Summarized theories that can guide managers who need to grow new business with predictable success become the disruptors rather than the disruptees - and ultimately kill the well-run, established competitors.
Achieving and sustaining growth for a business
- Unpredictable - managers must be able to manage uncertainty
- Do not try to predict what individual might do
- Focus on understanding the forces that act on the managers
-predictable forces when building a business
- The growth markets of tomorrow are small today
- Theory - contingent statements of what causes what and why
- use the right theory for the situation
- a sound theory can remove many causes of failure
How theories are built
- Describe the phenomenon that we wish to understand
- Classify the phenomenon into categories
-highlight the most meaningful differences in complex phenomena
- Articulate a theory to assert what causes the phenomenon to occur, and why
- must also show how it might result in different outcomes
Getting the categories right
- Cannot use the same remedies that worked for other successes
- assertions of actions that lead to results are correlation, not causality
Use theories to make decisions, trusting that their predictions will be applicable and reliable, given the circumstances that they are in
Resource-rich, large companies
- Committing a large number of resources bears little relationship to the outcome
- Conservative and ineffective in exploiting new technology
- making better products that can be sold for more money to attract customers - incumbents prevail
- commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customer - entrants beat the incumbents
- greatly increase the odds of competitive success.
The best way for upstarts to attack established competitors is to disrupt them
- few businesses are disruptive in nature
- strategize an idea into a plan and then implement it
Innovations are sometimes more than the consumer can use
The pace of technological improvements is almost always more than the customer's ability to use it
An established company with products that are on target with today's mainstream customers will probably overshoot those customers needs in the future
- because they try to make better products to sell for higher profits to not-yet-satisfied customers in the more demanding tiers
- making a better product that they can sell for a higher profit margin to best customers
- target demanding, high-end customers with better performance than what was previously available.
- incremental year-by-year improvements that all good companies grind out
- established competitors almost always win
- don't attempt to bring better products to established customers in existing markets
- introduce products and services that are not as good as currently available products
- in a simpler, more convenient, and less expensive way
- this appeals to new or less-demanding customers
- industry leader resource allocation supports sustaining innovations. They do not revert to making lower-end products or defend the loss of them.
Disruption at work
- attack the easy market
- lower prices than the bigger company
- big company stops producing 'that'
- the mini company now has that market
- prices collapse to break-even instead of profitable
- the reward for victory is the end of profit
- innovate to the next easy market
- beats big competitors because they get out of the way. They flee rather than fight for that market
Technology - process that any company uses to convert inputs of labor, materials, capital, energy, and information into outputs of greater value.
A sustaining technology exp: The Internet for Dell Computers
- a focused new company can develop a new product without conflicts and distractions of an established company.
- after established as a better product it's best to sell out to the established company
- but if you attempt to enter and make a better product the established company is motivated to fight
Do not pursue an idea for product or business
- if it appears disruptive to established companies but might represent a sustainable improvement for others
- define an opportunity that is disruptive to all established players
- do not pick a fight you won't win.
To create new-growth business
- Target products and markets that the established companies are motivated to ignore or run away from.
- So much more affordable to own and simpler to use that they enable a whole new population of people to begin owning and using the product, and to do so in a more convenient setting.
- The initial customers are new consumers - they had not owned or used the prior generation of products or services.
The Disruptive Innovation
- Doesn't invade the mainstream market
- Pulls customers out of the mainstream value market
- Because it is more convenient for these customers to use the new product.
- the incumbent leaders feel no pain and little threat until the disruption is in its final stages.
- the first stages actually feel good to the incumbent
- they move up-market into their sustaining innovations
- losing low-margin revenues
- but gaining higher-margin revenues from their up-market
- Start at the low end of the original or main-stream value network
- Do not create new markets - unless they enable new customers to enter
- Focus on the least attractive of the established firm's customers
- Induces incumbents to ignore the attackers and later flee the attack
- competing against discounters at those levels would send margin too low to bother
- disruptors in one generation become disruptees later.
Initial sustaining innovations could be shaped into disruptive business plans
- Are there people who have not had the money, equipment, or skill to do this for themselves, and have gone without it, or had to pay for expertise?
- Is there an inconvenient centralized location that can be eliminated?
Low-end disruption can be possible if
- customers who would purchase less but good enough performance if cheaper?
- can a business model be created to earn profits at discount prices?
- innovations are improvements that reduce overhead cost
- The innovation has to disrupt all of the incumbent firms in the industry
Who are the best customers for our products?
- which initial customer are most likely to become the solid foundation upon which we can build a successful growth business
- and how should we reach them
New-Market customer - nonconsumers
- innovation that enables a larger population of people who previously lacked the money or skill now to begin buying and using a product and doing the job for themselves
- consistent pattern regardless of the type of industry or the time in history
non-consumers and non-consumption
- type of situation, where the job needs to get done but a good solution historically has been beyond reach
- available products are too expensive or too complicated
- inconvenient, expensive or unsatisfying ways to get a job done
- competing against non-consumption
Extracting growth from non-consumption
- 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
- Customers will compare the disruptive product to having nothing at all. It may not be as good as other products available at high prices to current users with deeper expertise in the original value network. Modest performance hurdle.
- Technology that enables the disruption might be quite sophisticated, but made out to be simple, convenient, and foolproof.
-Disruptive innovation creates a new value network. Purchased through new channels and used at new venues.
Disruptions fit this pattern and succeed because the established competitors view the entrants in the emerging markets as irrelevant to their well-being.
- it does not affect demand in the mainstream market for some time
- think they have sensed the threat and are responding
- wrong response - invest money trying to advance technology enough to please the existing customers
- force disruptive technology to compete on a sustaining basis
What makes competing against non-consumption so hard?
- companies do the opposite
- compete against consumption and try to supplant established products, well-entrenched companies
Threats Vs Opportunities
- become command and control orientated - focus on countering the threat
- frame as a threat gets resource allocation
How to get commitment and flexibility
- get top level commitment by framing as a threat
- autonomous organization takes it on as an opportunity or they will lack flexibility or commitment.
It is a mistake to promise big numbers in the future for resources in the present.
- Markets whose size can be substantiated are those that exist. Innovations don't fit in an existing market.
- If results fall short of projection, resources get cut
Allocate resources that fit the pattern, not numerical rules.
Doesn't matter what your company does best today
Need to ask
- what do we need to master today, and in the future
Integrate when products are not good enough
Outsource when products are more than good enough
Product architecture - determines its constituent components and subsystems and defines how they must interact in order to achieve the targeted functionality.
Interface - The place where any two components fit together
- design and manufacturing
- manufacturing and distribution
- one part cannot be created independently of the other part
- same organization must simultaneously develop both of the components in order to develop either component
- optimized performance
- fit and work together in well understood and highly defined ways
- doesn't matter who makes the components as long as they meet the specifications
- too many degrees of design freedom away from engineers so they cannot optimize performance
- can prosper by outsourcing and supplying just one element
Performance surplus - customers are happy to accept improved products but they're unwilling to pay a premium price to get them.
Vertical integration - combination of two or more stages of production
Predictable progression from integration to modularization
- The pace of technological improvement improves faster than the ability of customers to utilize it.
- Companies have to compete differently - customers do not pay a premium for further improvements so suppliers get comfortable in the attractive margin area.
- Companies need to be fast a responsive so they evolve from proprietary and interdependent toward modular.
- Modularity disintegrates the industry allowing non integrated firms to out compete the dominant companies.
The modular model gradually becomes more dominant.
Companies will prosper when performance is not good enough to what customer require at the next stage of value addition.
In order for a firm to procure something from a supplier to sell it to a customer
- Specifiability - Both suppliers and customers need to know which attributes of the component are crucial to the operation of the product system and which are not
- Verifiability - Must be able to measure those attributes so they can verify that the specifications have been met.
- Predictability - Cannot be any poorly understood or unpredictable interdependencies across the interface
When the functionality and reliability of a product are not good enough to meet customers' needs, then the companies that will have competitive advantage are those that have proprietary architecture
When functionality and reliability become more than adequate nonintegrated, modular architecture firms have the advantage.
How to avoid commoditization
Mechanical and microelectronic marvels are commodified - exp cd player
Companies that position themselves at a spot in the value chain where performance is not yet good enough will capture the profit.
They design and assemble the not-good-enough end-use products
- proprietary products
- strong cost advantages
- high entry barriers
- interdependent, proprietary architecture of their products makes differentiation straightforward.
- steep economies of scale give larger competitors strong cost advantages and create formidable entry barriers against new competitors
Circumstances change when dominant profitable companies overshoot what their mainstream customers can use
- customers will not pay even higher prices for products they already thought too good
- when performance is determined not by you but subsystems from suppliers
Need to detect when commoditization and de-commoditization begin
- Company has proprietary architecture on a product that comes closest to satisfying customers' needs
- To keep ahead of competitors they eventually overshoot the functionality customers can utilize
- Precipitates a change in the basis of competitors
- Starts evolution toward modular architectures
- Facilitates the dis-integration of the industry
- makes it difficult to differentiate performance or cost of product against competitors - cause they now have access to same components and assemblage
A company in more-than-good-enough circumstances can't win
- Disruption will steal its markets
- or Commoditization will steal its profits
Must find new place on the value chain to earn attractive profits
Process of de-commoditization is initiated
- has ability to earn lots of money where profits were hard to attain in the past
Formally victorious disruptors now compete against equally low-cost disruptors who are assembling the same modular components procured from a common supplier base
- only subsistence levels of profit remain
- a low cost strategy only works when there are higher-cost competitors left in the market
To keep profits modular disruptors
- must find the best performance-defining components
Reciprocal process of de-commoditization
- as soon as high-cost suppliers of proprietary products are gone, must move up-market to take them on again
- performance-defining subsystems determine how fast they can move up-market
- competition among subsystem suppliers causes designs that are proprietary and interdependent
- leading subsystem providers sell differentiated, proprietary products with attractive profits
- begins the next cycle of commoditization and de-commoditization
Many firms don't see this cycle and miss the opportunity to move where the money will be.
Investor pressure to increase returns on assets causes them to not go where the profits will be.
- cannot improve ROA because can't differentiate or produce produce at a lower cost than competitors.
- can only shrink assets
Asymmetric motivation - component supplier is motivated to integrate forward into the very pieces of value-added activity that the modular assembler is motivated to get out of.
Competitiveness is far more about doing what customers value than doing what you think you're good at.
Attractive returns shift away from activities where the immediate customer is more than satisfied, because it is there that standard, modular integration occurs.
When modularity and commoditization cause attractive profits to disappear at tone stage in the value chain, the opportunity to earn attractive profits with proprietary product will usually emerge at a adjacent stage.
Is your organization capable of disruptive growth?
- People or things - are visible and flexible
- Cash, information, technology, designs, brands, equipment
- Managers are often the cause of failure
- Important to have been through the challenges in the past even if they were failures - recovering from mistakes help to bring better results next time.
- interaction, coordination, communication, and decision making
- how products are developed and made and the methods by which procurement, market research, budgeting, employee development and compensation, and resource allocation are accomplished.
- Formal or informal - explicitly defined, visibly documented, and consciously followed OR habitual routines that have evolved over time.
- defines how an organization transforms inputs into things of greater value.
- Standards by which employees make prioritization decisions
- Employees must prioritize those things that help the company to make money
- Constraints - they define what an organization cannot do (cannot pursue ideas that would...)
- Change as they migrate up-market
- With success businesses lose the capability to enter small emerging markets
The Role of Senior Executive in Leading New Growth
Is it possible to perpetuate disruptive growth without continuous time and effort? Yes!
Main jobs of senior executives
- short-term - determine the corporation's resources that should be imposed on disruptive growth or mainstream business
- long-term - lead the process of the disruptive growth engine (capability of repeatedly launching successful growth business.
- perpetual - sense when circumstances are changing and to teach others to recognize these signals
Managing innovation for senior executives
- actively coordinate action and decisions when no processes exist
- break the grip of established processes for teams confronted with new tasks
- create processes to streamline recurrent activities and decisions
- stand astride of the multiple simultaneous processes and business models to ensure learning flows back into the mainstream.
Be sure the right resources, processes, and values are always being applied in the right situation.
Summary of advice to executive who seek solutions to the innovator's dilemma
- Never say yes to a strategy that targets customers and markets that look attractive to an established competitor
- If the target customers are already using pretty good products, find a way to compete against non-consumption
- If there are no non-consumer available, ask your team to explore either a low-end disruption is feasible
- Terminate and send the team back if they ever use the phrase - If we can just get the customer to... Do not wish against customers' manifest priorities.
- Do not let the team focus on market segments that mirror you own boundaries. Find customers that are trying to get things done.
- Don't assume competition won't change. Look at what the low end is doing to see the change.
- You will struggle to succeed if your product or service not yet good enough. It is better to develop competencies where money will be made in the future than to cling to skills that made you successful in the past.