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The Innovator's Solution: Creating and Sustaining Successful Growth (Hardcover)
by Clayton M. Christensen, Michael E. Raynor
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A critical tool to understand and succeed with disruptive innovation. |
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Author: Clayton M. Christensen, Michael E. Raynor
Publisher: Harvard Business School Press
Pub. in: September, 2003
ISBN: 1578518520
Pages: 288
Measurements: 9.5 x 6.4 x 1.1 inches
Origin of product: USA
Order code: BA00056
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- MSL Picks -
In 1997, Christensen published The Innovator's Dilemma, a widely read, hugely influential and utterly depressing management book. It explained why established, well-run companies regularly get blindsided by "disruptive" innovations that at first seem innocuous but wind up gutting their businesses.
It gave reason to why Digital Equipment never saw the PC coming, or why Sears never saw Wal-Mart. To tech leaders such as Andy Grove of Intel and Scott Cook of Intuit, the book was an eye-opener. Grove uses the book's principles today to explain the threat to the U.S. software industry posed by programmers in India.
Ultimately, though, Dilemma concludes there's not much established companies can do to change their fate. Big-company executives are trapped in a doom cycle. For them, reading Dilemma is as comforting as learning the physics propelling a giant asteroid that's heading for Earth.
This bothered Christensen, who seems a lot like Mister Rogers - if Mister Rogers were a 6-foot-8 Harvard Business School professor. Christensen comes across as kind, humble and happy. He has five kids, is a devout Mormon and has been a Boy Scout leader since 1975. He played basketball at Brigham Young University. In fact, he might actually be the anti-matter to Dennis Rodman, and if they ever meet, both will disappear in a cloud of cosmic dust.
"I try to be an optimistic guy," Christensen explains, "and Dilemma was such a pessimistic book." He says he felt a need to find a cure for the illness he discovered. He wanted to give managers hope. "It occurred to me that behind every one of these corporate murders was an innovative entrepreneur" who pulled the trigger, he says. So Christensen decided to study the innovators instead of the innovatees.
The result is The Innovator's Solution: Creating and Sustaining Successful Growth by Christensen and Michael Raynor, who used to be Christensen's student and is now research director at Deloitte Touche. They say this book, released in October, is a guide to thinking about innovation inside big companies. The goal is to help firms find a way to innovate over and over, growing like mad and keeping would-be disrupters at bay.
"By understanding the theory (behind innovation), we hope to make mere mortals able to achieve geniuslike results," Raynor says.
One conclusion is that a huge part of innovation comes from looking at a problem the right way. Customers don't really buy a product, Christensen and Raynor write - they hire a product to do something for them. The authors cite a classic example from a fellow Harvard prof: People don't want to buy a quarter-inch drill. They want a quarter-inch hole….
Christensen and Raynor lay out how the very nature of corporate life kills break- through innovations. There are several layers to this. Among them: Retail channels force consumer product companies to think in terms of products, not circumstances. Wal-Mart has a drill aisle; it doesn't have a hole aisle…
A theme running through Solution is that sustainable innovation - not incremental innovations, but big ones that drive growth - is pretty close to hopeless. Right up front, the authors admit that no company has ever done it. "A few companies have done it sporadically over time, but not over a sustained period," Christensen says.
The authors admit they have no idea whether their theories will work. That probably makes it less likely that corporations will do what Solution suggests…
At companies that have sustained innovation for a burst of time, it has almost always been because of the intuition and drive of a single person, the authors write. Sony did it from 1945-80, but it all burst from the head of co-founder Akio Morita, and fell off after he left. Apple Computer was the most innovative PC company when Steve Jobs was there, faltered after he left, then regained that knack when he came back. (From quoting an American reader)
Target readers:
Executives, managers, entrepreneurs, strategists, product/brand Managers, professionals, academics, and MBAs.
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Clayton M. Christensen, D.B.A., is the Robert and Jane Cizik Professor of Business Administration, with a joint appointment in Technology and Operations Management and General Management, at the Harvard Business School.
Michael E. Raynor, D.B.A., is a Director at Deloitte Research, the thought leadership arm of Deloitte.
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From the Publisher:
At best one company in ten is able to sustain profitable growth. Yet capital markets demand that all companies seek it relentlessly and mercilessly punish those who fail. Why is consistent, persistent growth so difficult to achieve? Surprisingly, it's not for lack of great ideas or capable managers, nor is it because customers are too fickle or innovation too unpredictable. Innovation fails, say Clayton M. Christensen and Michael E. Raynor, because companies unwittingly strip the disruptive potential from new ideas before they see the light of day.
In his worldwide bestseller The Innovator's Dilemma, Christensen explained how industry leaders get blindsided by disruptive innovations precisely because they focus too closely on their most profitable customers and businesses. The Innovator's Solution shows how companies get to the other side of this dilemma, creating disruptions rather than being destroyed by them.
Drawing on years of in-depth research and illustrated by company examples across many industries, Christensen and Raynor argue that innovation can be a predictable process that delivers sustainable, profitable growth. They identified the forces that cause managers to make bad decisions as they package and shape new ideas – and offer new frameworks to help managers create the right conditions, at the right time, for a disruption to succeed. The Innovator's Solution addresses a wide range of issues, including:
- How can we tell if an idea has disruptive potential?
- Which competitive situations favor incumbents, and which favor entrants?
- Which customer segments are primed to embrace a new offering?
- Which activities should we outsource, and which should we keep in-house?
- How should we structure and fund a new venture?
- How do we choose the right managers to lead it?
- How can we position ourselves where profits will be made in the future?
Revealing counterintuitive insights that will change your perspective on innovation forever, this landmark book shows how to create a disruptive growth engine that fuels ongoing success.
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The Growth Imperative
Financial markets relentlessly pressure executives to grow and keep growing faster and faster. Is it possible to succeed with this mandate? Don't the innovations that can satisfy investors' demands for growth require taking risks that are unacceptable to those same investors? Is there a way out of this dilemma?
This is a book about how to create growth in business. Growth is important because companies create shareholder value through profitable growth. Yet there is powerful evidence that once a company's core business has matured, the pursuit of new platforms for growth entails daunting risk. Roughly one company in ten is able to sustain the kind of growth that translates into an above-average increase in shareholder returns over more than a few years. Too often the very attempt to grow causes the entire corporation to crash. Consequently, most executives are in a no-win situation: equity markets demand that they grow, but it's hard to know how to grow. Pursuing growth the wrong way can be worse than no growth at all.
Consider AT&T. in the wake of the government-mandated divestiture of its local telephony services in 1984, AT&T became primarily a long distance telecommunications services provider. The break-up agreement freed the company to invest in new businesses, so management almost immediately began seeking avenues for growth and the shareholder value that growth creates.
The first such attempt arose from a widely shared view that computer systems and telephone networks were going to converge. AT&T first tried to build its own computer division in order to position itself at that intersection, but was able to do no better than annual losses of $200 million. Rather than retreat from a business that had proved to be unassailable from the outside, the company decided in 1991 to bet bigger still, acquiring NCR, at the time the world’s fifth largest computer maker, for $7.4 billion. That proved only to be a down payment: AT&T lost another $2 billion trying to make the acquisition work. AT&T finally abandoned this growth vision in 1996, selling NCR for $3.4 billion, about a third of what it had invested in the opportunity.
But the company had to grow. So even as the NCR acquisition was failing, AT&T was seeking growth opportunities in technologies closer to its core. In the light of the success of the wireless services that several of its spun-off local telephone companies had achieved, in 1994 the company bought McCaw Cellular, at the time the largest national wireless carrier in the United States, for $11.6 billion, eventually spending $15 billion in total on its own wireless business. When Wall Street analysts subsequently complained that they were unable to properly value the combined higher-growth wireless business within the lower-growth wireline company, AT&T decided to create a separately traded stock for the wireless business in 2000. this valued the business at $10.6 billion, about two thirds of the investment AT&T had made in the venture.
But the move left AT&T wireline stock right where it had started, and the company had to grow. So in 1998 it embarked upon a strategy to enter and reinvent the local telephony business with broadband technology. Acquiring TCI and MediaOne for a combined price of $112 billion made AT&T Broadband the largest cable operator in the United States. Then, more quickly than anyone could have foreseen, the difficulties in implementation and integration proved insurmountable. In 2000, AT&T agreed to sell its cable assets to Comcast for $72 billion.
In the space of a little over 10 years, AT&T had wasted about $50 billion and destroyed even more shareholder value – all in the hope of creating shareholder value through growth.
The bad news is that AT&T is not a special case. Consider Cabot Corporation, the world's major producer of carbon black, a compound that imparts to products such as tires many of their most important properties. This business has long been very strong, but the core markets haven't grown rapidly. To create the growth that builds shareholder value, Cabot's executives in the early 1980s launched several aggressive growth initiatives in advanced materials, acquiring a set of promising specialty metals and high-tech ceramics businesses. These constituted operating platforms into which the company would infuse new process and materials technology that was emerging from its own research laboratories and work it had sponsored at MIT.
Wall Street greeted these investments to accelerate Cabot's growth trajectory with enthusiasm and drove the company's share price to triple the level at which it had languished prior to these initiatives. But as the losses created by Cabot's investments in these businesses began to drag the entire corporation's earnings down, Wall Street hammered the stock. While the overall market appreciated at a robust rate between 1988 and 1991, Cabot's shares dropped by more than a half. In the early 1990s, feeling pressure to boost earnings, Cabot's board bought in a new management whose mandate was to shut down the new businesses and refocus on the core. As Cabot's profitability rebounded, Wall Street enthusiastically doubled the company's share price. The problem, of course, was that this turnaround left the new management team no better off than their predecessors: desperately seeking growth opportunities for mature businesses with limited prospects.
We would cite many cases of companies' similar attempts to create new-growth platforms after the core business had matured. They follow an all-too-similar pattern. When the core business approaches maturity and investors demand new growth, executives develop seemingly sensible strategies to generate it. Although they invest aggressively, their plans fail to create the needed growth fast enough; investors hammer the stock; management is sacked; and Wall Street rewards the new executive team for simply restoring the status quo ante: a profitable but low-growth core business.
Even expanding firms face a variant of the growth imperative. No matter how fast the growth treadmill is going, it is not fast enough. The reason: Investors have a pesky tendency to discount into the present value of a company's stock price whatever rate of growth they foresee the company achieving. Thus, even if a company's core business is growing vigorously, the only way managers can deliver a rate of return to shareholders in the future that exceeds the risk-adjusted market average is to grow faster than shareholders expect. Changes in stock prices are not driven by simply the direction of growth, but largely by unexpected changes in the rate of change in a company's earnings and cash flows. Hence, one company that is projected to grow at 55 and in fact keeps growing at 5% and another company that is projected to grow at 25% and delivers 25% growth will both produce for future investors a market-average risk-adjusted rate of return in the future. A company must deliver the rate of growth that the market is projecting just to keep its stock price from falling. It must exceed the consensus forecast rate of growth in order to boost its share price. This is a heavy, omnipresent burden on every executive who is sensitive to enhancing shareholder value.
It's actually even harder than this. This canny horde of investors not only discounts the expected rate of growth of a company's existing businesses into the present value of its stock price, but also discounts the growth from new, yet-to-be-established lines of business that they expect the management team to be able to create in the future. The magnitude of the market's bet on growth from unknown sources is, in general, based on the company's track record. If the market has been impressed with a company's historical ability to leverage its strengths to generate new lines of business, then the component of its stock price based on growth from unknown sources will be large. If a company's past efforts to create new-growth businesses have not borne fruit, then its market valuation will be dominated by the projected cash flow from known, established businesses.
Table 1-1 presents one consulting firm's analysis of the shared prices of a select number of Fortune 500 companies, showing the proportion of each firm's share price on August 21, 2002, that was attributable to cash generated by existing assets, versus cash that investors expected to be generated by new investments. Of this sample, the company that was on the hook at the time to generate the largest percentage of its total growth from future investments was Dell Computer. Only 22% of its share price of $28.05 was justified by cash thrown off by the company's present assets, whereas 78% of Dell's valuation reflected investor's confidence that the company would be able to invest in new assets that would generate whopping amounts of cash. Sixty-six percent of Johnson & Johnson's market valuation and 37% of Home Depot's valuation were grounded in expectations of growth from yet-to-be-made investments. These companies were on the hook for big numbers. On the other hand, only 5% of General Motor's stock price on that date was predicated on future investments. Although that's a chilling reflection of the track record of GM's former management in creating new-growth businesses, it means that if the present management team does a better job, the company's share price could respond handsomely. (MSL remarks: The list includes brand-name companies such as Dell, J&J, P&G, GE, Wal-Mart, Intel, Pfizer, IBM, Merck, Home Depot, Boeing, GM and Cisco. The table is not shown in this book excerpt). (From Chapter One: The Growth Imperative)
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| View all 14 comments |
Andy Grove (Chairman, Intel) (MSL quote), USA
<2006-12-28 00:00>
In The Innovator's Solution, Christensen and Raynor address the holy grail of all organizations: how to generate growth and sustain it over long periods. Avoiding the temptation to provide simplistic formulas, they guide the readers through a carefully constructed framework that teach how to think about the issues that limit – and provide – growth to organizations. |
Pekka Ala-Pietila (President, Nokia) (MSL quote), USA
<2006-12-28 00:00>
Christensen and Raynor have done a superb job of creating a framework for helping to understand industry dynamics and for planning your own growth alternatives. |
Teo Ming Kian (Chairman, Singapore Economic Development Board) (MSL quote), USA
<2006-12-28 00:00>
Singapore, as a small nation, needs to be innovative and sensitive to disruptive changes more than other countries. Christensen and Raynor have provided an excellent framework to reduce the randomness of the innovation process. This framework will help in our effort to nurture an environment conducive for enterprises to create and capitalize on disruptive innovations. |
Geoffrey Moore (Chairman and founder of TCG Advisors, and author of Crossing the Chasm) (MSL quote), USA
<2006-12-28 00:00>
A good business book makes mangers stop and think. A great business book teaches managers how to stop and think. This is a great book. It is hard to imagine an executive team that would not benefit from devoting an entire day to discussing it. |
View all 14 comments |
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