Clayton Christensen is a well-known innovation HBS professor, researcher and doer. His ‘Innovator’s dilemna’ book from 1997 had a resounding success, raising the famous notion of disruptive innovation. It was followed by several others: Seeing what’s next, the Innovator’s DNA, … As a doer, Clayton cofounded several ventures: Innosight, a consultancy in innovation, Rose Park Advisors, and CPS (Ceramics Process Systems Corporation).
I discovered another talent last Monday as he was speaking at Innovation management chair of Ecole Polytechnique: Clayton is a fantastic storyteller. Watching him unrolling his line of argument about innovation was like listening to “A Little night Music”!
Based on notes taken, here is a sum up some of the stories and lessons he delivered during his terrific speech named ‘Rebuilding Creativity’.
While innovation can be tricky (too many products, business plan failure, lack of new idea, …), ‘there are a few things that, if you get them right, increase the probability of success’:
- Watch out the bottom to prevent competitors from killing you;
- Seeking for growth, invest in ’empowering innovation’;
- Understand the job to be done;
- Have a strategy, and catch unanticipated opportunities;
- Revise your financial dashboard.
Watch out the bottom to prevent competitors
For years, dominant model was: ‘you want to be sure competitors will not kill you, and that you will kill them’ But disruptors don’t rule their pace thinking of competition: they leverage an innovation, focus on customers, and take position.
Clayton exemplifies the story of the steel industry: while mini-mill brought a 20% lower cost than integrated-steel, no existing steel company built a mini-mill factory. Why didn’t incumbents catch the cue?
Mini-mills started crammy, tackling the lowest part of the market, a 7% margin business while incumbents were making 20%: incumbents were happy to leave that unattractive part of the market.
But mini-mills with lower cost were making a lot of money, then they attacked a higher segment in the pursuit of profit, a 12% margin of which integrated-mills were happy to leave, and so on… Today in Europe, mini-mills occur for 75% of market, all integrated steel got bankrupt but one.
In the 60’s, Toyota came in the US with the smallest car, and started riding up from the bottom, like mini-mill. GM and Ford were making bigger cars for the higher-end of the market. Now Toyota is at the top of the game.
If you’re coming at the bottom of the market, the leader will not fight but flee to the higher-end of the market.
Seeking for growth, invest in ’empowering innovation’
If it takes every time longer to go back to prior peak after a crisis, that’s because we have lowered our investment in ’empowering innovation’.
What are ’empowering innovations’? ‘Empowering innovations’ transform complicated, expensive products into simpler and more affordables ones, opening new markets, and thus creating growth.
Innovation often starts at the center of the market where there is money. Then a new population can have access when price decreases: Mainframe computers transform into PCs, Smart Phones get better and cheaper, etc…
At the beginning, Smart Phones were not very good: ‘sustaining innovations’ are the kind of innovations which make good products better. ‘Sustaining innovations’ create very few jobs while ’empowering’ create plenty. Toyota Prius is a sustaining innovation, replacing another Toyota car.
‘Efficiency innovations’ are process related: same product, same customer but cheaper processed. Walmart is an efficiency innovation, it eliminates jobs but frees up capital. Assembling a car in 2 days instead of 60 is a process innovation freeing susbstantial capital from the balance sheet. You can use it for empowering innovation.
At a time were capital was costly, ‘efficiency innovations’ were in high demand, introducing a bias: if efficiency would create capital, why should we invest in ’empowering innovations’ which take roots in 5 or 10 years? If we invest in efficiency, return is much faster. In America, in the last 2,5 decades, we reinvested 1/3 of capital in ’empowering innovation’, and it’s even worse in Europe: these are a wash of capital, creating no growth.
Look at Japan to see what the future holds in store: Japan invested a lot in ’empowering innovation’ in late 90s, making affordable products, enlarging markets, then it stopped. The Nintendo Wii is the only disruptive innovation delivered in the last 25 years, and Japan is in a dead end.
So go back to your office, and check wether investments are only for ‘efficiency innovation’.
New technology can be used in the market profitably, but don’t deploy it only in the center.
Let’s look at the story of the large transition from vacuum to transistors. Transistor succeeded combining ’empowering and sustaining innovation’ against the vacuum. Initial pocket radios produced by Sony and using transistors were a crammy product… but infinitly better than nothing! The same with portable TVs using transistors. Then transistors started to be good enough to build big TVs for the living room, and all vacuum companies got blowed up.
One has to look after the untapped market: solar energy is not cost competitive, it works because government subsidizes it, and wants to make the new tech sustain the old one. We discovered solar made of glass in Mongolia: there is no power access over the grid there, sole electricity is a huge non subsidized business.
Don’t force new tech with sustaining innovation, don’t lock it to be better in every dimensions, let it start unfolding unexplored market potentials with its genuine features.
Empowering products is about letting customers do what wasn’t possible. If you want to go following the current business model, it won’t work. You have to let start up address the new segment, a new unit in your core co acting as a start up can be an entry point.
Let’s consider electrical vehicle and its specific features: is there a larger population of people that would love to have a car hat won’t go far and fast? The parent of small children who need a car to go from home to schools. Avoid competing against traditional cars. It is such a different business, it has to be profitable on a different measure.
Moving from ’empowering’ to ‘sustaining’ and ‘efficiency innovation’ will afterwards make the market bigger. Once you’ve done that, you need to look to what next ’empowering innovations’ will come first.
Understand the job to be done
Deep market understanding is what mirrors how customers experience life. Characteristics don’t propense me to buy a product like ‘Le Monde’ (French daily newspaper)! It is what it confers, through the analysis, opinion, thoughtful interpretation it offers, which is important. I buy this product because I need it to get the job done.
Don’t understand the customer: understand the job.
Editors’ note: In other words, customers often do not want the product itself, but rather the effect that it produces.
Clayton explains the success of the milk shake people buy early in the morning: at that time of the day, a milk share hire is not primary for what it tastes, it’s for a long and boaring drive! Customer could hire bagles: but they are so dry; if he buys donuts, when the phone rings, he surely will ruin his pants. Milk shake doesn’t flow out, it does a better job than any other competitor.
How to improve to nail the job perfectly? Faster delivery, gas up and go, and during the drive, reengage the user with a piece of fruit.
When I have to furnish an new appartment by tomorow, Ikea odes the perfect job. Nobody has copied ikea, competitors can copy products, but not the way they integrate to provide experiences to do the job perfectly.
Whole Foods has no competitors, the ambiance attact their customers.
When you think of transportation, you can say the job has not changed but the way to do it has, from horse man & chariot, poney express, telegraph, railroad, to airplaine mail, and email. Adopting the new technology can improve the way.
When job is done, you don’t have to change your business model. Once you understand the job to be done and stated to something, shape the experience in purchase and use to do the job perfectly, integrate in the deeper deeper way, build a purpose brand.
Have a strategy, and catch unanticipated opportunities
You got to have a strategy but in all likelihood you’re wrong: reality will not turn out as planned. Start with a deliberate strategy, define resource allocation, products, understand and refine prioritiees, and prepare to catch unanticipated opportunites.
In an established business, watch out the opportunities out of the deliberate strategy.
Revise your financial dashboard
Finance can create problems for innovation. If you want to convince finance in the basis of data, you will start when the game is over!
Evaluating investments on marginal rather than full biases incumbent leaders to leverage what they have, instead of building what they need.
The only option for steel was to build the mini mail themself: the finance argued to use the free capacity showing a low marginal cost, and integrated-steel never build a mini mill. Marginal cost makes all the sense to use what you have instead building something new.
Other ratios can be misleading as well: NPV (Net Present Value) doesn’t take into account what happens if we don’t invest in innovation.
If the cost of capital is zero, the concept of return on capital becomes irrelevant. You can’t reverse the filling up of he world with capital.
Instead, the investment in good people will be the next measure: and in results, we will have good finance.
The way the world used to be won’t be the same. Teaching people how to think instead of what to think. Just like teaching your children what to think doesn’t work, leadership is not teaching managers what to think, it’s about helping them how to think.