The Innovator's Solution

by Clayton Christensen

  13. We have written elsewhere that the Harvard Business School has an extraordinary opportunity to execute exactly this strategy in management education, if it will only seize it. Harvard writes and publishes the vast majority of the case studies and many of the articles that business school professors have used as components in courses whose architecture is of interdependent design. As on-the-job management training and corporate universities (which are nonintegrated assemblers of modular courses) disrupt traditional MBA programs, Harvard has a great opportunity to flip its business model through its publishing arm and sell not just case studies and articles as bare-bones components but also value-added subsystems as modules. These should be designed to make it simple for management trainers in the corporate setting to custom-assemble great material, deliver it exactly when it is needed, and teach it in a compelling way. (See Clayton M. Christensen, Michael E. Raynor, and Matthew Verlinden, “Skate to Where the Money Will Be,” Harvard Business Review, November 2001.)

  14. This would suggest, for example, that Hewlett-Packard’s branding power would be strong mapping upward to not-yet-satisfied customers from the trajectory of improvement on which its products are positioned. And it suggests that the HP brand would be much weaker, compared with the brands of Intel and Microsoft, mapping downward from that same point to more-than-satisfied customers.

  15. We are indebted to one of Professor Christensen’s Harvard MBA students, Alana Stevens, for many of these insights, which she developed in a research paper entitled “A House of Brands or a Branded House?” Stevens noted that branding power is gradually migrating away from the products to the channels in a variety of retailing categories. Manufacturers of branded food and personal care products such as Unilever and Procter & Gamble, for example, fight this battle of the brands with their channels every day, because many of their products are more than good enough. In Great Britain, disruptive channel brands such as Tesco and Sainsbury’s have decisively won this battle after first starting at the lower price points in each category and then moving up. In the United States, branded products have clung more tenaciously to shelf space, but often at the cost of exorbitant slotting fees. The migration of brands in good-enough categories is well under way in channels such as Home Depot and Staples. Where the products’ functionality and reliability have become more than good enough and it is the simplicity and convenience of purchase and use that is not good enough, then the power to brand has begun migrating to the channel whose business model is delivering on this as-yet-unsatisfied dimension.

  Procter & Gamble appears to be following a sensible strategy by launching a series of new-market disruptions that simultaneously provide needed fuel for its channels’ efforts to move up-market, and preserve P&G’s power to keep the premium brand on the product. Its Dryel brand do-it-yourself home dry cleaning system, for example, is a new-market disruption because it enables individuals to do for themselves something that, historically, only a more expensive professional could do. Do-it-yourself dry cleaning is not yet good enough, so the power to build a profitable brand is likely to reside in the product for some time. What is more, just as Sony’s solid-state electronics products enabled discount merchandisers to compete against appliance stores, so P&G’s Dryel gives Wal-Mart a vehicle to move up-market and begin competing against dry cleaning establishments. P&G is doing the same thing with its introduction of its Crest brand do-it-yourself teeth whitening system, a new-market disruption of a service that historically could only be provided by professionals. We thank one of Professor Christensen’s former students, David Dintenfass, a global brand manager at Procter & Gamble, for pointing this out to us.

  16. As we have shared these hypotheses with students, some of the more stylishly dressed among them have asked whether this applies also to the highest-fashion brands, such as Gucci, and in product categories such as cosmetics. Those who know us probably have observed that dressing ourselves in fashionable, branded merchandise just isn’t a job that we have been trying to get done in our lives. We confess, therefore, to having no intuition about the world of high fashion. It will probably persist profitably forever. Who are we to know?

  17. Remaining competitive at the level of the process-defined value chain that the current auto assemblers dominate is likely to require that they move toward new distribution structures—an integration of supply chains and customer interfaces in a way that effectively exploits the modularity of the product itself. How this can be done and its performance implications are explored at length in the Deloitte Research study “Digital Loyalty Networks,” available for download at < http://www.dc.com/research>, or upon request from delresearch@dc.com.

  18. Those of our readers who believe in the efficiency of capital markets and the abilities of investors to diversify their portfolios will see no tragedy in these decisions. After these divestitures the shareholders of the two auto giants found themselves owning stock in companies that design and assemble cars, and in companies that supply performance-enabling subsystems. It is because we are writing this book for the benefit of managers in firms like General Motors and Ford that we characterize these decisions as unfortunate.

  19. We say “usually” here because there are exceptions (most, but not all, of which prove the rule). We note in the text of this chapter, for example, that two modular stages of added value can be juxtaposed—as DRAM memory chips fit in modular personal computers. And there are instances where two interdependent architectures need to be integrated, such as when enterprise resource planning software from companies such as SAP needs to be interleaved into companies’ interdependent business processes. The fact that neither side is modular and configurable is what makes SAP implementations so technically and organizationally demanding.

  CHAPTER SEVEN

  IS YOUR ORGANIZATION CAPABLE

  OF DISRUPTIVE GROWTH?

  Who should we chose to run new-growth businesses? Which organizational unit in the company will do the best job of building a successful growth business around this particular idea, and which units will likely botch it? What is the best way to structure the team that develops and launches this product? When is creating an autonomous organization important for success, and when is it folly? How can we predict precisely what an organizational unit is capable and incapable of accomplishing? How can we create new capabilities?

  A surprising number of innovations fail not because of some fatal technological flaw or because the market isn’t ready. They fail because responsibility to build these businesses is given to managers or organizations whose capabilities aren’t up to the task. Corporate executives make this mistake because most often the very skills that propel an organization to succeed in sustaining circumstances systematically bungle the best ideas for disruptive growth. An organization’s capabilities become its disabilities when disruption is afoot.1 This chapter offers a theory to guide executives as they choose a management team and build an organizational structure that together will be capable of building a successful new-growth business. It also outlines how the choices of managers and structure ought to vary by circumstance.

  Resources, Processes, and Values

  What does this awfully elastic term capability really mean? We’ve found it helpful to unpack the concept of capabilities into three classes or sets of factors that define what an organization can and cannot accomplish: its resources, its processes, and its values—a triptych we refer to as the RPV framework. Although each of these terms requires careful definition and analysis, taken together we’ve found that they provide a powerful way to assess an organization’s capabilities and disabilities in ways that can make disruptive innovation much more likely to succeed.2

  Resources

  Resources are the most tangible of the three factors in the RPV framework. Resources include people, equipment, technology, product designs, brands, information, cash, and relationships with suppliers, distributors, and customers. Resources are usually people or things—they can be hired and fired, bought and s
old, depreciated or built. Most resources are visible and often are measurable, so managers can readily assess their value. They tend to be quite flexible as well: It is relatively easy to transport them across the boundaries of organizations. An engineer who is a valuable contributor in a large company can quickly become a valuable contributor in a start-up. Technology that was developed for telecommunications can be valuable in health care. Cash is a very flexible resource.

  Of all the resource choices required to successfully build new-growth businesses, the one that most often trips a venture up is the choice of its managers. We have examined innumerable failed efforts to create new-growth business and would estimate that in as many as half of these cases, those close to the situation judge that, in retrospect, the wrong people had been chosen to lead the venture.3 Why is the selection process for key managerial resources so vexingly unpredictable?

  Why Those with the Right Stuff Are Often the Wrong People

  We suspect that the mistakes happen when firms choose managers at any level—from CEO to business unit head to project manager— based on what we call “right stuff” thinking, borrowing the term from Tom Wolfe’s famous book and the 1983 movie of the same name.4 Many search committees and hiring executives classify candidates by right-stuff attributes. They assume that successful managers can be identified using phrases such as “good communicator,” “results oriented,” “decisive,” and “good people skills.” They often look for an uninterrupted string of past successes to predict that more successes are in store. The theory in use is that if you find someone with a track record and with the right-stuff attributes, then he or she can successfully manage the new business venture. But in the parlance of this book, right-stuff thinking gets the categories wrong.5

  An alternative, circumstance-based theory articulated by Professor Morgan McCall can, in our view, serve as a much more reliable guide for executives who are attempting to get the right people in the right positions at the right time.6 McCall asserts that the management skills and intuition that enable people to succeed in new assignments were shaped through their experiences in previous assignments in their careers. A business unit therefore can be thought of as a school, and the problems that managers have confronted within it constitute the “curriculum” that was offered in that school. The skills that managers can be expected to have and lack, therefore, depend heavily upon which “courses” they did and did not take as they attended various schools of experience.

  Managers who have successfully worked their way up the ladder of a stable business unit—for example, a division that manufactures standard high-volume electric motors for the appliance industry—are likely to have acquired the skills that were necessary to succeed in that context. The “graduates” of this school would have finely honed operational skills in managing quality programs, process improvement teams, and cost-control efforts. Even the most senior manufacturing executives from such a school would likely be weak, however, in starting up a new plant, because one encounters very different problems in starting up a new plant than in running a well-tuned one.

  When a slowly growing firm’s leaders decide they need to launch a new-growth business to restore their company’s vitality, who should they tap to head the venture? A talented manager from the core business who has demonstrated a record of success? An outsider who has started and grown a successful company? The school-of-experience view suggests that both of these managers might be risky hires. The internal candidate would have learned how to meet budgeted numbers, negotiate major supply contracts, and improve operational efficiency and quality, but might not have attended any “courses” on starting a new business in his or her prior career assignments. An outside entrepreneur might have learned a lot about building new fast-moving organizations, but would have little experience competing for resources and bucking inappropriate processes within a stable, efficiency-oriented operating culture.

  In order to be confident that managers have developed the skills required to succeed at a new assignment, one should examine the sorts of problems they have wrestled with in the past. It is not as important that managers have succeeded with the problem as it is for them to have wrestled with it and developed the skills and intuition for how to meet the challenge successfully the next time around. One problem with predicting future success from past success is that managers can succeed for reasons not of their own making—and we often learn far more from our failures than our successes. Failure and bouncing back from failure can be critical courses in the school of experience. As long as they are willing and able to learn, doing things wrong and recovering from mistakes can give managers an instinct for better navigating through the minefield the next time around.

  To illustrate how powerfully managers’ prior experiences can shape the skills that they bring to a new assignment, let us continue chapter 4’s discussion of Pandesic, the high-profile joint venture between Intel and SAP that was launched in 1997 to create a new-market disruption selling enterprise resource planning (ERP) software to small businesses. Intel and SAP hand-picked some of their most successful, tried-and-true executives to lead the venture.

  Pandesic ramped to 100 employees in eight months, and quickly established offices in Europe and Asia. Within a year it had announced forty strategic partnerships with companies such as Compaq, Hewlett-Packard, and Citibank. Pandesic executives boldly announced their first product in advance of launch to warn would-be competitors to stay away from the small business marketspace. The company inked distribution and implementation agreements with the same IT consulting firms that had served as such capable channel partners for SAP’s large-company systems. The product, initially intended to be simple ERP software delivered to small businesses via the Internet, evolved into a completely automated end-to-end solution. Pandesic was a spectacular failure. It sold very few systems and shut its doors in February 2001 after having spent more than $100 million.

  It is tempting to use 20/20 hindsight to explain this failure. Pandesic’s channel partners weren’t motivated to sell the product because it was disruptive to their economic model. The company quickly ramped up expenses to establish a global presence, hoping to build a steeper ramp to volume. But this increased dramatically the volume required to break even. The product evolved into a complex solution instead of the simple small business software that originally was envisioned. Its features got specified and locked in before a single paying customer had used the product.

  The Pandesic team did a lot of things wrong, certainly. But the truly interesting question isn’t what they did wrong. It is how such capable, experienced, and respected managers—among the best that Intel and SAP had to offer—could have made these mistakes.

  To see how managers with great track records could steer a venture so wrong, let’s look at their qualifications for the task from the schools-of-experience point of view. This can be done in three steps. First, imagine yourself at Pandesic on day one, when the executives were agreeing to start this disruptive venture. With only foresight and no hindsight allowed, what challenges or problems could you predict with perfect certainty that this venture would encounter? Here are a few of the problems that we could know we would face:

  We know for sure that we aren’t sure if our strategy is right—and yet we have to figure out the right strategy, develop consensus, and build a business around it.

  We don’t know how this market ought to be segmented. “Small business” probably isn’t right, and “industry vertical” probably isn’t right. We have to figure out what jobs the customers are trying to get done, and then design products and services that do the job.

  We need to find or create a distribution channel that will be energized by the opportunity to sell this product.

  Our corporate parents will bequeath gifts upon us such as overhead, planning requirements, and budgeting cycles. We will need to accept some and fend off others.

  We need to become profitable, and we must manage perceptions and expectations so that o
ur corporate parents will willingly continue to make the investments required to fuel our profitable growth.

  Now, as the second step, let’s apply McCall’s theory. List the courses that we would want members of Pandesic’s management team to have taken in earlier career assignments in the school of experience—experiences through which they would have developed the intuition and skill to understand and manage this set of foreseeable problems. This listing of experiences should constitute a “hiring specification” for the senior management team. Rather than specifying a set of right-stuff attributes, the first step specifies the circumstances in which the new team will be asked to manage. The second step matches those circumstances against the challenges with which the managers of the new venture need already to have wrestled.

  We would, in Pandesic’s instance, want a CEO who in the past had launched a venture thinking he or she had the right strategy, realized it wasn’t working, and then iterated toward a strategy that did work. We’d want a marketing executive who had insightfully figured out how a just-emerging market was structured, had helped to shape a new product and service package that did an important job well for customers who had been nonconsumers, and so on.

  With that list complete, our third step would be to compare that set of needed experiences and perspectives with the experiences on the resumés of the managers who led Pandesic. Despite their extraordinary track records in managing the global operations of very successful companies, none of the executives who were tapped to run this venture had faced any of these kinds of problems before. The schools of experience that they had attended taught them how to manage huge, complex, global organizations that served established markets with well-defined product lines. None of them had ever wrestled with establishing an initial market foothold with a disruptive product.7