Monday, June 19, 2017

The Four Principles of Disruptive Innovation

Lest there be any doubt, Clayton Christensen has an enviable brain. I first encountered him last year, reading Disrupting Class for another course, and some of themes overlap with his piece on why good companies fail. He wrote about, in education, how disruptive innovation occurs in areas of non-consumption: where the alternative to a disruptive innovation, which is often not great in its 1.0 (or even 4.0 version), is non-consumption - so, the innovation is welcomed no matter how it looks.

In "Why Good Companies Fail to Thrive in Fast-Moving Industries," he offers a framework for failure, which includes four principles of disruptive innovation. The entire premise is enchanting - both intuitive and complex. Christensen seems to document what in business should be obvious, but isn't. On top of these four principles is the theory of resource dependence, which "states that while managers may think they control the flow of resources in their firms, in the end it is really customers and investors who dictate how money will be spend because companies with investment patterns that don't satisfy their customers and investors don't survive." But, as Christensen shows, disruptive innovation is not on the minds of - or within the set of demands from - customers, so pursuing disruptive innovations requires managers to buck existing KPIs and experiment in a way that is insulated from the larger organization - within a sub-organization whose "size and interest are carefully aligned" with the needs of customers within the sub-market.

Principle #1: Companies Depend on Customers and Investors for Resources
This first principle echoes the discussion above about resource dependence. Managers are necessarily entirely reactive, but their proactiveness is only within the framework set by customers and investors. I saw this when first launching an accelerator for craft businesses, here in Pittsburgh. Our focus in the first stretch was on real estate development professionals - alongside the businesses themselves, those were the "customers" we served, and who were most responsive to our services. We were proactive, but only on behalf of - or in search of more of - those customers. Only by changing our resource dependence (through grant funding, in this case) were we mentally and financially freed to explore other customer types and, really, just try things out.

Principle #2: Small Markets Don’t Solve the Growth Needs of Large Companies
Here, Christensen notes that large companies can sometimes spot emerging markets or innovations, but they wait until the market for that innovation is "large enough" to pay real attention to, and begin competing in. But the first innovator often has a significant advantage over later ones in the same space. Disruptive innovation should be considered R&D, but with a less predictable and longer-term potential ROI (versus sustaining innovation). We're betting on things that may never come to fruition, and we have to be okay with that. Perhaps even establish a way to learn from our failures.

Principle #3: Markets that Don’t Exist Can’t Be Analyzed
Companies "whose investment processes demand quantificaitn of market sizes and financial returns before they can enter a market" are highly unlikely to pursue disruptive technologies, or go about it in a problematic way, given that disruptive innovation first occurs in areas of non-consumption. It's a risky bet. It's one that you'd not necessarily make, given a standard market analysis. This underscores the risk and imagination factors needed for successful entrepreneurship. While sustaining innovation is rounding up the wood and dividing the work to build the show, disruptive innovation is yearning for the vast and endless sea.

Principle #4: An Organization’s Capabilities Define Its Disabilities
This last principle was my favorite, again in the sense that it is both intuitive and revolutionary. Christensen argues that "organizations have capabilities that exist independently of the people who work within them." These capabilities play out through values and processes, which determine what we prioritize and how we go about tackling that which is a priority. New markets often require new definitions of value. But, can we change our processes and values to better align with the disruptive innovation? Of course, but principles 1-3 say that we won't - not until its too late.

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