May 6, 2021
TPL Insights: Building Peak-Performance Cultures #66 – How Innovation Fuels Cultures of Peak Performance Pt 2
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.
Once customers’ requirements for functionality and reliability have been met, they redefine what is not good enough, changing the basis of competition in that market. The pressure of competing along this new trajectory of improvement forces a gradual evolution in product architecture, away from the proprietary and interdependent, toward more modular designs in a period of too-good performance. Modular architectures enable companies to introduce new products faster because they can upgrade individual pieces of a product without having to create a brand-new design. Modularity enables independent, nonintegrated organizations to sell, buy, and, assemble components and subsystems.
Many executives are resigned to the belief that, regardless of the innovation, the inevitable fate of their products is to be “commoditized.” However, there is some hope for them. Research has found that whenever commoditization is at work somewhere in a value chain, a reciprocal process—call it “de-commoditization”—is at work somewhere else in the value chain. Whereas the lack of differentiability inherent to commoditization undermines an organization’s ability to capture profits, de-commoditization creates opportunities to create and capture significant wealth. The companies that position themselves at a spot in the value chain where performance is not yet good enough will capture the profit.
The Value of Brands
Executives who seek to avoid commoditization often rely on the strength of their brands to sustain profitability, without considering that brands themselves too, become commoditized and de-commoditized. When things aren’t good enough yet in the value chain, and customers are not certain whether a product’s performance will be satisfactory, a well-crafted brand can close some of the gap between what customers need and what they fear they might get if they buy from an unknown supplier.
The migration of branding power in a market that is composed of multiple tiers is a process, not an event. Brands of companies with proprietary products typically create value as they attract customers who are not satisfied with the functionality or reliability of the best available. When one deals with more modular products and a greater emphasis on speed and convenience, the power to create profitable brands migrates more toward subsystems and the channel used.
Is Your Organization Capable of Disruptive Growth?
A surprising number of innovations fail because responsibility to build these businesses is given to managers or organizations whose capabilities are not up to the task. Indeed, an organization’s capabilities become disabilities when disruption is afoot. The concept of such capabilities can be unpacked into three classes or sets of factors that define what an organization can and cannot accomplish— its resources, its processes, and its values.
Resources (people, technology, information, cash, etc.) are the most tangible of the three factors, because they can be hired and fired, bought and sold, depreciated or built. They are often visible and measurable and can be easily transported across the boundaries of an organization. Typically (and unfortunately), the wrong people are chosen to lead a disruptive venture. Why is that?
Those with the right stuff are usually the wrong people. When hiring potential managers, corporations often focus on attributes—“good communicator,” “decisive,” “good people skills”—that do not necessarily lend themselves to disruptive successes. Rather than focus on categories, companies should consider focusing on prior experiences that show appropriate intuition and management skills for the disruptive environment of a new-growth business venture. What sorts of problems have they wrestled with in the past? Have they learned enough to meet similar challenges head-on in a new environment? Can they learn and bounce back from failure?
Organizations create value as employees transform inputs of resources (the work of people, equipment, technology, etc.) into products and services of greater worth. The patterns through which these transformations are accomplished—the processes at work—include ways products are developed and made, and the methods by which procurement, research, budgeting, compensation, resource allocation, and more are accomplished. Processes are defined or evolve to address specific tasks, and the efficiency of a given process is determined by how well these tasks are performed.
Processes that define capabilities in executing certain tasks concurrently define disabilities in executing others. Consistency is key—processes are not as flexible as resources, and must be applied in a consistent manner, time after time. In addition, some processes are difficult to observe, and it can therefore be difficult to judge whether a process will facilitate or impede a new-growth business.
An organization’s values are the standards by which employees make prioritization decisions—those by which they judge whether an order is attractive or unattractive, whether a customer is more or less important than another, etc. Whereas resources and processes are often enablers that define what an organization can do, values often represent constraints that define what it cannot do.
If, for example, the structure of a company’s overhead costs requires it to achieve gross profit margins of 40 percent, a powerful value will likely evolve that will nix any idea that promises gross margins below 40 percent. Such an organization would be incapable of succeeding in low-margin businesses because one cannot succeed with an endeavor that cannot be prioritized. A different organization with a different cost structure might accord a high priority to a similar project. These differences create the asymmetries of motivation that exist between disruptors and “disruptees.”
The Right Organizational Home for Disruptive Businesses
Incumbent leaders in an industry almost always emerge victorious in sustaining-technology battles, whereas historically they have almost always lost battles of disruption. Industry leaders develop and introduce sustaining technologies over and over again—they develop a capability for sustaining innovation that resides in their processes. Sustaining-technology investments also fit the values of the leading companies, because they promise improved profit margins from better or cost-reduced products.
Conversely, disruptive innovations occur so intermittently that no company has a practiced process for handling them. Disruptive products typically promise lower profit margins per unit sold and cannot be used by the best customers, rendering disruptions inconsistent with many companies’ values. They have the resources required to succeed, but their processes and values are disabilities in their pursuit of disruptive innovation.
Smaller, disruptive companies are actually more capable of pursuing emerging growth markets. They might lack resources, but their values can embrace small markets and their cost structures can accommodate lower margins per unit sold. These advantages can add up to enormous opportunity for the organization whose processes will facilitate what needs to be done and whose values can prioritize those activities.
Disruptive Growth Starts at the Top
Senior executives of companies that repeatedly seek to create disruptive growth have three jobs:
• They must personally stand astride the interface between disruptive growth businesses and the main- stream businesses, to determine through judgment which of the corporations’ resources and processes should be imposed on the new business.
• They must shepherd the creation of a process that can be called a “disruptive growth engine,” which capably and repeatedly launches successful growth businesses.
• They must perpetually sense when the circumstances are changing and keep teaching others to recognize these signals. Senior executives need to look to the horizon (the low end of the market, or in nonconsumption) for signs that the basis for competition is changing. They must then initiate projects to ensure the company properly responds to the circumstance as an opportunity, not a threat.
To succeed in disruptive business endeavors, CEOs must be intimately involved. Because the processes and values of mainstream business by their very nature are meant to manage sustaining innovation, there is no alternative at the outset to the CEO or someone with comparable power assuming oversight responsibility for disruptive growth.
Disruption as Part of the Process
Launching a single successful disruptive business can create years of profitable growth—just ask General Electric (which launched GE Capital), Johnson & Johnson (for their medical devices and diagnostics group), or Hewlett-Packard (whose disruptive ink-jet printer is now the company’s primary profit driver).
Launching a sequence of growth businesses requires leaders to repeatedly use sound theories to make solid key business-building decisions. From these activities, a predictable, repeatable process for identifying, shaping, and launching successful growth can coalesce. Such an engine would have four critical components.
Start Before You Need To
The best time to invest for growth is when the company is growing. To build what will be a respectable growth business in five years’ time, you must start now, adding new units to your portfolio of growth businesses as dictated by the growth needs of the corporation five years hence. This gives your businesses the opportunity to grow under the radar, away from the glare of Wall Street, giving each disruptive endeavor ample time to achieve viability and take off. Wal-Mart today is a $220 billion business, but it took 12 years for it to make its first billion—it was a disruption that needed a longer runway before it took off.
Put a Senior Manager in Charge
Creating a successful disruptive growth engine requires the careful coaching of the CEO or another senior manager with the confidence and power to exempt a venture from an established corporate process, to declare when different processes need to be created, and to ensure that the criteria being used in resource allocation are appropriate to the circumstance of each venture and the needs of the company. He or she must be well versed in disruptive innovation theory, capable of discerning ideas with disruptive potential from those best deployed as sustaining endeavors, and able to maximize the success prospects of disruptive ideas by feeding them into a nurturing business process.
Create an Expert Team of Movers and Shapers
Ideas often lose their disruptive growth potential in the shaping process that they go through in order to get funded. The challenge here is to create a separately operating process through which ideas can be shaped into high-potential disruptions. Senior management should create a core team that is responsible for collecting disruptive innovation ideas and molding them into propositions that have the greatest chance for success. This core shaping group cannot use the company’s standard planning and budgeting processes when launching disruptive businesses, because they will not know, at the outset, the full dimensions of growth strategy that will ultimately prove successful.
Train the Troops
Sales, marketing, and engineering employees are best positioned to encounter disruptive growth ideas, and thus should be among the first of the company’s “troops” to be trained in the language of sustaining and disruptive innovation. It is crucial that they come to know what kinds of ideas they should channel into the sustaining processes of established business units, and which should be directed into disruptive channels. These people have direct contact with markets and technologies that can yield ideas for new-growth businesses; with training, they can develop intuition on these matters that far outstrip any kind of analyst-laden corporate strategy
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