[notes] The Innovator’s Solution

 The Innovator’s Solution: Creating and Sustaining Successful Growth (2003) by Clayton M. Christensen and Michael E. Raynor

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NOTE: Bewarned, these notes are un-edited, un-revised, and un-styled. I plan on cleaning them up eventually, but until then, I apologize.

 The Growth Imperative

basically doing an overview of the innovator’s dilemma

theories

“The Innovator’s Dilemma summarized a theory that explains how, under certain circumstances, the mechanism of profit-maximizing resource allocation causes well-run companies to get killed”

 How can we beat our most powerful competitors?

circumstance of innovation

sustaining

disruptive

new-market disruptions

low-end disruptions

“If the technology can be developed so that a large population of less skilled or less affluent people can begin owning and using, in a more convenient context, something that historically was available only to more skilled or affluent people in a centralized, inconvenient location then there is potential for shaping the idea into a new market disruption.”

“Often the innovations that enable low-end disruptions are improvements that reduce overhead costs, enabling a company to earn attractive returns on lower gross margins, coupled with improvements in manufacturing or business processes that turn assets faster.”

 What products will customers want to buy?

market segmentation

reasons we don’t do this:

fear of focus:

quantification of opportunities

structure of channels

advertising economics and brand strategies

be super cautious when asking consumers to change jobs

 Who are the best customers for our products?

low-end disruption

new-market disruption

reaching new market customers often requires disruptive channels

 Getting the scope of the business right

product architecture and interfaces

Interdependent architectures

modular architectures

most companies exist somewhere in between

what usually happens is integrated companies with cutting edge technology create new products. eventually these products overshoot the required functionality, then modularized companies come up and start taking market share

 How to avoid commoditization

integrated companies that design and assemble the not-good-enough end-use products

  1. in a new market a company develops a proprietary product that is better than its competitors and earns attractive profit margins
  2. in striving to keep ahead of competitors that company overshoots the functionality that customers in lower tiers of the market can utilize
  3. this precipitates a change in the basis of competition in those tiers
  4. which precipitates an evolution toward modular architectures
  5. which facilities the dis-integration of the industry
  6. which makes it difficult to differentiate the performance or cost of competitors

this functional overshoot occurs first at the bottom of the market, and then moves up inexorably to affect the higher tiers

“disruption and commoditization can be seen as two sides of the same coin”

  1. low-cost strategy of modular product assemblers is only viable as long as they are competing against higher-cost opponents thus they must constantly strive up market
  2. the mechanisms that constrain how rapidly they can move up-market are the performance-defining subsystems, these elements become not good enough
  3. competition among subsystem suppliers causes their engineers to devise designs that are increasingly proprietary and interdependent
  4. the providers of these subsystems therefore find themselves selling differentiates, proprietary products with attractive profitability
  5. the creation of this profitable, proprietary product is the beginning of the next cycle of commoditization and de-commoditization

roa - return on assets

the value of brands

The Law of Conservation of Attractive Profits

 Is your organization capable of disruptive growth?

RPV framework:

instead, use a circumstance-based theory

  1. “management skills and intuition that enable people to succeed in new assignments were shaped through their experiences in previous assignments in their careers” – think of business units as schools for training managers – use them to “train” managers for the situations they need

RPV framework:

RPV framework:

there is a dilemma: training managers to be good in situations requires putting untrained managers in situations
— “those who have the most to learn bring the least experience to the task”
— “those who are deemed to be fully qualified to handle a given job, by definition have the least to learn by doing it.
— could just buy talent
— but can be difficult because managers have to get used to new processes and values

instead of focusing on right stuff attributes, focus on "ability to learn”: ‘seeks opportunities to learn’, ‘seeks and uses feedback’, ‘asks the right questions’, ‘looks at things from new perspectives’, ‘learns from mistakes’

Buying Resources, Processes, and Values

 Managing the strategy development process

Two Processes of Strategy Formulation

  1. Deliberate
  2. conscious and analytical
  3. based on rigorous analysis of data on market growth, segment size, customer needs, competitors’ strengths and weaknesses, and technology trajectories.
  4. typically implemented ‘top down’
  5. are appropriate if three conditions are met:
  6. 1. strategy must encompass and address correctly all of the important details required to succeed, and those responsible for implementation must understand each important detail in management’s deliberate strategy.
  7. 2. if the organization is to take collective action, the strategy needs to make as much sense to all employees as they view the world from their own context as it does to top management, so that they will all act appropriately and consistently
  8. 3. the collective intentions must be realized with little unanticipated influence form outside political, technological, or market forces
  9. it’s difficult to meet all three of these requirements, so usually the emergent strategy making process alters the strategy that the company actually implements

  10. Emergent

  11. bubbles up from within the organization

  12. “is the cumulative effect of day-to-day prioritization and investment decisions made by middle managers, engineers, salespeople, and financial staff”

  13. tend to be tactical day to day operating decisions that are made by people who are not in a visionary, futuristic, or strategic sense of mind

  14. emergent processes should dominate in circumstances in which the future is hard to read and in which it is not clear what the right strategy should be

Points of Executive Leverage in the Strategy-Making Process

“… defining and implementing strategy entails managing the conditions under which the strategy and resource allocation process operate so that the strategy process can work efficiently, given the circumstances that each of company’s organizations is in.”

Managers must:

  1. Carefully control the initial cost structure of the new-grown business, because this quickly will determine the values that will drive the critical resource allocation decisions in that 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 judgment 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.

Discovery driven planning

  1. make targeted financial projections (required financial performance of the venture)
  2. what assumptions must prove true in order for these projections to materialize?
  3. implement a plan to learn - to test whether the critical assumptions are reasonable
  4. invest to implement the strategy

 There is good money and there is bad money

“… the best money during the nascent years of a business is patient for growth but impatient for profit.”

impatient for profit

Death Spiral From Inadequate Growth

“The dilemma on investing for growth is that the character of a firm’s money is good for growth only when the firm is growing healthily. Core businesses that are still growing provide cover for new-growth businesses.”

Use Pattern Recognition, Not Financial Results, to Signal Potential Stall Points

Create Policies to Invest Good Money Before it Goes Bad
“… the policies force the organization to start early, start small, and demand early success.”

  1. Acquire new-growth business in a predetermined rhythm. Launch new-growth business regularly when the core is still healthy – when it can still be patient for growth – not when financial results signal the need.
  2. Keep dividing 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 in small opportunities.
  3. Minimize the use of profit from established businesses to subsidize losses in new-growth business. Be impatient for profit: There is nothing like profitability to ensure that a high-potential business can continue to garner the funding it needs, even when the corporation’s core businesses turn sour.

 The role of senior executives in leading new growth

Three jobs:

  1. near term assignment: personally stand astride the interface between the disruptive growth businesses and the mainstream businesses to determine through judgment which of the corporations’s resources and processes should be imposed on the new business, and which should not.
  2. longer-term responsibility: shepherd the creation of a process that we call a ‘disruptive growth engine,’ which capably and repeatedly launches successful growth businesses.
  3. perpetual responsibility: sense when the circumstances are changing, and keep teaching others to recognize these signals.

A Theory of Senior Executive Involvement
when should senior management get involved in a decision?

disruptive growth engine

  1. Start before you need to
  2. Appoint a senior executive to shepherd ideas into the appropriate shaping and resource allocation process
  3. Create a team and process for shaping ideas
  4. Train the troops to identify disruptive ideas

 Passing the baton

  1. Never say yes to a strategy that targets customers and markets that look attractive to an established competitor.
  2. Try to compete against non-consumption.
  3. If there are no non-consumers available, explore low-end disruption.
  4. Try to help customers get done more conveniently and inexpensively what they are already trying to get done.
  5. Segment the market in ways that mirror the jobs that customers are trying to get done.
  6. Look to the low end to see the opportunity to change the basis of competition.
  7. Don’t switch too soon or too late from a proprietary architecture to modularity and open standards.
  8. RPV framework 8.1. Do we have the resources to succeed? 8.2. Will our processes facilitate what needs to be done in order to succeed in the new business? 8.3. Will our values enable the critical people to give the needed priority to this initiative when compared with the other initiatives that compete for their time, money, and talent.
  9. Ask these same questions to each of the entities that constitute the venture’s channels as well.
  10. In choosing the management team for your new venture, don’t look at the attributes or magnitude of past responsibilities. Instead, look for validation that they have grappled with problems in the past that this venture will face in the future.
  11. Insist that team give you a plan to accelerate the emergence of a viable strategy.
  12. Be impatient for profit.
  13. Keep your company growing so that you can be patient for growth.
 
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[notes] Creative Confidence

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