Books for startup strategist, Part One : The innovator's solution

I read a lot of books recently and I found 3 really interesting theories that I would like to share. I will do a 4 post series on this blog. I will try to sum-up these theories and give pointers to learn more about them + link each one to the others in the last post.

1. Clayton M. Christensen & Michael E. Raynor : The innovator's solution

Who are these guys?

Clayton Christensen is a professor at Harvard Business School, and was a cofounder of a ceramics material startup together with MIT professors. Michael Raynor is a consultant at Deloitte Consulting.

Theory Sum-up

Only companies practicing disruptive innovation can solve the innovator's dilemma: innovate successfully in order to deliver value to the shareholders when the initial growth period is over... Their theory is not specifically designed for startup but for companies which want to sustain growth and not stall like many others after some successful years. However to keep growing, they suggest launching disruptive businesses that can be assimilated to startups.

One very important point the authors make is that a good theory should always be based on circumstances instead of attributes. They try to apply this to every stage of their reflexion.

Main concepts

Disruptive innovation / Sustaining innovation

Disruptive innovation is here opposed to sustaining innovation. A disruptive innovation offers at first lower performances than existing products or processes. But on the other hand, it offers the benefits of better cost, delays, or is more convenient ...

Sustaining innovation, on the other hand, try to improve a product or process to generate better margins and move up-market.

When should disruption be used or not depends on how much customers can use existing products. If customers are not yet over-satisfied, the race between concurrents is based on performances and disruption will probably fail. The major actors on the market have a huge unfair advantage and it will be difficult to compete with them for a new entrant.

However, the postulate is that after successive rounds of sustaining innovation, customers are over-satisfied and will not use all the possibilities offered. In this circumstances, the race is not anymore based on performances and the advantage offered in cost or convenience can enable the disruptor to compete and surpass established actors. Established actors in their race to go up-market will be very pleased to abandon low-end market which generate small margins, and disruptor will face very little competition.

The authors identificated two types of disruption :

low end disruption : this is the lowest arrow on the chart, performances traded for simplicity, price...

new market disruption : competing with non-consumption. This could be imagined as building a new chart with different metrics for performance. By making a product simpler or cheaper, you can target people that would not even have thought of using your product (think Kodak and the personal camera which was a huge disruption compared to the old camera than only professional could possess and use...)

How to shape ideas to become disruptive ? Litmus tests

1. Can the idea become a new market disruption ?

If yes, both questions should be answered affirmatively

• Is there a large population of people who historically have not had the money, equipment, or skill to do things for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them ?
• To use the product or service, do customers need to go to an inconvenient, centralized location ?

2. Can the idea become a low-end disruption ?

If yes, both questions should be answered affirmatively

• Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price ?
• Can we create a business model that enable us to earn attractive profits at the discount prices required to win the business of these overserved customers at the low end ?

3. The last critical question for both disruption :

• Is the innovation disruptive to all of the significant incumbent firms in the industry ? If it appears to be sustaining to one or more significant players in the industry, then the odds will be stacked in that firm's favor, and the entrant is unlikely to win.

Job to be done / Segmentation based on circumstances

All products should be marketed based on the job (circumstances) people try to get done when they "hire" the product and not on the attribute of these people. A good example does better than long words, and so I encourage you to read this famous post by Christensen about milkshakes. It demonstrates that the same people can have, along the day, totally different needs for the same product, and that segmenting based on these people attributes can lead to average answer which will be good for none of them.

They apply this approach to what could be RIM's (Blackberry's manufacturer) strategy based of how they see their place on the market.

Modular / interlocked strategy

The last part of the book has more to do with execution. First of all, should a company follow :

• an interdependant/integrated strategy : do everything proprietary and keep all competencies in the company. This enables the company to achieve better performances by controlling every part of the product.

OR

• a modular/non-integrated strategy : open architecture that let others interface their products with your product, focus only on core competency and externalize others. This enables more flexibility when the customer wants a product adapted to his needs, and lower overhead costs.

So as you can see on the graph below, there is a time for modular/nonintegrated and a time for interdependant/integrated. As it enables better performances, interdependant architecture is better suited when the customer is not over-satisfied and the race is still about performance (left of the diagram).

However when the customer becomes oversatisfied, the race is about adapting products to his other (changing) needs. Modular architecture (right of the diagram) better suits this needs.

As the customer's needs are always changing, it is highly probable that after reaching the right of the diagram, the race on performances is back again and this induce a cycle involving alternatively modular and interdependant architecture.

Ressources allocation, filtering emergent and deliberate strategy

Deliberate strategy: it can be seen as what you first think at when you hear "strategy". Top down approach (from top management to all employees). It is often built as a project which leads to results and decisions that are then implemented. However, it is difficult to achieve such a level of understanding among employees that they can implement it when facing day to day decisions.

Emergent strategy: the way the company adapt itself to unattended opportunities or problems. 

Both deliberate and emergent strategies are at work when allocating resources and deciding on funding new projects, aquisitions, new process to put in place... the actual strategy is the result of the filtering of emergent and deliberate strategies through ressources allocation. Depending on the way resource allocation is done, the actual strategy can differe severely from the deliberate strategy... Understanding and controlling this is therefore extremely important ! It is however extremely complex as this process is highly diffused in all the company, all the time.

For example, it can be the way middle managers choose how they are going to choose between employees ideas and carry them to upper management. It is influenced by cost structure and size threshold for a project, as well as by other practices in the company (moving executives every 2/3 years, sales incentive)... But it can also be the way all employees prioritize their work or usage of resources on a day-to-day basis,...

Example of controlling the resources allocation process: Intel

Intel was originally a manufacturer of memories and developped DRAM chips. However one of Intel engineers invented the microprocessor. The sales of microprocessors grew gradually...

The limiting resource of a semiconductor manufacturer is the production capacity of its factories. Every month, production resources were allocated based on gross margin per wafer start. The highest-margin product would then be allocated the full ressources needed, and the lowest one would get resources only if there was some left... Business went were the money was, and this without any explicit management decision. Finally Intel had become a microprocessor company. Once this fact became clear, the management shifted fully to deliberate strategy... and achieve the success we know today.

Usually, a company first follows an emergent strategy (this is Steve Blank's search for a repeatable business), when they find this repeatable business, they shift to a deliberate strategy. However, they must be ready to adapt this strategy to evolving circumstances, and also be able to use emergent strategy again when they need to provide growth with new businesses or markets.

The authors give 3 points that can give leverage on the strategy process:

1. Create a cost structure that finds the right customers attractive .

If you need to fill a 1M gap, a 10K project may seems insignificant to you, whereas it could be a huge opportunities for a one man company with a 100K turnover... So if your typical customer's project size is 10K and you can make about 10 projects a year, you'd better size your costs accordingly, or you will become trying to sell more expensive projects which do not correspond to your product or strategy.

2. Discovery driven method for managing emergent strategy process (look like Steve Blank's customer validation)

  a. Make the targeted financial projections

  b. What assumptions must prove true in order for these projections to materialize ?
  c. Implement a plan to learn - to test wether the critical assumptions are reasonable
  d. Invest to implement the strategy

3. Manage the mix of deliberate and emergent strategy:

  - do not miss the point where to shift to deliberate strategy
 - do not forget to shift back to emergent strategy when launching new businesses.



Good money/ bad money
The kind of money (expectations of people who give it to you) you are going to take to develop your project can lead you to big success or lead to miserable failure. Indeed, accepting that disruptive markets are going to be small for some time is difficult for someone who is impatient for growth... (as a VC that need to liquidate his fund in two years could be...).

Good money is patient for profit, and impatient for growth
Bad money is patient for growth, and impatient for profit 

On the other hand, being impatient for profit will accelerate the emergent strategy process. Management must test all assumption as soon as possible to find the cashflows building profits and will try to keep costs low. If they do not need money, they may be tempted to postpone this work.


Additional information
- you can buy it here
- you can find some articles by one the author here (which includes examples that I did not included here for space stake and which will help you to understand better)

read part two about "Marketing Warfare" here