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:


  • 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.


  • 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)


  • 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?
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7 Responses to Seeing What’s Next: Porter, Drucker and Christensen

  1. Greg says:

    I’m going to take a shot at exercise 1. It’s a given that TiVo is not yet profitable, though with today’s announcement of the deal with Comcast that may change. I’m going to argue that TiVo is far from a death knell, despite the press it’s been getting lately.1. Are the “competitive technologies” really competitive? I’d argue no, except for the most basic functions. The ability of cable companies and satellite companies to compete with TiVo depends on several factors. The most relevent one at this time is the ownership of patents. The infringement lawsuit against Dish Network will have a lot to do with how the competitive landscape shapes up, but I’d bet on Dish losing, and TiVo ending up in a much stronger position.The deal with Comcast really says that Comcast has decided they can’t compete on technology at this point – only on price. Hence, they’ll offer the TiVo platform as a higher-end product.The second factor is application software. TiVo is generally considered to have the best GUI of the PVR’s and is certainly far ahead of either Motorola or Microsoft on offering functionality. TiVo’s Home Media Engine is attracting developers who are actually doing convergence applications – though it’s been available for less than three months, we’ve already seen proof of concept apps for Flickr streams, Ebay, Itunes, and email. Given that TiVo owns Strangeberry, the odd folks who had a LOT to do with developing Java, we can expect to see more convergence apps emerging in the next year or so – several years ahead of Microsoft’s timetable.I expect to see an RSS reader for TiVo in the very near future – and if it’s done right, enclosures or Media RSS will allow for IPTV applications and subscriptions in the same way that content can be subscribed to using the Season Pass or Wishlist options. Personally, I suspect that TiVo will form a natural platform for narrowcast video and vlogging – and I expect that market to grow enormously.In short, I’d argue that TiVo doesn’t need to reinvent itself, and that it’s not on the road to doom at all.

  2. Dave Pollard says:

    Hey Greg: That’s an excellent analysis. It would be interesting to see whether it would change if you studied all the players, current and potential in this space, and if you did some primary research with non-customers of TiVo to find out why they aren’t. I’d hypothesize for example that perhaps they are caught in the same bind as quality television producers — that the discriminating segment has already substantially abandoned the medium and watch so irregularly that TiVo does not provide enough value. Meanwhile, the undiscriminating segment, faced with hundreds of choices, can basically find something to watch anytime, and if they care enough about a program they’ll buy the whole series as a DVD set. So not only is the technology evolving quickly and in sometimes unexpected directions, so is the audience, the customer. That’s just a hypothesis — I’d need to do some real research to test it ;-)

  3. Greg says:

    Good questions, Dave. That would be a fairly long paper, but my conclusion wouldn’t change much. TiVo is a software company that makes hardware. So to look at all the potential players we have to look at the content sources (Dish, Comcast, et al); the CE manufacturers like Phillips; and the software/content/hardware/pipeline verticals like AOL/TimeWarner, Sony, NewsCorp, Microsoft, and so on. Convergence, in this case, seems to mean that a whole lot of folks can play in this sandbox. TiVo is currently pipleline independent, and an discussion of the competitive landscape would ultimately need to deal with that as a strategy.———————————-I’m convinced that for most non-users the primary factor is ignorance, followed by cost. If you look at the DVR market overall, it’s clear that the technology is just on the curve from early adopter to early majority. TiVo’s subscriber base grew somewhere around 20% in their last quarter – that curve is accelerating fast.——————————Your hypothesis of the “quality television” bind and the discriminating viewer is interesting, but misses two crucial points. TiVo solves both of those problems for the medium due to timeshifting and the “long tail”. A great many discriminating viewers own TiVos precisely because you can timeshift the things you ARE interested in. And if the discriminating viewers interested in your niche are a desirable target demographic, the long tail effect allows quality producers to target that niche effectively.————————————–So you’re right, the customer IS evolving in interesting and unexpected directions :)

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  5. Rayne says:

    Been thinking about these examples. Whatever TiVo is as a manufacturer, it forgets the most important component: the customer. It has a lousy rep for poor customer relations, in spite of the fact it’s got one of the most fanatic “fan bases”. If they spent more time actively listening to their fans/customers instead of treating them like a nuisance, they’d probably lock up the niche for quite a while (until a disruptive technology came along and listened to TiVo’s fans/customers).Can’t help on the small car intro, but I think GM has an opportunity to improve its domestic market. One of the challenges GM faces is a glut of lease vehicles reentering the market in 2005, along with higher oil prices. If GM could find a way QUICKLY to retrofit the lease vehicles for improved efficiency and move them to China to sell for 3K, maybe it could take care of two problems at the same time. But that’s assuming the Chinese would even consider this…maybe if GM partnered with a Chinese company on rapid development of a hybrid-retrofit of these lease vehicles…?Sony has to develop “cool” — what’s “cool”? how does one compete with the cachet that is iPod? a response won’t be just a “me too” product; it would have to blow the socks off iPod, do everything that iPod does well and MORE. I wonder if a bootable device with PDA, video and phone capability combined with the ease of use of iPod’s functionality isn’t the answer, but it would have to have an awesome branding promotion to counter the cool that is iPod. (In some respects, if something matched TiVo’s capability and ease of use but was “cooler”, TiVo would bomb. Would customer dialogue be enough to make a competitor “cool”?)

  6. Some ramblings from the Ideafarm…Having just bought an iPod shuffle, I’m loving the ability to listen to podcasts when I’m doing other stuff that doesn’t require my full sensory attention (like driving-joking ;) But it’s a relative schlep to get the content onto my iPod. I think the cellcos could become a major player (not sure about threat) in this space by combining UMTS/3G broadband connectivity, devices that play mp3/AAC, as well as a customer and billing relationship (SIM card). I’m very aware that consumers are calling for LESS stuff on their phones, but sometimes combinations make sense. Sony is struggling with NIH syndrome (read the recent New Yorker article) that has resulted in some very closed-loop innovations – memory sticks, Betamax, music players that only play their format. What makes the iPod so cool is the “insanely great” design and insight that goes into the product. That in turn creates the buzz factor of cool. In the same way, a product/service offering that just makes so much sense will be the next big thing. Hmmm…Apple + Motorola?McLuhan’s rear-view innovation commentary are also relevant to this discussion, something that Mark Federman at UT is far more competent at discussing than me, but saying the the forward trajectory of an industry is based on the past is flawed. Who would’ve thought that RSS feeds, Time-shifting, and the Long Tail would be keystone technologies and social drivers for the consumption of media.Bottom line, it’s the firms that have continuous, cluetain-esque, conversations with their customers, as well as the ability to make sense of all those insights, that are in the best position to “invent the future”, borrowing from Alan Kay.David – thank you for a most wonderful resource of innovation thinking and practice. Your work here is really appreciated.

  7. Different types of Business Models of Michael porter you can find here also.

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