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The Innovator’s Solution — SUMMARYHow Can We Beat Our Most Powerful knowing what jobs out there that are not getting doneCompetitors? very well — can give innovators a much clearer road(continued from page 2) map for improving their products to beat the true com- petition from the customer’s perspective, in everyentrant will make improvements and move up-market dimension of the job. This segmentation can then be— now targeting your high-end customers. used to gain a disruptive foothold — the initial productValue Networks or service that is the point of entry for a new-market disruption. Disruptions create and exist in value networks—con-texts within which companies respond profitably to the The first time that builders of a new-growth businesscommon needs of a class of customers through evaluat- need to assess what the target customers really try to geting and establishing appropriate processes and channel done is when they are searching for that disruptivepartners. Two kinds of disruptions can create new value foothold. While it may never be possible to get everynetworks: dimension of a product introduction in a new-market ● New-market disruptions. These disruptions all but disruption right at the outset, using the “jobs-to-be- done” lens can help innovators come to market with ancreate a need in customers, by virtue of their affordabili- initial product that is much closer to what customersty and simplicity of ownership. Canon’s desktop photo- ultimately discover that they value. How does one docopiers, for example, made photocopying in one’s office this? By observing what people seem to be trying to(rather than shipping a job out to a print shop) easy, and, achieve for themselves, then asking them about it.as a result, people made a lot more copies. As improve-ments are made in new-market disruptions, the compa- Helping Disruptions Grownies that foster them are able to pull customers out of Exciting growth happens when an innovationold, mainstream value networks and into new ones. improves in ways that allow it to displace incumbent ● Low-end disruptions. Disruptions that take root at offerings. These are sustaining improvements, relative tothe low end of the original, mainstream value network the initial innovation—improvements that stretch todo not create new markets, but simply feature low-cost meet the needs of more and more profitable customers.models that pick off an established firms’ least attractive With low-end disruptions, it can be easy to determinecustomers. ■ the right sequence of product improvements in the up- market march. Target stores, for example, set out to replicate the product line, brands, and ambience previ- (continued on page 4)What Products Will CustomersWant to Buy? Marriott’s Circumstance-Based Marketers often segment markets by product type,price point, or demographics of the individuals or com- Brandspanies that comprise their customer base. This segmen- Marriott Corporation has developed a brand archi-tation is often defined by the attributes of products or tecture that is consistent with several different “jobs”customers, which reveals correlations between those its customers experience in life, thereby facilitatingattributes and outcomes. It does not, however, offer the creation of new disruptive businesses, whileplausible causality — confident assertions of what fea- simultaneously strengthening the Marriott brandtures, functions, and positioning will cause customers to name. Marriott Hotels are positioned as the choicebuy a product. when the job is to host a business meeting; Courtyard by Marriott is the choice when the job is In essence, customers “hire” products to do specific to get a clean, quiet place to work into the evening;“jobs,” and managers must segment their markets to Fairfield Inn by Marriott is the inexpensive choice formirror the way their customers experience life (see family getaways; Residence Inn by Marriott providesMarriott example at right). a home away from home. Companies that target their products at the circum- Such a crisply defined purpose brand guides cus-stances in which customers find themselves, rather than tomers to hire the various hotels to do different jobs,at the customers themselves, are those that can launch thereby strengthening the Marriott brand and itspredictably successful products. endorsing power. Knowing what job a product gets “hired” to do — and 3 Soundview Executive Book Summaries ®
The Innovator’s Solution — SUMMARY Who Are the Best Customers Akio Morita Helps Sony Cause For Our Products? Disruptions Which initial customers are most likely to become the solid foundation upon which we can build a successful One of the best leaders in innovative disruptions growth business? How can we reach them? It is quite was Akio Morita, Sony’s founder. tricky to find new market customers (or “noncon- From 1950 through 1982, the company success- sumers”) in the typical model of disruptive innovation. fully built a dozen different new-market disruptive When only a fraction of a population is using a product, growth businesses, from the first solid-state black some of the nonconsumption may simply reflect the fact and white television, to the introduction of the that there just is not a job that needs to be done in the Walkman and 3.5-inch floppy disk drives. Every new- lives of nonconsumers. Thus, a product that purports to product launch decision in this era was made by help nonconsumers do something that they hadn’t Morita himself and a trusted group of associates. already prioritized in their lives is unlikely to succeed. They looked for ways in which their miniaturized, Another kind of nonconsumption occurs when people solid-state electronics could help a larger population try to get a job done but find themselves unable to of less-skilled and affluent people conveniently and accomplish it themselves, because the available prod- cheaply accomplish jobs they already got done ucts are too expensive or too complicated. Hence, they through awkward, unsatisfactory means. Morita put up with getting it done in an inconvenient, expen- observed the ways in which people accomplished sive, or unsatisfying way. these tasks and used that data to build innovation after innovation. This type of nonconsumption is a growth opportunity, The end of Sony’s disruptive odyssey came in waiting for a new-market disruption that enables these 1981, when Morita began withdrawing from active consumers to begin buying and using a product that management of the company in order to become helps them do the job for themselves. more involved in Japanese politics. In his place Extracting Growth from Nonconsumption came a team of marketers who used sophisticated, quantitative techniques for segmenting markets and There are four elements of a pattern of new-market assessing market potential. Although these methods disruption, which managers can use to find ideal cus- have proven successful on a limited basis, the inno- tomers and market applications for disruptive innova- vations that have arisen have been more sustaining tions. These elements are— in character—such products as the PlayStation video ● The target customers are trying to get a job done, game and the Vaio notebook computer were late but because they lack money or skill, a simple, inexpen- entrants into established markets. Time will tell if the sive solution has been beyond reach. company can ever quite return to the Morita era of ● These customers will compare the disruptive prod- disruptive innovation. uct to having nothing at all. As a result, they are delight- ed to buy it, even though it may not be as good as other products available at high prices to current users withWhat Products Will Customers deeper expertise in the original value network (in otherWant to Buy? words, the bar one must scale to delight these customers(continued from page 3) is quite low). ● The technology that enables the disruption might beously only available in expensive, full-service depart- quite sophisticated, but disruptors deploy it to make thement stores. The low-end disruptor’s marketing task is purchase and use of the product simple, convenient, andto extend the lower-cost business model up toward foolproof (enabling people with less money and trainingproducts that do the jobs that the more profitable cus- to begin consuming).tomers are trying to get done. New-market disruptions, ● The disruptive innovation creates an entire newconversely, challenge innovators with inventing the value network. The new consumers typically purchaseupward path, because no one has been up that trajecto- the product through new channels and use the productry before. ■ in new venues. Disruptions that fit this pattern succeed because estab- lished competitors view entrants in the emerging market as irrelevant. The mainstream market the established (continued on page 5)4 Soundview Executive Book Summaries ®
The Innovator’s Solution — SUMMARYWho Are the Best CustomersFor Our Products? Why Computer(continued from page 4) “Appliances” Failedcompanies sustain is unaffected by the new value net-work for some time. Incumbents might even think they It is difficult, if not impossible, to convince non-have sensed a threat and are responding, investing inor- consumers to make a purchase if a given productdinate amounts of money in an attempt to advance the does not fall within their prioritized needs. For exam-technology enough to please the customers in the exist- ple, in the 1990s, a number of companies, includinging value network, forcing the disruptive technology to Oracle, thought they saw a growth opportunity in the significant number of American households that didcompete on a sustaining basis. This, of course, is the not yet own a computer. These companies reasonedwrong response. ■ that the cause of nonconsumption was the price of a PC, and they thought they could create growth byGetting the Scope of Business developing an “appliance” PC that could access the Internet and perform basic PC functions at a priceRight around $200. Decisions about what activities to handle in-house and Their efforts failed, in large part because expensewhat to procure from suppliers and partners have a pow- was not the solution for opening the market — theerful impact on a new-growth venture’s chances for suc- nonconsuming households simply did not havecess. Most companies follow the core competency enough “jobs” for any computers, regardless ofrule—if something fits your core competence, you price.should do it inside; if it’s not your core competence andanother firm can do it better, you should outsource it to outsourcing when products are more than good enough.that firm. The Not-Good-Enough World The problem with the core-competence/not-core-com- When product functionality and reliability are not yetpetence categorization is that what might seem to be a good enough to address the needs of customers in anoncore activity today might become an absolutely cru- given tier of the market, companies must compete bycial competence to have mastered in a proprietary way making the best possible products. Firms that build theirin the future, and vice versa. Consider, for example, products around proprietary, interdependent architec-IBM’s decision to outsource the microprocessor for its tures (i.e., if one part cannot be created or used indepen-PC business to Intel, and its operating system to dently of another part) enjoy important competitiveMicrosoft. In the 1980s, when IBM made these deci- advantage over competitors whose product architecturessions, it did so in order to focus on what it did best— are modular (in which the fit and function of all ele-designing, assembling, and selling computers—and to ments are so connected, it doesn’t matter who makes thekeep development costs and time at bare minimum. Yet, separate components).in the process of outsourcing what was not its core or itscompetence, IBM helped raise the profile and business Companies that compete with proprietary, interdepen-stature of the two companies that eventually captured dent architectures must be integrated—they must con-most of the profit in the industry. trol the design and manufacture of every critical compo- nent of the system in order to make any piece of theTo Integrate or To Outsource—That Is system.The Question Trajectory and Modularity The core/noncore categorization can lead to seriousand even fatal mistakes. Instead of asking what their Once customers’ requirements for functionality andcompany does best today, managers should determine reliability have been met, they redefine what is not goodwhat they need to master today and in the future in enough, changing the basis of competition in that market.order to excel on the trajectory of improvement that cus- The pressure of competing along this new trajectorytomers will define as important. of improvement forces a gradual evolution in product Remember the job-to-be-done approach—customers architecture, away from the proprietary and interdepen-will not buy your product unless it solves a problem for dent, toward more modular designs in a period of too-them. What comprises a solution, however, differs across good performance. Modular architectures enable com-two circumstances — whether products are not good panies to introduce new products faster because theyenough, or more than good enough. The advantage goes can upgrade individual pieces of a product without hav-to integration when products are not good enough, and to (continued on page 6) Soundview Executive Book Summaries ® 5
The Innovator’s Solution — SUMMARYGetting the Scope of Business Right(continued from page 5) IBM Losesing to create a brand new design. Modularity enablesindependent, nonintegrated organizations to sell, buy, Early Branding Powerand assemble components and subsystems. ■ In the early decades of the computer industry, investment in complex mainframe computer systemsAvoiding Commoditization unnerved most managers. Because IBM’s servicing capabilities were unsurpassed, the IBM brand had Many executives are resigned to the belief that, the power to command price premiums of 30 to 40regardless of the innovation, the inevitable fate of their percent, compared with other companies’ compara-products is to be “commoditized.” However, there is ble equipment.some hope for them. Research has found that whenever How did the brands of Intel and MicrosoftCommoditization is at work somewhere in a value Windows subsequently steal the valuable brandingchain, a reciprocal process—call it “de-commoditiza- power from IBM in the 1990s? It happened whention”—is at work somewhere else in the value chain. computers came to pack good-enough functionalityWhereas the lack of differentiability inherent to com- and reliability for mainstream business use, andmoditization undermines an organization’s ability to modular architectures became predominant in thosecapture profits, de-commoditization creates opportuni- tiers of the market. At that point, the microprocessorties to create and capture significant wealth. The compa- and operating system running the computer becamenies that position themselves at a spot in the value chain not good enough, and the locus of the powerfulwhere performance is not yet good enough will capture brands migrated to those new locations.the profit.Six Steps of Commoditization they carry low-cost business models up-market as The natural and inescapable process of commoditiza- quickly as possible. This enables them to keep compet-tion occurs in six steps: ing against higher-cost makers of proprietary products. 1. As a new market coalesces, a company develops a Competitive forces compel suppliers of these modularproprietary product (complete with a proprietary archi- products to create architectures that, within modulartecture) that, while not good enough, comes closer to subsystems, are increasingly interdependent and propri-satisfying customers’ needs than any of its competitors. etary. The performance-defining subsystems then 2. As the company strives to keep ahead of its direct become de-commoditized as the result of the end-usecompetitors, it eventually overshoots the functionality products becoming modular and commoditized.and reliability that customers in lower tiers of the mar- The Value of Brandsket can use. Executives who seek to avoid commoditization often 3. This precipitates a change in the basis of competi- rely on the strength of their brands to sustain profitabili-tion in those tiers. ty, without considering that brands themselves, too, 4. The change in basis of competition precipitates an become commoditized and de-commoditized. Whenevolution toward modular architectures. things aren’t good enough yet in the value chain, and 5. That evolution facilitates the disintegration of the customers are not certain whether a product’s perfor-industry. mance will be satisfactory, a well-crafted brand can 6. It becomes difficult to differentiate the performance close some of the gap between what customers need andor costs of the product versus those of competitors, who what they fear they might get if they buy from anhave access to the same components and assemble unknown supplier.according to the same standards. The migration of branding power in a market that isDe-commoditization composed of multiple tiers is a process, not an event. Attractive profits of the future are often to be earned Brands of companies with proprietary products typicallyelsewhere in the value chain, in different stages or layers create value as they attract customers who are not satis-of added value. This de-commoditization occurs in places fied with the functionality or reliability of the best avail-in the value chain where attractive profits were hard to able products. When one deals with more modular prod-maintain in the past—in the formerly modular and undif- ucts and a greater emphasis on speed and convenience,ferentiable processes, components, or subsystems. the power to create profitable brands migrates more toward subsystems and the channel used. ■ Modular disruptors can only keep profits healthy if6 Soundview Executive Book Summaries ®
The Innovator’s Solution — SUMMARYIs Your Organization Capable cult to judge whether a process will facilitate or impede a new-growth business.Of Disruptive Growth? Values A surprising number of innovations fail becauseresponsibility to build these businesses is given to An organization’s values are the standards by whichmanagers or organizations whose capabilities are not employees make prioritization decisions—those byup to the task. Indeed, an organization’s capabilities which they judge whether an order is attractive or unat-become disabilities when disruption is afoot. The con- tractive, whether a customer is more or less importantcept of such capabilities can be unpacked into three than another, etc. Whereas resources and processes areclasses or sets of factors that define what an organiza- often enablers that define what an organization can do,tion can and cannot accomplish— its resources, its values often represent constraints that define what itprocesses, and its values. cannot do. If, for example, the structure of a company’s overheadResources costs requires it to achieve gross profit margins of 40 Resources (people, technology, information, cash, etc.) percent, a powerful value will likely evolve that will nixare the most tangible of the three factors, because they any idea that promises gross margins below 40 percent.can be hired and fired, bought and sold, depreciated or Such an organization would be incapable of succeedingbuilt. They are often visible and measurable, and can be in low-margin businesses, because one cannot succeedeasily transported across the boundaries of an organiza- with an endeavor that cannot be prioritized. A differenttion. Typically (and unfortunately), the wrong people are organization with a different cost structure might accordchosen to lead a disruptive venture. Why is that? a high priority to a similar project. These differences Those with the right stuff are usually the wrong peo- create the asymmetries of motivation that exist betweenple. When hiring potential managers, corporations disruptors and “disruptees.”often focus on attributes—“good communicator,” The Right Organizational Home for Disruptive“decisive,” “good people skills” — that do not neces- Businessessarily lend themselves to disruptive successes. Ratherthan focus on categories, companies should consider Incumbent leaders in an industry almost alwaysfocusing on prior experiences that show appropriate emerge victorious in sustaining-technology battles,intuition and management skills for the disruptive whereas historically they have almost always lost battlesenvironment of a new-growth business venture. What of disruption. Industry leaders develop and introducesorts of problems have they wrestled with in the past? sustaining technologies over and over again—theyHave they learned enough to meet similar challenges develop a capability for sustaining innovation thathead-on in a new environment? Can they learn and resides in their processes. Sustaining-technology invest-bounce back from failure? ments also fit the values of the leading companies, because they promise improved profit margins from bet-Processes ter or cost-reduced products. Organizations create value as employees transform Conversely, disruptive innovations occur so intermit-inputs of resources (the work of people, equipment, tently that no company has a practiced process for han-technology, etc.) into products and services of greater dling them. Disruptive products typically promise lowerworth. The patterns through which these transforma- profit margins per unit sold and cannot be used by thetions are accomplished—the processes at work— best customers, rendering disruptions inconsistent withinclude ways products are developed and made, and the many companies’ values. They have the resourcesmethods by which procurement, research, budgeting, required to succeed, but their processes and values arecompensation, resource allocation, and more are disabilities in their pursuit of disruptive innovation.accomplished. Smaller, disruptive companies are actually more capa- Processes are defined or evolve to address specific ble of pursuing emerging growth markets. They mighttasks, and the efficiency of a given process is deter- lack resources, but their values can embrace small mar-mined by how well these tasks are performed. kets and their cost structures can accommodate lowerProcesses that define capabilities in executing certain margins per unit sold. These advantages can add up totasks concurrently define disabilities in executing oth- enormous opportunity for the organization whoseers. Consistency is key — processes are not as flexi- processes will facilitate what needs to be done andble as resources, and must be applied in a consistent whose values can prioritize those activities. ■manner, time after time. In addition, some processesare difficult to observe, and it can therefore be diffi- Soundview Executive Book Summaries ® 7
The Innovator’s Solution — SUMMARYDisruptive Growth Starts endeavor the time it requires to achieve viability and take off. Wal-Mart today is a $220 billion business,At the Top but it took 12 years for it to make its first billion—it Senior executives of companies that repeatedly seek was a disruption that needed a longer runway before itto create disruptive growth have three jobs: took off. ● They must personally stand astride the interface Step 2: Put a Senior Manager in Chargebetween disruptive growth businesses and the main- Creating a successful disruptive growth enginestream businesses, to determine through judgment requires the careful coaching of the CEO or anotherwhich of the corporations’ resources and processes senior manager with the confidence and power toshould be imposed on the new business. exempt a venture from an established corporate process, ● They must shepherd the creation of a process that to declare when different processes need to be created,can be called a “disruptive growth engine,” which and to ensure that the criteria being used in resourcecapably and repeatedly launches successful growth allocation are appropriate to the circumstance of eachbusinesses. venture and the needs of the company. He or she must ● They must perpetually sense when the circum- be well versed in disruptive innovation theory, capablestances are changing, and keep teaching others to recog- of discerning ideas with disruptive potential from thosenize these signals. Senior executives need to look to the best deployed as sustaining endeavors, and able to max-horizon (the low end of the market, or in nonconsump- imize the success prospects of disruptive ideas by feed-tion) for signs that the basis for competition is chang- ing them into a nurturing business process.ing. They must then initiate projects to ensure the com-pany properly responds to the circumstance as an oppor- Step 3: Create an Expert Team of Movers andtunity, not a threat. Shapers To succeed in disruptive business endeavors, CEOs Ideas often lose their disruptive growth potential inmust be intimately involved. Because the processes and the shaping process that they go through in order to getvalues of mainstream business by their very nature are funded. The challenge here is to create a separatelymeant to manage sustaining innovation, there is no operating process through which ideas can be shapedalternative at the outset to the CEO or someone with into high-potential disruptions. Senior managementcomparable power assuming oversight responsibility for should create a core team that is responsible for collect-disruptive growth. ing disruptive innovation ideas and molding them into propositions that have the greatest chance for success.Disruption as Part of the Process This core shaping group cannot use the company’s stan- Launching a single successful disruptive business can dard planning and budgeting processes when launchingcreate years of profitable growth—just ask General disruptive businesses, because they will not know, at theElectric (which launched GE Capital), Johnson & outset, the full dimensions of growth strategy that willJohnson (for their medical devices and diagnostics ultimately prove successful.group), or Hewlett-Packard (whose disruptive ink-jetprinter is now the company’s primary profit driver). Step 4: Train the TroopsLaunching a sequence of growth businesses requires Sales, marketing, and engineering employees are bestleaders to repeatedly use sound theories to make solid positioned to encounter disruptive growth ideas, andkey business-building decisions. From these activities, a thus should be among the first of the company’spredictable, repeatable process for identifying, shaping, “troops” to be trained in the language of sustaining andand launching successful growth can coalesce. Such an disruptive innovation. It is crucial that they come toengine would have four critical components. know what kinds of ideas they should channel into the sustaining processes of established business units, andStep 1: Start Before You Need To which should be directed into disruptive channels. The best time to invest for growth is when the com- These people have direct contact with markets and tech-pany is growing. To build what will be a respectable nologies that can yield ideas for new-growth businesses;growth business in five years’ time, you must start with training, they can develop intuition on these mat-now, adding new units to your portfolio of growth ters that far outstrip any kind of analyst-laden corporatebusinesses as dictated by the growth needs of the cor- strategy. ■poration five years hence. This gives your businessesthe opportunity to grow under the radar, away fromthe glare of Wall Street, giving each disruptive8 Soundview Executive Book Summaries ®