The Innovation Catalyst
Christian Sarkar and Elizabeth Ferrarini
never want to ever say: 'Well those idiots failed because they had
the wrong strategy.'
have to ask: 'Why did they have the wrong strategy?'
always, they've used the wrong process to come with the strategy."
-- Clayton Christensen, author, The Innovator’s Dilemma and
The Innovator’s Solution
Ferrarini: What are your views on Nick Carr's Harvard Business
Review article, "IT Doesn't Matter"?
Christensen: In chapters 5 and 6 of Innovator's Solution,
I talk about how you start out in the early era of an industry's
history when the functionality and reliability of the product aren't
good enough. The way you compete is to make more reliable and higher
performing products. In order to do that well, you need to have
an interdependent architecture that's a proprietary system. You
then get to the paint where you've overshot what customers can use.
this point, a process of commodization begins to set in. It has
two dimensions: First, having overshot you keep trying to improve
the product. People will accept the improved product; however, they
won't pay much money for the improvements. Customers often don't
need all of the improvements.
other dimension of commodization surrounds the argument of now having
to compete differently. You're faced with the need to market so
that every customer gets exactly what they need when they need it.
If you achieve this, you can responsibly market to smaller and smaller
niches in the market. To compete at this level, you need to have
the architecture of the product evolve from a proprietary interdependent
one to a modular architecture. When you have a modular architecture
where the product's performance is really driven by the subsystem
that you snap together, like your personal computer, then modularity
finishes the commodization job. You can no longer differentiate
your product from the others on the basis of product performance
because everyone has the same modules.
the first realm of commodization, the functionality and reliability
are determined in the architecture of the product. The component
themselves don't make much of a difference. In the other realm of
commodization, the components or the subsystems make all the difference
and the architecture doesn't make much difference.
chapter 6, the very move in this direction at a stage of value added
precipitates a reciprocal of decommodization of the adjacent stages.
Usually, that where what's not good enough gets resolved.
Carr's point is a little bit consistent with this view. There was
an era when you could gain a competitive advantage by having information
technology that (1) others didn't have, and (2) you had processes
within your company to integrate that technology into your strategic
planning, product development processes, and pricing better and
faster than others. Now, the ability to capture that information,
process it, and deploy it to the people who need it is almost modular,
in the sense, any company can get it. Carr overstates this point
a bit. Things are headed in this direction, and thus the information
technology becomes a commodity you must have. You just can't differentiate
Ferrarini: Let's talk about a specific example- about five years
ago, StorageNetworks built an IT infrastructure from commercially
available hardware, raised more than $200 million, and offered organizations
a third-party source for immediate storage, likened to that of a
public service utility. EMC validated the concept. StorageNetworks
couldn't make a go of that business and offered backup stores and
eventually started licensing its software. StorageNetworks went
Chapter 11 and couldn't given find a buyer. What went wrong here?
Christensen: I haven't really studied this company in depth.
So, I can only surmise. With the caveat that I haven't crawled inside,
I will tell you some of the things I worry about as I watch that.
First, Chapter 8's key assertion is the only thing you know for
sure at the beginning you don't know what the right strategy is.
Likewise, you don't know who are the right customers, and what job
are they trying to get done. You start out with a deliberate strategy
where you think this's the right thing. You almost have to know
for sure you are wrong. Therefore, you have to get in the market
quick with a little of this and then figure out what's work.
Chapter 8, I cite a colleague's study of 400 Harvard Business School
graduates who started new companies. Half have been successfully;
half haven't been. The half that succeeded didn't entirely trust
the strategy they used when they raised money. They ended up selecting
another strategy that enabled them to succeed. Ninety percent of
this group said they ended up doing something completely different
from what they intended to do. The difference between the successes
and the failures wasn't the successful ones got it right the first
time. They just had money left over after they got it wrong. They
learned from their mistake in time to shift gears.
Chapter 9, I talk about good money and bad money. Bad money is a
lot of money flowed into something with the willingness to accept
big losses. You have the expectation that the more you spend, the
more you will earn later. The money is spent in the expectation
your strategy is right.
would be in error to say that somewhere in that space where StorageNetworks
was there wasn't a great business opportunity. It's more accurate
to say, like everyone else, there initial strategy wasn't right.
They spent a lot of money pursuing that strategy. The problem they
employed a deliberate strategy aggressively from the beginning,
and spent to get big fast.
Sarkar: How do you fix the disconnect between upper management's ideas
and what the market will accept?
Christensen: It is a combination of Chapters 8 and 9. Too much
money is a huge curse. Enough money can get you into the market
as quickly as possible. In Chapter 3 talks about segmenting the
market by the job people are trying to get done. The faster you
can get into the market and get people to pay real money for real
products, then you need to figure you what were these people trying
to get done for them when they hired your product. You can then
begin to focus on helping them get the job done better and better.
As you learn what works and how the customers are using your product,
you reach the point where you can aggressively spend money to grow.
It's the premature outlay of huge amounts of money in pursuit of
the wrong strategy is the thing to avoid. You need to have an experimental
my own language, I try not to use innovative and non innovative.
Most company's are innovative, but in different ways. An established
company is usually very good in the sustaining innovation track.
Usually established companies pull off radical sustaining innovations.
Sometimes they overshoot and flame out. The disruptive innovation
is a different kind. I would rather work for an innovative company.
The question is which ones.
I live with the ideas in the Innovator's Solution, history might
judge the concepts in Chapter 3 -- segmenting markets in ways that
cause us to fail - might judge this to be the most important chapter
in the book.
always have an overwhelming tendency to frame the market we are
targeting by the boundaries defined by product categories, or product
points, or the demographics of the customers. We think about industry
verticals. When we target products that markets that are defined
by demographics of customers or by the product characteristics,
we are playing the crapshoot game of determining whether or not
there is a valid customer need. We define our business as helping
a customer get a job done - one that he is already struggling to
get done and has no satisfactory means of doing it - the probability
that product will contact with the customer is very high. You need
to look at what is the customer trying to get done and does it help
him or her get it done better. Or, does it make it easier for them
to do what they aren't trying to get done. The latter is a failure.
give a little example in Chapter 3. It's about investments in Internet-based
or electronic learning technologies which are oriented as trying
to help college students learn more. These technologies usually
never work. If you think about what college students are really
trying to do, they want to pass the course without really having
to study. If the same effort was focused on crammed.com, making
it easier for them to cram, you help them try to do what they are
already trying to get done. This works.
makes the comment about commodization (Oracle and SAP struggling
to sell better products at higher and higher prices). If the IT
industry has lost a bit of its luster, history will show IT vendors
have cut to segment the market by product categories and by the
attributes of customers, rather than the fundamental jobs people
are trying to do in organization. An IT professional who wants to
know should I join this organization or this organization I am working
with have high potential. If there's a deep of what the customer
is trying to accomplish, then I would be excited about working there.
Sarkar : What are the symptoms of a business or an industry that's
ready for disruption? You mention companies that produce products
with features no one uses. What are some of the other attributes
to look for?
Christensen:There are two types of disruptions: low-end and
new market. The possibility that a low-end disruption, which is
covered in Chapter 2, might occur only if two conditions are met:
There have to be customers at the low end of the market who don't
value and won't pay for further improvement. The second condition
for that to happen is that someone has to figure out a lower-cost
business model that can be attractively profitable at the discount
prices required to win the business of those customers at the low
end. If these conditions are met, then a low-end disruption most
likely will occur.
new market disruption is based on an entirely new market sector.
If there is a population who are trying to get something done but
they can't to do it for themselves satisfactorily because they don't
have the skills or money to buy the product, they have to rely on
the expensive and inconvenient help of experts. If that population
exists, that is the requisite condition for new market disruptibility.
The second reason for new market disruption is can I technologically
come up with a market that is so afford and simple to use that I
can enable this new population who are trying to get it done, but
can't. If these two conditions exist, then a market is new market
Sarkar: Your company - Innosight - is a disruptive company in the
management consulting space. How do you differentiate yourself from
the McKinseys and the Bains?
Christensen: The trajectory that the consulting firms are on
is higher billings, per partner, per client. Partners make more
money by putting more people on the ground. These projects tend
not to be strategic related, but operations effectiveness type consulting
in mergers and acquisitions and integration. That has become the
bread and butter of those companies. The way we try to help
a company is to go in and spend a day going over theory. We have
this conviction that theory is a very useful thing. It's a statement
of what causes what and why. Managers use theories every day. In
a way, we give them virtual glasses so they can see these theories.
the second day, we have them make a list of 20 or more of the new
business ideas or growth product ideas that have been kicked around
in this company. Let's look at each one of those ideas through this
lens. Almost always, there are three or four that just pop out and
managers say we haven't been giving this much thought because it
is not a sustaining innovation. However, when you look at it through
the theories lenses, the ideas have enormous potential. As we go
through the day, we say it has enormous potential, but the way we've
been thinking about doesn't meet with what we say in Chapter 3.
Most likely, they've been studying the wrong customers for that
idea. You can take an idea and start to shape it so it conforms
to the pattern of disruptive successful companies.
the end of the second day, they have several products which they
say could be successful. Then we have them go through a market study
phase where we try to send them to market by the job customers are
trying to get done. They need to answer how big is this market?
It does involve finding some people to watch and then to ask them
a unique set of questions. When you just hired that product what
job were you trying to get done? And when you don't hire that product,
what else do you hire to get the job done? There's a methodology
for converting those insight into an estimate for how big is the
third is to work with the team to create a business plan that can
get funded and implemented.
Sarkar: When creating businesses to commercialize high-potential
innovations, you have six questions, six decisions you ask people
to make. Can you go over them with us?
Christensen: The questions are fairly simple:
Whether the new business should be set up to operate autonomously. Opportunities that require developing new skills and using
new business models ought to be kept separate from the main business.
The activities the company should build versus the activities it
should buy. The new business needs to control activities that
allow it to improve performance along dimensions that matter most
How the new business should interact with value network
participants, such as suppliers and channel partners. The new
business must help its value network partners move up their own
improvement trajectory. People dont do what doesnt make
sense to them.
Which managers should be appointed to run the new business. Managers should have wrestled with challenges (attended schools
of experience) they know they will encounter.
How the new business should set its strategy. In all likelihood,
the new business needs to use an emergent strategy process
that lets it experiment and learn from the marketplace.
Who should fund the new business. The new business needs investors
whose prioritization criteria match the business needs. For
truly disruptive innovations, this typically means being patient
for growth but impatient for profits!
assume an answer to these questions without really asking. They
often don't have a theory or strategic framework to think them through.
You never have a one-size fits all answer. There are no best practices.
Best practices is flawed thinking- it causes innovation to fail.
example, should the business be autonomous or not? There is a model
in Chapter 7 of resources, processes, and values. The organization
needs to be autonomous if its normal processes of prioritizing things
would place other priorities over this one. The organization can't
succeed if the responsible people are over prioritizing. You can
do the same thing with processes. A process is designed to do a
particular thing. If the process won't facilitate success, then
you need a different process. Then you need a separate team.
concept of getting the right people is one of the most important
ideas for an organization. You shouldn't segment markets by the
attributes of the product. You shouldn't segment people by their
personal attributes. You need, instead, to segment them by the way
they solve problems during earlier times in their career. You make
a list of what kinds of problems this management team is going to
comfort. Once we know, we have to make sure we have people on the
team who've seen problems like this before.
never want to ever say, "Well those idiots failed because they had
the wrong strategy."
You have to ask "Why did they have the
wrong strategy?" Almost always, they've used the wrong process
to come with the strategy. We show two fundamentally different processes:
one is a top-down analytical project that is followed by implementation,
and the other way is get into the market to try to experiment what
works and what doesn't.
should fund the business? During the era of being out in the market
experimenting, then the money has to be patient for growth and impatient
for profit. Once you have it figured out and you know what strategy
is going to work, then the money can demand growth.
Sarkar: Thank you so much.