substitute. Ventures that are allowed to defer profitability never get there.
Role of Senior Executives in Leading New Growth
The authors state that the key role that Senior executives should play is to help the new business grow. They need to clear any processes or resource impediments standing in the way of the teams trying to grow a disruptive innovation. They should be shielded from the revenue demands of the market. The senior executives should also be responsible for ensuring that emerging good practices in the disruptive innovation is being applied to the rest of the organization.One point that the authors highlight is that in most organization senior management gets involved only when maqnitude of money at stake is beyond a particular level. It is believed that below this level the lower-level managers can take a decision. The authors state that in most organizations the senior management get answers for the questions that they ask. and sometimes senior management does not know what questiosn need to be asked. Senior people in organizations cannot know much beyond what the managers below them choose to divulge. Worse, when the midlevel managers have been through a few senior management decision cycles, they learn what the numbers must look like in order for senior management to approve proposals, and they learn what information ought not to be presented to senior management because it might "confuse" them. Hence a good portion of middle manager's effort is spent winnowing the full amount of information into the particular subset that is required to win senior approval for projects that middle managers already have decided are important. Initiatives that don't make sense to the middle managers rarely get packaged for the senior people's consideration. SENIOR EXECUTIVES ENVISION THEMSELVES AS MAKING THE BIG DECISIONS, BUT IN FACT THEY MOST OFTEN DO NOT.
The authors stress that since the senior executives cannot participate when decisions are taken, decision making processes that work well without senior attention are critical to success in circumstances of sustaining innovation. It is important to follow the gospel of "driving decisions down to the lowest level", and of "making the lowest level competent".
The authors suggest that the organizations should have "growth engines" embedded in them to be successful in an on going basis. They suggest the following four policies for creation of this growth engine.
1. Start before you need to. Again referring back to the earlier suggestion of not waiting till is really required to grow.
2. Appoint a Senior Manager to shepherd ideas into Appropriate shaping and resource allocation process: This executive should be trained to and empowered to take decisions counter to the current organizational processes when required.
3. Create a team and a Process for shaping ideas: It is important that is a team which will collect the disruptive innovation ideas and run them through the viability process and then if viable help them shape the future of the innovation.
4. Train the troops to identify disruptive ideas: The rank and file of the organization should be trained to watch out for disruptive innovations so that the they can be brought to the notice of the right set of people to be taken forward.
Summary
Senior executives need to play four roles in managing innovation. First, they must actively coordinate action and decisions when no processes exist to do the coordination. Second they must break the grip of established processes when a team is confronted with new tasks that require new patterns of communication, coordination and decision making. Third, when recurrent activities and decisions emerge in an organization, executives must create processes to reliably guide and coordinate the work of employees involved. And fourth, because recurrent cultivation of new disruptive growth business entails the building and maintenance of multiple simultaneous processes and business models within the corporation, senior executives need to stand astride the interface of those organisations - to ensure that useful learning from the new growth business flows back into the mainstream, and to ensure that the right resources, processes, and values are always being applied in the right situation.When an established company first undertakes the creation of a disruptive growth business, senior executives need to play the first and second roles. Disruption is a new task, and appropriate processes will not exist to handle much of the required coordination and decision making related to the initial projects. Certain of the mainstream organization's processes need to be pre-empted or broker because they will not facilitate the work that the disruptive team needs to do. To create a growth engine that sustains the corporation's growth for an extended period, senior executives need to play the third role masterfully, because launching new disruptive businesses need to become a rhythmic, recurrent task. This entails repeated training for the employees involved, so that they can instinctively identify potentially disruptive ideas and shape them into business plans that will lead to success. The fourth task, which is to stand astride the boundary between disruptive and mainstream businesses, actively monitoring the appropriate flow of resources, processes and values from the mainstream business into the new one and back again, is the ongoing essence of managing a perpetually growing corporation.
Passing the Baton
In the last chapter the authors summarize their advice in the following points:1. Adopt a strategy that will be unappealing to the competitor so that you have a smooth sailing. It should not be attractive enough for the competitor to copy.
2. Address nonconsumption rather than trying to improve something for the existing consumers.
3. If nonconsumptions is not an options try and find overserved customers.
4. Try and find out a way to help the customer do something that she is currently doing more conveniently and inexpensively.
5. Instead of segmenting the based on available data, try and figure out what the customers are trying to achieve and try and help them address that in a simple way.
6. Do not assume that the competition is always going to be the same.
7. Do not pursue modularization prematurely.
8. Do not swayed by an idea because it gels with the "core competency" of the organization. It is important to have resources that can help succeed. The processes that we have should not be an impediment to the development of the new idea. And our existing values should not hamper the development of the new idea.
9. Same questions must be asked about the venture's channels as well. If the channel company's processes, values and their methods and motivations do not gel it can cause the venture to fail.
10. Do not blindly trust the managers that you have trusted in the past. Consider the learning that the manager has been through before deciding who will lead the new venture.
11. Be sure that in the beginning years after a venture is launched, the development team remains convinced that they aren't sure what the best strategy is, in terms of products, customers, and applications. Insist that the team give you a plan to accelerate the emergence of a viable strategy. Call a halt to decisive plans to implement any strategy before there is evidence that it works.
12. Be impatient for profit and patient for growth.
13. Keep the company growing so that you can be patient for growth. Disruption - and competing against nonconsumption in particular - requires a longer runway before a steep ascent is possible.
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