Seeing What’s Next: Porter, Drucker and Christensen

The Idea: An overview of Michael Porter’s, Peter Drucker’s, and Chris Christensen’s approaches to innovation research.

Research is probably the most undervalued, and poorly done, process in Western business. It’s not rocket science, but doing it well takes practice, a disciplined process, and strong creative, analytical and communication skills.

Clay Christensen’s new book Seeing What’s Next is essentially a book about doing good research, directed at accurately predicting the future of your business, or of an entire industry, and the market forces that affect it. Whereas most predictions of the future done by analysts and accountants are essentially projections, and assume little or nothing will change except perhaps the volume and margin of sales, any really useful, strategic prediction must be a forecast, which identifies what will, or might, significantly change, disrupt the market and the status quo, and how your company can react to these anticipated changes. The forecast is the net result of these anticipated external market and non-market changes and your company’s planned response to them.

The key to being able to competently anticipate such changes is knowing where to look and knowing what to look for. Michael Porter, in his book Competitive Strategy, identifies ‘five forces’ that provide one approach to doing so:

• Suppliers: How many there are, how their offerings differ, how their pricing structures differ, where/how they get their supplies, how expensive it is to switch suppliers, what substitute supplies might be available, whether suppliers could become competitors, and how much an impact their price has on your price
• Customers: How much power they have to affect your price, how much they buy, what different customer segments exist, how your and others’ brands are perceived, how price-sensitive they are, whether they could become competitors, how your products are differentiated in customers’ eyes, what motivates them to buy, what substitutes for your product could become available, and how many there are and how they are distributed
• Competitors: The fierceness of competitive actions and price-cutting, the costs of abandoning an overly-competitive product and doing something else, the number and diversity of competitors, fixed costs and margins, the growth rate and stage of maturity of the industry, production capacity, the cost to customers of switching suppliers, customer loyalty to your and to competitors’ brands, differences between your and competitors’ products, and the size and profitability of the market
• Potential New Entrants: Cost, capital requirements and learning curve to new competitors entering your market, availability of supplies and distribution channels to new entrants, impact of government regulation on ease of entrance, economies of scale, value of brand and cost-of-switching advantage to incumbents, ability of incumbents to retaliate quickly against new entrants, intellectual property (patents etc.)
• Potential New Products: New substitute products and technologies and their attributes, cost of switching to customers, customers’ buying criteria and propensity to change to a novel product versus just changing brands, price/performance ratio of new vs. current products

The last two of these five forces are the source of what Christensen in his earlier books called disruptive innovations — the ones that are often not foreseen when your focus is intently on customers, suppliers and competitors.

So one way to predict the future for your company would be to do thorough research in each of these five areas, see what changes are occurring or what changes your company could precipitate, and how those changes and your company’s responses to them would ‘play out’ in the marketplace. It is not uncommon for research of this nature to use scenario planning techniques — to write several different ‘stories’ of how these changes might play out, and allow management and experts in the industry to assign probabilities to each before deciding what actions to take.

I have already written about Drucker’s approach, in his book Innovation and Entrepreneurship, to knowing where to look and what to look for. For completeness, my synopsis charts of his innovation process are reproduced in the charts below. His ‘where to look’ is the seven innovation sources illustrated in Fig.2 below. His approach to analyzing these potential ‘change producers’ is described in Fig.3 below. His approach to identifying what changes may be coming is similar to Porter’s — look for the sources, do your research, and then analyze the implications critically — but he slices the ‘universe of change possibilities’ differently:


In Seeing What’s Next, Christensen offers yet another way of parsing this ‘universe of change possibilities’. What is most different about his book is that he devotes the bulk of it to applying his approach in detail to predict ‘what’s next’ in five industries: education, air transport, semiconductors, health care and telecom, and in global markets. Here’s a summary of his theory of where to look and what to look for:

Customers:

• Undershot Customers (those dissatisfied with current product limitations): Look for signs whether existing or new providers are addressing these dissatisfactions through ‘sustaining’ innovations (incremental or radical).
• Overshot Customers (those for which current products are too complex or expensive): Look for signs whether new or existing providers are introducing low-end ‘disruptive’ innovations, whether providers from niche or other markets are entering this space because their offering is simpler or cheaper and meets requirements, and whether new standards are emerging that allow commoditization of the product at a radically lower price.
• Non-Customers (those that are not currently using the industry’s products): Look for signs whether new or existing providers are introducing new products that are simpler, cheaper or more convenient and bringing new customers into the market.
• Non-Market Forces: Look for signs whether new regulations or government policies are making it easier for new competitors to enter the market space.

Competitors:

• SWOT: Compare the strengths and weaknesses of current and potential competitors (tangible and intangible resources they have access to, processes and skills they have at their disposal, response to past challenges, their strategies, structure, historical priorities and business model — the way they make money.
• Asymmetries: Assess what each competitor is doing that others can’t or won’t do (e.g. go after niche markets, compete in the low end of the market, dramatically shift processes or business model in response to new market opportunities)

Strategies:

• New Entrants: Assess whether potential new entrants are flexible, experimenters and fast learners; whether they have the internal skills and experience to enter the market effectively; and whether their investors are patient for growth yet demanding of high margins — all of these signal success in entering the market.
• Creation of New Value Network (suppliers, customers, alliance partners): Assess whether new entrants’ initial target customers, selected suppliers and strategic allies are sufficiently ‘freestanding’ (different from incumbents’) to prevent incumbents from co-opting them before they can effectively enter the market.
• Incumbents: Assess whether incumbents have established their own separate innovative organizations or internal innovative capability to launch its own disruptive innovations.

Just as a reminder, here from my earlier article are Christensen’s definitions of sustaining innovations and disruptive innovations:

• 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 then the PC which largely destroyed the mainframe computer market).

I like all three models — Porter’s, Drucker’s, and Christensen’s — and if I were to be assigned to do some innovation research today, I would use a combination of all three approaches, looking at the markets, and potential markets, and the forces that drive them, from all three perspectives. That way you can actually get a ‘3-D’ forecast of the future of your, or your client’s, business or industry, or the entire economy.

I would also integrate into the research process Imperato and Harari’s Thinking the Customer Ahead approach, a type of primary research (i.e. face-to-face, as contrasted with secondary research, which is looking at written documents in the public domain) that entails helping the customer to imagine where their business is headed, and then working backwards to assess the implications of that on where your client’s business is headed. I would use the Pyramid Principle methodology to document the research and perform the analysis. And I would probably structure the results as scenarios or future-state stories, embedding the results of the identified strategic innovation and differentiation responses I would recommend the client undertake.

If you want to practice applying these theories and doing your own research, analysis and “what’s next” forecasting, here are three intriguing exercises:

1. Tivo won many awards for its invention of the personal video recorder, which had all sorts of interesting attributes: the ability to record automatically by interfacing with online program guides, the replacement of the much-loathed VCR, the ability to strip out commercials, the ability to do ‘instant replays’ on the fly on any program. But it has not been terribly successful or profitable. Could it reinvent itself or is the advent of competitive PVR technologies built into TVs, satellite systems, and PC video software its death knell?
2. The decision by Mercedes not to introduce its Smart Car into the US market has the industry abuzz, as has its failure to make a profit in Europe. Now, GM is considering introducing a lower-end similar vehicle for $3,000 into the Chinese market, but is concerned about whether this could cannibalize its own markets. What will the future hold for these vehicles?
3. The Apple iPod has been enormously successful, even being able to command a premium price over comparable products made by reputable manufacturers. If you were Sony, what would be your competitive response to the iPod?