April 29, 2021
TPL Insights: Building Peak-Performance Cultures #65 – How Innovation Fuels Cultures of Peak Performance Pt 1
With paraphrased content from The Innovator’s Solution by Clayton M. Christensen and Michael E. Raymor, One of the World’s Top Ten Books on Innovation
According to Christensen and Raymor, Harvard Professors and co-authors of one of history’s most highly acclaimed works on innovation, only one organization in ten can sustain significant growth over time. Once most companies mature, they settle into core competencies and see pursuit of new platforms for growth as daunting and unnecessary risk; and they often do so at their own peril. A principle practiced by every company we’ve studied that consistently outperforms its competitors is the one we call Ahead of the Curve. It’s about having a healthy sense of paranoia, never resting on your laurels, never thinking you’ve arrived, remaining in a state of ambitious dissatisfaction, and relentlessly searching for what Raymor and Christensen refer to as sustaining and disruptive innovation.
To beat their most powerful competitors, managers have long sought ways to win competitive fights based around innovations, but it has become increasingly difficult to do so. It’s not simply a matter of big companies having the resources to stomp out small ones or produce incremental changes or innovations that enable them to outlast the competition. It is the circumstances of innovation that often determines whether incumbent industry leaders or upstart companies win a competitive fight.
Entrants are more likely to overtake entrenched leaders in disruptive circumstances — when the challenge is to commercialize a simpler, more convenient product that sells for less and appeals to new customers. Established companies, conversely, can capture disruptive growth (rather than be defeated by it), if they are aware of the circumstances of disruptive innovations and are able to leverage them for their own benefit.
There are three critical elements of disruption (these were first identified in the book, The Innovator’s Dilemma):
- A rate of improvement customers can fully use or absorb.
- A rate of improvement that goes beyond what customers can fully use or absorb.
- The distinction between sustaining and disruptive innovation.
A sustaining innovation targets those demanding, high-end customers with better performance than previously available, whether that performance is an incremental improvement or a breakthrough, leapfrog-over-competitors variety.
Disruptive innovations do not attempt to bring better products to established customers in existing markets. Instead, they introduce products and services that are not as good as existing products, but which are simpler, more convenient, and less expensive than existing items.
Disruption often paralyzes industry-leading companies, which are used to delivering sustaining innovations. In other words, established companies are motivated to focus on pushing innovations to meet the needs of their high-end customers (it’s hard to turn away from your most profitable customers). This leaves the door open for new entrants to target your low-end customers. Eventually, however, the new entrant will make improvements and move up-market now targeting your high-end customers.
Marketers often segment markets by product type, price point, or demographics of the individuals or companies that comprise their customer base. This segmentation is often defined by the attributes of products or customers, which reveals correlations between those attributes and outcomes. It does not, however, offer plausible causality — confident assertions of what features, functions, and positioning will cause customers to buy a product. In essence, customers “hire” products to do specific “jobs,” and managers must segment their markets to mirror the way their customers experience life. Companies that target their products at the circumstances in which customers find themselves, rather than at the customers themselves, are those that can launch predictably successful products.
Knowing what job, a product gets “hired” to do — and knowing what jobs out there that are not getting done very well — can give innovators a much clearer road map for improving their products to beat the true competition from the customer’s perspective, in every dimension of the job. This segmentation can then be used to gain a disruptive foothold — the initial product or service that is the point of entry for a new-market disruption.
Marriott Corporation has developed a brand architecture that is consistent with several different “jobs” its customers experience in life, thereby facilitating the creation of new disruptive businesses, while simultaneously strengthening the Marriott brand name. Marriott Hotels are positioned as the choice when the job is to host a business meeting; Courtyard by Marriott is the choice when the job is to get a clean, quiet place to work into the evening; Fairfield Inn by Marriott is the inexpensive choice for family getaways; Residence Inn by Marriott provides a home away from home. Such a crisply defined purpose brand guides customers to hire the various hotels to do different jobs, thereby strengthening the Marriott brand and its endorsing power.
Which initial customers are most likely to become the solid foundation upon which we can build a successful growth business? How can you reach them? It is quite tricky to find new market customers (or “non-consumers”) in the typical model of disruptive innovation. When only a fraction of a population is using a product, some of the non-consumption may simply reflect the fact that there just is not a job that needs to be done in the lives of non-consumers. Thus, a product that purports to help non-consumers do something that they hadn’t already prioritized in their lives is unlikely to succeed.
There are four elements of a pattern of new-market disruption, which managers can use to find ideal customers and market applications for disruptive innovations. These elements are—
- The target customers are trying to get a job done, but because they lack money or skill, a simple, inexpensive solution has been beyond reach.
- These customers will compare the disruptive product to having nothing at all. As a result, they are delighted to buy it, even though it may not be as good as other products available at high prices to current users with deeper expertise in the original value network (in other words, the bar one must scale to delight these customers is quite low).
- The technology that enables the disruption might be quite sophisticated, but disruptors deploy it to make the purchase and use of the product simple, convenient, and foolproof (enabling people with less money and training to begin consuming).
- The disruptive innovation creates an entire new value network. The new consumers typically purchase the product through new channels and use the product in new venues.
Disruptions that fit this pattern succeed because established competitors view entrants in the emerging markets irrelevant. The mainstream market the established companies sustain is unaffected by the new value network for some time. Incumbents might even think they have sensed a threat and are responding, investing inordinate amounts of money to advance the technology enough to please the customers in the existing value network, forcing the disruptive technology to compete on a sustaining basis. This, of course, is the wrong response.
Decisions about what activities to handle in-house and what to procure from suppliers and partners have a powerful impact on a new-growth venture’s chances for success. Most companies follow the core competency rule—if something fits your core competence, you should do it inside; if it’s not your core competence and another firm can do it better, you should outsource it to that firm.
The problem with the core-competence/not-core-competence categorization is that what might seem to be a noncore activity today might become a crucial competence to have mastered in a proprietary way in the future, and vice versa. Consider, for example, IBM’s decision to outsource the microprocessor for its PC business to Intel, and its operating system to Microsoft. In the 1980s, when IBM made these decisions, it did so to focus on what it did best— designing, assembling, and selling computers—and to keep development costs and time at a bare minimum. Yet, in the process of outsourcing what was not its core or its competence, IBM helped raise the profile and business stature of the two companies that eventually captured most of the profit in the industry.
The core/noncore categorization can lead to serious and even fatal mistakes. Instead of asking what their company does best today, managers should determine what they need to master today and, in the future, to excel on the trajectory of improvement that customers will define as important.
Remember the job-to-be-done approach—customers will not buy your product unless it solves a problem for them. What comprises a solution, however, differs across two circumstances — whether products are not good enough, or more than good enough. The advantage goes to integration when products are not good enough, and to outsourcing when products are more than good enough. Stay tuned for Part 2 of this post next week.
The purpose of this blog is to share what we’re learning about building cultures of peak performance. We study organizations that outperform their peers and have observed the following principles at work: Unified Leadership, Disciplined Hiring, Leading with Purpose, Stakeholder Engagement, Cost Leadership, Measuring Everything that Matters, Customer Experience, Clarity in Everything, and Staying Ahead of the Curve. If you’d like to talk about how we can help your organization, or if you’d like a thought partner, please give us a call.
Consultants in Retained Search & Leadership Advisory