A Brief Book Review of The Innovator’s Solution by Clayton M. Christensen and Michael E. Raynor
John Stuart Mill famously said, “Sound theory is the only foundation for sound practice.” Another John with a four-syllable name, Maynard Keynes, later quipped: “Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.” Clayton Christensen and Michael Raynor would probably agree wholeheartedly with both statements. They begin and end this brief but dense book, The Innovator’s Solution (2003), with the idea that whether we are conscious of it or not, all business people, whether the managers of established enterprises or the entrepreneurs and investors of new companies, have mental models and theories guiding their business decisions and actions; and not all of these models and theories are good. The best theories are those which are based on pattern recognition that evolves as the patterns it observes evolve. The worst theories tend to be simple inventories of seemingly fixed attributes. While the best theories are grounded in existing circumstances, they also reflect that circumstances change, and as such, they themselves should change too. The good theory this book hopes to build is around the question of growth, namely why it is so hard for companies to sustain their success. To this end, I would argue its most important chapter is its sixth, which attempts to provide guidance on “How to Avoid Commoditization”.
But let’s back up for a second. To quote the great writer Roger Lowenstein, the trouble begins, “as it often will, in a remote and seemingly minor colony of the corporate empire”. A manager at a large, established company is tasked with finding growth. But not the natural rate of growth the large, established company is used to; she is tasked with finding growth that surprises outside investors by exceeding their expectations. In short, she is searching for innovation. Oh, Wall Street; can’t you ever leave well enough alone?
Enter Christensen and Raynor. They begin their theory-building by reprising a framework from the prequel to this book that Christensen wrote, The Innovator’s Dilemma (1997). The authors hold that there are two types of innovations: There are those that are sustaining in nature to the company’s value network (read: its entire business ecosystem) and its place within it, and there are those that are disruptive in nature. With sustaining innovations, a better product is being introduced to an existing market, and this is done best by established, integrated companies providing greater functionality and reliability to their most profitable customers. However, the disruptive innovations are where the largest future rewards are, and these arise from two different situations.
The first is low-end disruption; here a new company with modular or cobbled-together aspects is able to create a lower-margin cost structure to attract customers from the existing market who have been “overserved” on functionality and reliability and just want better speed and responsiveness. The second is new market disruption; a new company—instead of competing with the Goliaths by eating their low margin businesses and forcing them to flee up-market—competes with “nonconsumption” by finding a new “basis of competition” separate from established value networks. It does this by essentially serving new customers or situations that had previously been ignored. Christensen and Raynor spend ample time making the point that to figure out the latter type of disruption involves not asking customers why they like your product but what they hire it to do (the concept of “jobs-to-be-done”). To quote them later, “Competitiveness is far more about doing what customers value than doing what you think you’re good at.” This is not simple stuff to figure out or implement. Few outside of founder-led companies have done it well repeatedly. But it is imperative to know.
If our hypothetical manager is the right type of manager—as Christensen and Raynor spell out in an enlightened chapter on staff selection—it is not because she is deeply experienced in the new areas of disruptive innovation. Rather, it is because she has shown “the ability to learn what needs to be learned” to succeed here. But she still will face problems. The main problem is that the most exciting opportunities of tomorrow are small today and hard to sell within the traditional operations of a large, established company. Why? Because its resources, processes, and values are inextricably intertwined with benefiting its current value network of customers, distributors, and suppliers so that it can in turn make as much money as possible and sustain and grow its largeness.
I know this pretty well. I have advised several Fortune 500 companies on how to create and scale businesses and business models around sustaining and disruptive innovations. I have also served as the outsourced CFO for startups within several of these larger organizations, helping four promising early-stage startups recently raise $14.3 million from C-suites of their parent companies. The core challenge to overcome exists in what Christensen and Raynor refer to as “asymmetric motivations” within “resource allocation processes”. Essentially, the cost structures and values of large, established companies are geared toward prioritizing and incentivizing activities that raise the company up-market to higher margin business lines and keep their current customers happy; this comes at the opportunity cost of attracting new and (currently) less-lucrative customers who are the bedrock of new markets and future disruptive growth. The authors provide useful guidance for how to overcome these problems that aligns well with my own experiences.
This book is dense with ideas, and in many ways it is several books crammed into one. But it is absolutely worth reading. The section on how companies should be patient for growth but impatient for profit—rather than impatient for growth and patient for profit—is wonderful, as is the admirable employment of so many case studies; from the motorcycle, steel, airline, disk drive, automobile, milkshake, and PC industries, as well as repeated use of a Wayne Gretzky quote that would make businessman-theorist Michael Scott of Dundler Mifflin proud.
If you’d like to know how these theories have been sampled and remixed, head over to Ben Thompson’s blog Stratechery, where he has done an admirable job to challenge, update, and apply Christensen’s and Raynor’s powerful and eloquent theories for the ever-changing circumstances of our present time.