CLAY CHRISTENSEN ON INNOVATION

For those who haven’t read The Innovator’s Dilemma or The Innovator’s Solution, he recaps the definitions of the two main categories of innovation:

• Sustaining Innovations are new, higher-margin, significantly more valuable products and services brought to an existing market, a known group of customers. Large corporations, who ‘have’ most of those customers, have a huge advantage in introducing such innovations.
• Disruptive Innovations are new products and services that extend the market to a whole new class of customers (usually down-market, by introducing a cheaper version or alternative). As these innovations improve they gradually start to eat away at the up-market version, sometimes destroying it.  (His books have many examples of both types, the most famous disruptive innovations being the Mini-computer and the PC which largely destroyed the mainframe computer market.

He then goes on to say, in response to a question about whether public companies, being bottom-line (profit) rather than top-line (revenue) focused, are inherently incapable of innovation and hence doomed to fail, “The evidence is just overwhelming that is true.” That’s a remarkable statement, and vindication of my claim that the current price/earnings ratios of most public companies, which anticipate continuing double-digit annual profit growth for decades to come, are absolutely preposterous.

Not only will disruptive innovations eventually kill market leaders, he says, but those that want to survive will have to create new, autonomous organizations or business units to compete in the new ‘disrupted’ marketplace — the inertia of the ‘old’, disrupted organization is deadly, and cannot hope to transition to the new market reality fast enough to survive. IBM was the only survivor of the mainframe PC companies, he says, because they did exactly that when they entered the Mini-computer and PC markets — they established completely separate, autonomous divisions headquartered in different cities.

[An interesting aside for regular readers of this weblog: Christensen, in the process of discussing how disruptive innovations take over a market, suggests something that may be disheartening to entrepreneurs who want to take a low-risk, low-sweat Natural Enterprise approach: The race is to the quick, meaning the entrant who can bring in a lot of new investment quickly to commercialize the innovation will likely dominate the market. Big risk, big return. Entrepreneurs need to recognize their limitations — trying to bit off more than you can chew is more likely to lead to bankruptcy than the brass ring. There are still lots of opportunities for natural entrepreneurs to make a very comfortable living, without significant risk, by innovating on a scale they can manage and which they can finance organically. There is much to be said for modesty in business.]

Christensen goes on to suggest, as a corollary, that going, or staying, private can be a better route to sustainable innovation than being a public company. While an IPO can be a great way to raise cheap money, it then exposes your company to the insatiable and unreasonable expectations of passive shareholders, forcing you to take your eye off both innovation and strategic vision, in pursuit of short-term profitability targets that, in the long run, are often dysfunctional. That creates a great quandary — because private companies have much less access to cheap capital, they are also less equipped to capitalize on innovation, even though they are better equipped to produce it.

Now Christensen gets to the most important point in the interview, though he does so strangely. He starts by saying it is dangerous to listen too much to your customers, because they are, by definition, satisfied with what you do now, and hence won’t force you to be innovative. But his real point is that it is by talking to prospective customers (who he calls non-customers) that you discover why they are not buying from you today, that can lead you on the path of innovation (by finding out why). I think that’s a bit black-and-white: It suggests you have either 100% ‘market share’ of a customer or none. In my experience there are lots of opportunities to sell more to existing customers, and since you have strong relationships with those customers they may be able to help you identify opportunities to sell more to them through innovation, than ‘non-customers’ who don’t know your capabilities and with whom you don’t have a relationship that can buy you time, trust and candour from them. But there are still three important points here:

• While the best innovative ideas come from talking to customers and determining their unmet needs, ‘customers’ should include prospective customers, not just current ones, and
• There is some danger that a customer who knows you for product or service X will not want you, or not imagine you being able, to produce Y as well: Your excellence in one area can actually detract customers who are aware of that excellence from helping you innovate in another area.
• If you’re going to try to innovate in a new area, set up a separate, autonomous business unit to do so, so interference from, and to, the existing business is minimized.

He goes on to talk about the folly of the traditional product line/demographic market segmentation, trying to find patterns in product category needs by customer age, income level, profession or sex — leading even sophisticated market-driven companies like P&G to fail with 85% of their new product launches. He re-affirms what I’ve always believed: Every individual is a market segment of one. The answer, he says, is to segment the market by types of need instead of by demographics. To do this, he says, you need to understand yourself as a customer and consumer, and appreciate that your needs are diverse, dynamic, and ever-changing. The best innovations fill an unmet need, and starting with demographic segments actually obfuscates the identification of needs that transcend demographic boundaries.

He recommends two techniques for honing in on such needs:

• At brainstorming sessions, get people to identify and then individually rank why people buy each type of product or service (KJ diagramming), and then aggregate the top-ranked reasons to create a profile of the need.
• Conduct a series of interviews of customers who recently used the product or service, asking each to tell a story about (a) the specific situation that caused them to decide to use the product or service, and (b) the last time they were in a similar situation but used a different product or service, and why; and then aggregate these into a profile of the motivations.

The combination of these two profiles gives you an appreciation for the needs that exist, and the customers’ buying behaviours when faced with that need — excellent grist for the innovation mill.

The interview includes a wonderful quote from Ted Leavitt in a 1960 HBR article called Marketing Myopia: “People don’t buy a quarter-inch drill. They buy a quarter-inch hole. You’ve got to study the hole, not the drill. The drill is just a solution for it.” Rob Paterson recently made this point with similar eloquence, coining the word “coolth” for what people were really buying when they bought an air conditioner.

Christensen didn’t seem to be prepared for the final question — where to look for unfilled needs. I guess I need to tell him about my post of last week.

Thanks to the always-excellent Innovation Weekly for the link to the Gartner article, and to John Wark at New Dog Old Trick for the link to KJ diagramming. John also has an interesting recent post suggesting one of the main values of a blog is as a place to organize and store our memories.  For the explanation of my Innovation Process chart, above, please see this article.