This morning, Clayton Christensen, world-renowned for his work in innovation and disruption, opened day 2 of #WIF09 with a keynote address about creating and sustaining profitable growth.

Because he offered so much great information, we’re going to give you summary of his presentation now and come back in the next week with more details of his talk and our thoughts on it.

Christensen, who is  the Robert and Jane Cizik professor of Business Administration at the Harvard Business School, opened his presentation saying that only 15 percent of new products become successful. Then he shared eight business principles we’ve been taught – and are often leveraging to sustain our innovations – that aren’t universally true:

1. Listen and respond to the unmet needs of your best customers.
2. Focus investments in those opportunities that promise the most attractive profit margins.
3. Outsource those activities that are low value-added that are not your core competencies.
4. The value of innovation can be expressed as a net value present value.
5. You should ignore fixed and sunk costs, and make investment decisions based on future, marginal outlays and revenues.
6. Large markets represent the biggest growth opportunities.
7. Understanding the customer is key to successful innovation.
8. Great brands are built through advertising.

These principles might be true for an organization. Or they might cause that organization to be eaten for lunch by a new, disruptive organization.

Disruptive innovations are those that transform complicated, expensive products into simple, affordable ones.

Like, for instance, the Sony portable TV from the 1960s. At the time, Christensen said, RCA was a leader in vacuum tube televisions. Vacuum tubes were big and TVs were expensive and took up a lot of space in a house.

Then someone invented the transistor and the unknown Sony used it to develop a less expensive, portable TV. It might not have been the best product, but people living in smaller spaces, like apartments, could afford one more easily.

RCA didn’t see Sony as a threat because it thought the audience buying the smaller TV was different from the audience buying the bigger TV. Initially this was true, but Sony was successful with their lower margin customers and improved their offering over time. Eventually, it turned out that RCA was wrong. Sony had crept into their core market and vacuum TVs vanished.

Sony, the “bottom feeder,” therefore, disrupted RCA.

According to Christensen, disruptive entrants to a market nearly always win over the incumbents. The disruptors make products that are of lower quality but more affordable, simpler, which allows customers who haven’t been able to purchase the chance to consume. Over time the entrant gains market share from the bottom of the category, allowing them to improve their offering and creep into the upper levels of the category, eventually toppling the giant. In response the industry leader tries to inject new, more expensive and complex improvements and technologies into their current products rather than starting fresh. Often cramming the new into the old is profitable in the beginning, but eventually, it is their downfall. The entrant that’s experimenting is easier to understand, has appeal to new and established customer segments, and wins the day (until it is disrupted by the next disruptive entrant).

It’s not that the industry leaders did the wrong thing, in fact they followed everything they were taught in business school. Everything that they learned taught them to sustain success, but it failed to teach them to deal with disruption.

Another area where industry leaders often miss the mark, according to Christensen is in a customer’s relationship with a product.

Christensen said most companies focus on who’s buying their products rather understanding the “job” that the buyers need the product to do for them.

For instance, according to Christensen, a popular fast food chain was trying to increase sales of milkshakes. So it asked the people who already buy the milkshakes what would improve them. It did no good. Finally, they studied the people who buy and why. They were trying to understand the “job” that the milkshake was doing for them. The people buying milkshakes in the morning said they had long, boring commutes to work and wanted something tasty and filling that would take a while to consume and only required the use of an “otherwise bored second hand.”

So the fast food chain made the morning milkshakes thicker so they’d take even longer to eat. And set up the milkshake machine so that customers could access it quickly and easily without standing in line.

According to Christensen, there are three levels in the architecture of a “job”:

• What is the fundamental “job” or problem the customer is facing? This includes its political, functional, emotional and social dimensions.
  • What are the experiences in purchase and use which, if all provided, would nail the job perfectly? (The “hiring criteria”)
    • What are the product attributes, technologies, features, etc., that are needed to provide these experiences?

The companies that understand the job of the product, and segment markets based on that job find a larger market, their share is smaller, no real competitors in their product category, greater growth potential, the ability to integrate properly and build a straightforward, valuable brand.

For more on Christensen’s presentation and disruptive innovation thoughts, join us later this week.

– Kathie and Stephanie

May 7th, 2009 | No Comments
Tags: #WIF09 · conference · World Innovation Forum