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Seeing What's Next: Using the Theories of Innovation to Predict Industry Change (Hardcover)
by Clayton M. Christensen, Stott D. Anthony, Erik A. Roth
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Innovation, Corporate strategy, Business |
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| MSL Pointer Review:
An eye-opening read to help companies to stay ahead of competition through adaptation and strategic choices. |
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Author: Clayton M. Christensen, Stott D. Anthony, Erik A. Roth
Publisher: Harvard Business School Press
Pub. in: May, 2004
ISBN: 1591391857
Pages: 312
Measurements: 9.4 x 6.5 x 1.2 inches
Origin of product: USA
Order code: BA00055
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- MSL Picks -
A stunningly good book. If you were disappointed at The Innovator's Solution, Christensen and team certainly deliver in Seeing What's Next. This is an intensely theoretically book so it is not to all tastes, and it takes a long time to digest. The analytics and case studies used are rudimentary, but the conceptual frameworks will have true strategists buzzing. Departing from his usual formula, Christensen and co-authors Scott Anthony and Erik Roth, aim Seeing What's Next at those who watch industries from the outside and must make important decisions based on what they see. By contrast The Innovator's Dilemma and The Innovator's Solution were aimed at managers inside firms who wanted to defend against or attack with a disruption.
In this book, the authors proclaim that good theory provides a robust way to understand important developments, even when data is limited. And theory is even more helpful when there is so much data that it is tough to discern what information really matters. Theory helps to identify signals of change amongst a deluge of meaningless "noise". Three big theoretical frameworks are brought together in this work, as outlined in previous Christensen's books.
Firstly the Disruptive Innovation Theory - refers to how new entrants to an industry can use relatively simple, convenient, low-cost innovations to create growth and triumph over powerful incumbents. Disruptive innovation can be of two types: one) low end disruptions which deliver a low priced alternative to customers who are overshot by existing offerings or two) new-market disruptions, which create new growth by making it easier to for people to do something that historically required deep expertise or wealth.
Secondly the Resources, Processes and Values Theory - that helps to explain why existing companies have such difficultly in grappling with disruptive innovations. The theory holds that resources (what an organization has), processes (how work is done), and values (the criteria by which resources are allocated) collectively define the organization's strengths as well as its weaknesses and blind spots.
Thirdly the Value Chain Evolution Theory - this framework helps to assess whether an organization has made the organizational design choices to compete successfully. The golden rule underlying this theory is that companies ought to control any activity or combination of activities within the value chain that drive performance along the dimensions that matter most to customers. In other words, they should integrate to improve performance along dimensions that are "not good enough" for what customers need and outsource what is "more that good enough" (those features and improvements that customer don't need and won't pay more to use).
Combining these three models will achieve a process for "looking ahead, and working backwards", as ManyWorlds CEO Steve Flinn would say. Combine this approach with the StrategySpace model, to ensure that your organization is not trying to inhabit the same "strategyspace" as current or future players in your marketspace and you have an excellent recipe for success. Of course it all comes down to execution, and theories are impotent until they are used, but if you can see what's next, you are half way there. (From quoting Naomi, USA)
Target readers:
Executives, managers, entrepreneurs, professionals, government leaders, and MBAs.
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Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School, with a joint appointment in Technology and Operations Management and General Management.
Erik A. Roth is a Partner at Innosight LLC. Stott D.
Anthony is a Consultant in Mckinsey & Company's Boston Office
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From the Publisher:
Great firms don't topple overnight. Industries don't radically change in an instant. But far too often, it seems like they do. And when that happens, the consequences - for the executives in those firms, for the analysts who recommend them, for the investors who bet on them, and millions of others with a stake in the outcome - are devastating.
Now, the world's leading expert on disruptive innovations and his team of researchers introduce a groundbreaking model that will enable "outsiders" with no proprietary information to predict how innovations will impact firms and industries - and to make the right decisions while there is still time to make them.
Imagine how different the outcome would have been if Western Union had recognized the telephone's disruptive potential, rather than dismissing it as a "toy." Imagine how different the fates of millions of investors would have been if analysts had been able to read the signs that trouble was afoot before Digital Equipment Corporation collapsed. Imagine how it would feel to be in the shoes of the investors who wisely put their money into eBay instead of the hundreds of dotcoms that burst along with the technology bubble.
Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth argue that every industry-shifting disruption is preceded by strong "signals" that suggest that dramatic changes are underway. What's more, by knowing what signals to look for, it is possible to determine where disruption is heading, which firms will find themselves in competition as a result of the disruption, which competitor is most likely to win, and which choices can change the game..
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Overshot Consumers and Opportunities for Low-End Disruption, Shifting Profits, and Emergence of Rules
The final group of existing customers is overshot customers (Customers who stop paying for further improvements in performance that historically had merited attractive price premiums, according to the author). As companies introduce up-market sustaining innovations and improve their products and services, they eventually overshoot the performance that some of their customers can use. One bedrock finding from our research is that companies innovate faster than customers' lives change. In other words, what people are looking to get done remains remarkably consistent, but products always improve. Thus, products eventually become too good. Overshooting is the driver behind the commoditization – the process that results in companies being unable to profitably differentiate their products and services. Customers would always be willing to pay higher prices for better products.
Overshooting redefines the type of innovation that can create opportunities for growth because companies can alter an industry's basis of competition. It opens the door for several important forms of industry change and leads to changes in how companies ought to organize.
How can you tell if customers are overshot? Overshot customers pay decreasing premiums for improvements they used to value. In economic parlance, they derive diminishing marginal benefits from product enhancements. Companies add extra features that never get used. People begin to complain about things they ignored in the past. "This product is too complicated," they say. "And it costs too much."
Nature abhors a vacuum, especially when avenues for profitable growth remain. You can always predict that competitors will be motivated to find new ways to earn above-average profits. After functionality and reliability have become good enough, the next dimensions along which firms can compete relate to ease of use – how flexible and easy to use a product (convenience), how squarely a product lines up with individual customers’ idiosyncratic jobs (customization), and how much it costs to use a product (price). Note that price appears last on this list even though the emergence of price-based competition is the signal most often associated with overshooting. Remember, price-based competition means that companies can no longer earn premium prices for improving a particular dimension. It is only after companies fulfill all customer needs that price becomes the only thing that matters. In other stages, customers reward companies with premium prices for providing superior functionality, reliability, convenience, or customization.
It is important to remember that all customers in a market do not become overshot at once. The condition starts at the bottom of the market and then creeps upward.
Overshooting and the resultant changes in the basis of competition open the door for the 3 different forms of industry change:
1. Low-end disruptions taking root among the most overshot customers
2. Specialists entering and displacing integrated players
3. Standards or rules developing that allow different types of providers to create products and services good enough to meet the minimum requirements of customer segments.
We will discuss each of these changes and show how they all require changes in an industry's value chain.
Targeting the Lowest Tier: Low-End Disruptive Innovations
Although they don't create new-growth markets, innovators in overshot market tiers can create new-growth companies by using low-end disruptive innovations to establish a beachhead among the incumbent's least demanding customers. These customers are the most overshot. They are likely using the incumbent's product or service because it is the only available alternative. But they are unsatisfied. They are paying for functionality and features that just aren't important to them. They are the most likely to desert the incumbent for a company offering lower prices or more convenience.
For example, MCI created low-end disruptive growth by targeting price-sensitive customers who did not need all of the functionality offered by AT&T. MCI's Execunet service, introduced in the 1970s, allowed business users to pay lower prices if they were willing to dial a 22-digit code to connect to MCI's network. MCI built its own long-distance network and relied on AT&T's local lines for call origination and completion. Although AT&T predictably protested the requirement that it allow its competitor to use its local network, MCI could plug its equipment into AT&T's switches relatively easily. Regulation granted MCI permission to enter at this point of modularity.
Although MCI did not (and could not) offer all of the advanced features that AT&T's customers enjoyed, it offered much lower prices than AT&T. Regulation prevented AT&T from dropping its prices without appealing to the local regulatory commission. Exploiting this price discrepancy, MCI began to build a large customer base by reaching price-sensitive business customers with its low-price offering. MCI's customers tolerated lower functionality in exchange for lower prices.
A signal that a company is launching a low-end disruptive innovation is the creation of a business model that makes money in a different way than established companies – for instance, lower prices but higher asset turnover, a different mix of sales and post-sales support revenue, and so on. |
Entering as a Specialist: Displacements
Specialist providers can introduce a displacing innovation and take part of a market from an incumbent. Displacements are a distinct class of innovation. Unlike up-market sustaining innovations, displacements take place at the point of modularity. Unlike low-end disruptions that first target the least demanding customers, displacements first target the mainstream market. Displacements do not necessarily involve low-cost business models or products with performance limitations. Specialists who focus on one particular piece of a product or service tend to introduce displacements.
Consider the emergence of competition in the customer premise equipment (CPE) market. In the 1950s, Western Electric (AT&T's equipment arm) controlled the residential CPE market. As implied by the name, CPE is anything a customer plugs into the network and uses, such as a standard telephone. Western Electric produced a phone that was indestructible and available in any color you wanted – as long as you wanted black or beige. Efforts to sell non- Western Electric CPEs were restricted, because nonsanctioned equipment could threaten the telephone network's reliability. In simple terms, plugging something else in might unexpectedly affect the entire network, so plugging in only those technologies designed and made by AT&T was the best alternative.
In the late 1950s, entrepreneur Tom Carter introduced the Carterfone. Resembling a walkie-talkie, the Caterfone transmitted a voice signal from a remote device to a speaker placed next to the phone. It let farmers use their telephones when they were in the fields. Because the Caterfone had a direct electrical connection to AT&T's network, AT&T cust off service to any subscriber it found using the device.
After an FCC decision in 1968 sanctioning the use of Caterfone and a protracted legal battle that eventually reached the Supreme Court, the government decided that consumers could attach devices to the edge of the network that met a set of specifications and that did not cause any unanticipated performance problems elsewhere in the system.
The court decision opened the floodgates. New specialist companies offering a wide variety of devices entered the CPE market, stealing substantial share from Western Electric. Competition eventually led to the creation of innovative types of CPE that created booming new product segments, such as the fax machine, the modem, the private-branch exchange (PBX), which manages and directs in most modern businesses. Specialist companies arose and captured these new markets.
The financial services industry has also seen a number of displacements. Historically, the same financial institution would originate, service, and source a loan (such as a mortgage, auto loan, or consumer credit card). The past two decades have seen the emergence of specialist providers. Asset securitization and credit scoring (discussed below) have fueled this displacement.
When looking for displacements, look for functionality that overshoots customers and for modular interfaces. Both are important: Remember, AT&T and Western Electric didn't immediately lose all of their business when competition emerged in the CPE market. Specialist companies had no chance of competing against AT&T's equipment at the core of the telephone system. AT&T's integration still served as a source of unparalleled competitive advantage. Only AT&T could develop and master the intricate interdependencies involved in the electronic switches that constituted its core operations. As a general rule, specialists cannot win unless their products can interface with the larger product system at points of well-defined modularity. For example, the bevy of specialists spawned by the Telecommunications Act of 1996 (Telecommunications Reform Act or TRA) - particularly the so-called competitive local exchange carriers (CLECs) – struggled. The CLECs found it surprisingly difficult to plug into the local telephony provider's networks. There was no clean interface allowing easy entrance. (From Chapter One: The Signals of Change: Where Are the Opportunities?)
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Inc. magazine (MSL quote), USA
<2006-12-28 00:00>
Just as kids await the latest Harry Potter installment, so do business leaders look for Clayton M. Christensen's next offering. |
Robert Morris (MSL quote), USA
<2006-12-28 00:00>
Opinions are divided as to whether or not it is possible to "predict industry change" but it is certainly possible to maintain a system by which to rigorously monitor developments in relevant industries, measure the nature and extent of probabilities, and then formulate appropriate contingency plans in anticipation of them. (FYI, Peter Schwartz in The Art of the Long View: Planning for the Future in an Uncertain World and Kees van der Heijden in Scenarios: The Art of Strategic Conversation also have much of substantial value to say about that process.) Together with Erik A. Roth and Scott D. Anthony, Clayton M. Christensen offers in this volume further development of core concepts previously discussed in The Innovator's Dilemma and The Innovator's Solution. However, there is a substantial amount of new thinking and an abundance of new material. Although I strongly recommend that the two earlier works be read first, that is not a requirement to derive full benefit from Seeing What's Next.
According to Christensen, "While the two previous books were aimed at managers [in italics] inside firms who wanted to defend again or attack with a disruption, Seeing What's Next is written for those who watch industries from the [in italics] outside, and who must make important decisions based on what they see. It will help executives, analysts, investors, and others who have a stake in a specific industry to evaluate the impact of innovations, the outcomes of competitive battles, and the moves made by individual firms - and to make smarter business decisions, forecasts, and stock recommendations based on those evaluations. The goal here [in Seeing What's Next] is to dramatically increase the odds of getting things right in the arena where wrong decisions could be devastating."
The authors carefully organize their material as follows:
In Part I, "How to Use Theory to Analyze," they identify the "signals of change" which indicate where the best opportunities are; explain how to size up competitors; how to identify which strategic choices are of greatest importance; and then explain how nonmarket factors influence innovation.
Then in Part II, "Illustrations of Theory-Based Analysis," they apply various TBA tools when examining the future of education, aviation, semiconductors, healthcare, and telecommunications; using the same tools, they also assess strategies for both corporations and countries. Then in the "Conclusions" section, they step back and recap where they have taken their reader, suggest areas for further investigation, and provide some final thoughts. I especially appreciate the Appendix in which the authors provide a summary of the book's key concepts.
All of the most important points made in this book help us to understand both the opportunities and (yes) the perils of disruptive innovation. They include: disruption is a process, NOT an event; disruption is a relative phenomenon in that what is disruptive to one company may be sustaining to another; different, even radical technology does NOT equal disruptive; disruptive innovations are NOT limited to high-tech markets. Re this last point, the authors carefully explain that disruption can occur in any product or service market and can even help to explain competition among national economies. (Please see Chapter Chapter 9, pages 207-223). Another substantial value-added benefit of this book is derived from the generously annotated "Notes" at the end of each chapter. Together, these sections (all by themselves) are worth far more the cost of this book.
Thus, in a single volume, the authors guide and inform decision-makers in all manner of organizations as they embark on the three-part process by which to (1) identify signals of change, (2) evaluate competitive, head-to-head battles between companies loosely classified as "attackers" and "incumbents" (please see the Glossary), (3) formulate appropriate strategic choices that can influence the outcome of competitive battles, and (4) meanwhile establish and then sustain an effective relationship between innovation and nonmarket forces such as government regulation. Christensen, Anthony, and Roth are to be congratulated for what I consider to be a brilliant achievement. Reluctant as I am to predict anything, I feel certain that Seeing What's Next will become a business book "classic." |
Bill Godfrey (MSL quote), USA
<2006-12-28 00:00>
This is the third book in a series on innovation, with Christensen as the lead author. The three books develop theories around the concepts of disruptive and sustaining innovation, and how to apply strategies based on these concepts and an understanding of the markets into which innovations are directed.
The first book, The Innovator's Dilemma, explains why established companies can often be successfully attacked by innovators introducing disruptive products, while The Innovator's Solution develops an approach to launching disruptions. Seeing What's Next changes focus somewhat to propose that the theories developed in the first two books can be used to analyse and predict industry change. In doing so, it also provides a useful summary of the theories put forward in the previous books and their application.
The analysis is undertaken essentially in the context of Porter's 'five forces' (competitors, potential entrants, buyers, substitutes and suppliers) but with the added dimensions of the nature of the innovation (disruptive or 'sustaining' - i.e. something that creates new markets or reshapes existing ones, or something that develops further on existing offerings) and the range of customers from 'overshot' (offered more than they really want) to 'undershot' (looking for more than they are offered) in terms of product characteristics.
It is a useful way of looking at markets - one that will keep analysts very occupied in collecting data and pondering alternative conclusions and strategies. The associated risk is that it appears to invite 'paralysis by analysis'.
While the coverage of the book extends to other industries, including airlines, education and the health industry, the methodology is built primarily around various elements of the telecommunications and computer industries. I suspect that choice of the fashion or food industries would have led to a different perspective on the same questions - one in which the ideas put forward by Gladwell in The Tipping Point might provide more useful clues to competitive challenges to established companies.
How reliable the authors' methodology is in actually predicting the future in a specific case is, of course, open to question, and it is not a question that the authors put to the test. Rather, they claim that the analytical process proposed will put both a potential attacker and a potential defendant into a better position to achieve their goals.
The three underlying theories round which the analysis in the book is built are:
- the disruptive innovation theory (briefly described above)
- the resources, processes and values (RPV) theory, and
- the value chain evolution theory (VCE).
The RPV theory argues that resources, processes and values define an incumbent's strengths, but also its weaknesses and blind spots - it is not easy to operate outside a well established arena.
The VCE theory argues that integration gives greater control over interdependent factors but reduces flexibility. The theory provides a tool for judging whether the right decisions about what should and should not be integrated have been made in particular circumstances.
Part 1 of the book elaborates on these theories and their application, while Part 2 essentially consists of extended case studies of five industries (education, aviation, semiconductors, health care, telecommunications) and an examination of innovation overseas. Of these industries, I am most familiar with health care and, while I found the analysis interesting, it did not seem to me to come to grips with the central dynamics of the challenge of health care into the future. |
Gerry Stern (MSL quote), USA
<2006-12-28 00:00>
The theme is "(u)sing theory allows us to see the future more clearly and act more confidently to shape our destiny." Using case studies, the authors outline a model, diagnostics and tools to allow decision makers to spot industry-changing firms or business models, forecast winners and losers, and assess the merits and implications of specific strategic choices. The book's foundation is built on the premise that "the best way to make accurate sense of the present, and the best way to look into the future, is through the lens of theory. Good theory provides a robust way to understand important developments, even when data is limited. And theory is even more important when there is an abundance of data. ... Theory helps to block out the noise and to amplify the signal." This book reveals how to use theory to see the future. The authors' aim is to teach readers how to use the theories of innovation to predict industry change. The central elements of the authors' approach are: tracking the signals of change; sizing up competitors; and identifying which choices matter. It's hard to do justice to book so abounding in ideas and insights. The bottom line is, this is a great book for anyone who must strategically plan for any organization. Read this book next to start seeing what's next. |
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