Book review: The Innovator's Dilemma

I thought I’d share about a book I just finished reading… which I found memorable mainly because it provides a simple framework to understand what - at first look - seems to all of us working in big companies just corporate politics against common sense.

The book is “The Innovator’s Dilemma”, by Clayton Christensen.

What about it?

TL;DR successfull, well run companies that dominates industries and are on a trajectory of sustaining innovation (i.e. continuously improve their products) will inevitably be disrupted by new entrants, simply because the organizational processes (prioritization and resource allocation, cost structure, growth needs) that made them so successful in the current market, prevent them from entering newly created and less profitable ones.

Tell me more

Three aspects of it:

1. Big companies that dominate markets need very big opportunities to ‘get excited’… a 10M dollars newly created market is exciting to a startup, not at all to a conglomerate with billion-dollars yearly revenue
2. Big companies usually have very structured processes that demand an opportunity to be sized, financial returns to be quantified, before an investment is made.
   As such, they are not designed to invest in disruptive innovations that create new markets, as such markets can’t be sized because they do not yet exist
3. Even if #1 and #2 can be overcome, the new opportunity - to have a chance to be successful - should be assigned to an independent business unit or spin off.
   If that’s not the case, existing processes will impose a ‘cost’ structure (‘cost’ not only in terms of investment $$$, but also in risk appetite and speed to execute) that impede successful execution of the new opportunity.

Now we know the trick, so, problem solved?

Yes and no. Although the above theory is explained very clearly, a number of examples are made during the book - drawing from different industries - that shows those at play are powerful forces.

The curse of seeking higher margins

By looking at the industries that have been analyzed, you see a trend in that companies are not realizing when they overshoot the functionality threshold while their sustaining innovation is no longer so valuable to the customers to command higher prices.

Such companies still have corporate, high-value profitable customers, willing to pay a premium for their sustaining innovation. This is kind of blinding them: since revenue is not falling, they do not realize that customers are contented with a lower-performance product, which other companies - new entrants to the market - can provide at a lower marging, and hence at lower cost.

In the quest for profitability (higher prices, higher margins and higher volumes), they disregard the lower end of the market, allowing competitors to prosper.

Is there hope, then?

Yes there is. The book also look at a few (way fewer 🙂) examples where incumbent companies successfully managed to enter and dominate a new market againts disruptors.
The playbook to do so was:

1. address the right value network with the right product - sell a product that is good enough (not more, but less is ok at the beginning) at a price that customers are willing to pay for. These may not be your existing customers!! (they usually aren’t).
   Do a lot to stakeholder management to ease their fears of cannibalization.

2. do it in a smaller organization - a department or a spin off, but small enough that people are incentivized to pursue opportunities that are too small for the parent company.

   • be independent from the main org when it comes to resource allocation - you don’t want to get into the yearly budget cycle, competing for funding with other projects that, by definition, align more closely to what the parent org perceive as “bringing value”. As the author clearly explains:
     

   I want my organization’s customers to answer the question of whether we should be in the business. I don’t want to spend my precious managerial energy constantly defending our existence to efficiency analysts in the mainstream.

3. iterate - this doesn’t require explanation… release MVP, iterate quickly.
   Your initial idea on what the market will pay for is most likely wrong… hence, any business plan you create should be plan for learning rather than plan for executing a preconceived strategy.

4. use the resources of the main org, but DO NOT leverage its processes - for two reasons:

   • processes are by nature inflexible… their attributes are consistency and repeatability. When you’re searching for a new market, you need flexibility. Create your own processes, only the one you need.
   • processes come with cost (resources, time) to implement them… and they mold a way of working, which soon become company culture. This risk bringin over attributes from the parent org that you don’t want in the spinoff, like risk aversion.

But this is a 1997 book. The last 20 years of technology tell another story!

Indeed the book ends with an analysis, trying to apply the same framework to the automobile market, and to electric cars in general.

The way modern companies like Tesla are attacking the auto market does not seem to be following the framework… they seem to be attacking not “from below”, from cheaper products that are not yet “good enough” for mainstream, but from the high-end (Tesla roadster), then moving down to cheaper (but higher margin?) Model S >> X >> 3…

I need to think a bit more about this example, as maybe what is evident to me now is the consumer price, while things like margins are not immediatly visibile and need more research…

Anyway, this may be the topic of the next post! :)