The Innovator's Solution: Creating and Sustaining Successful Growth (Book Digest)

"The Innovator's Solution" by Clayton Christensen and Michael Raynor lays out a framework for understanding disruptive innovation. Disruptive innovation creates both tremendous opportunities and existential threats for companies, making it one of the critical concepts driving modern corporate strategy.

Salespeople who understand disruptive innovation can position their product as a way to drive strategic success, enabling them to attract interest from senior decision makers who have the power to make major purchases.

Disruptive vs. Sustaining Innovation

Christensen and Raynor distinguish between two types of innovation: sustaining innovation and disruptive innovation.

Established companies recognize opportunities for sustaining innovation and are good at capturing them. The problem is that exceptional growth comes from disruptive innovation. What's worse, neglecting disruptive innovation opens companies up to threats from new entrants to the market.

Sustaining innovations improve product performance along dimensions historically valued by mainstream customers. Examples include cars with greater horsepower or computers with faster processors.

Established companies recognize opportunities from sustaining innovation because they help them sell more products to their best customers at higher margins. Established companies also tend to succeed at sustaining innovation because they have the motivation and resources to serve their existing customers better.

The problem with sustaining innovations is that the market eventually becomes over-served: The product becomes "good enough" and buyers won't pay more for higher performance. For example, most drivers don't need more horsepower past a certain point.

Disruptive innovations initially offer lower performance on traditional metrics but provide other benefits like lower cost or greater convenience. Established companies often neglect disruptive innovations because these innovations start in new or low-end markets that established companies view as unattractive.

Over time, disruptive innovations improve and move upmarket because buyers love their lower cost or greater convenience. This causes the disruptive innovation to capture the market.

Types of Disruptive Innovation

The authors identify two types of disruptive innovations:

Low-end disruptions target customers who are over-served by existing products and would prefer something less expensive or more convenient. Steel minimills are an example: They initially produced lower-quality steel at a 20% cost advantage, capturing the low-end of the steel market. Over time, their quality improved and they were able to move upmarket into more profitable segments.

This frequently happens with low-end disruptions: They start out in a corner of the market but they improve and eventually capture the bulk of the marketshare and profits.

New-market disruptions compete against non-consumption by allowing people who previously couldn't access a product to use it. For example, Sony's transistor radios enabled people who couldn't afford vacuum tube radios to own one.

These innovations create entirely new value networks rather than competing directly with incumbents.

Avoiding Commoditization

Changing technology can erode established companies' profits because it enables competitors to catch up. Products that stand still become commodities that have to compete on price and earn very little profit.

Commoditization happens in predictable ways and therefore good responses follow patterns.

New products typically earn the most profits for an integrated producer who controls the entire production process. New products are typically not "good enough," giving an advantage to integrated producers who can optimize every component to maximize performance.

iPhones are an integrated product: Apple builds the hardware, the operating system, and key components so they all work together seamlessly and create a differentiated product that consumers will pay more for.

Mature products develop to the point where their performance exceeds customer requirements. When this happens, they become commoditized, but there may still be outsized profits for some producers in the value chain.

Mature products often become modularized, using interchangeable components to cut costs. Windows PCs are an example of a modular product: The manufacturer bolts together standardized parts from many suppliers to create a finished product.

Consumers don't care very much which product they buy because all products are "good enough." This erodes pricing power and leads to lower profits.

There may still be profits to be earned selling mature products, but typically only to certain parts of the value chain. Profits may accrue to:

1. Manufacturers of components that still define performance (like Intel microprocessors in computers)

2. Parts of the value chain that still aren't "good enough" (like retail experience in clothing)

The most successful companies maintain flexibility and shift their focus as industry dynamics evolve. IBM, for example, transitioned from computer assembly to value-added services when hardware became commoditized. This allowed them to focus on the tasks that customers felt were important rather than their traditional core competencies.

Building Organizations Capable of Disruptive Growth

Established companies may need to create an autonomous organization within the company that focuses on disruptive innovation.

A company's capabilities consist of three elements: resources (what they have), processes (how they work), and values (what they prioritize). Resources are relatively flexible, but processes and values are much harder to change.

Established companies' processes and values often prevent them from capturing disruptive innovation. They typically require high gross margins and large, clear markets. These values support sustaining innovations but kill disruptive ones, which often begin as low-margin products with unclear market potential.

Organizations have a hard time either changing their values or simultaneously operating with multiple sets of values. Established companies may therefore need to create autonomous organizations with their own processes and values that foster a focus on disruptive innovation.

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If you liked this article, have a look at our other book digests in our series Required Reading for Salespeople. You can also check out the P.S.I. Selling Content Page for more insights on sales communication, strategy, and leadership.

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