The Innovator’s Solution: Complete Summary of Christensen and Raynor’s Framework for Sustaining Successful Growth

This book is a vital guide for managers and entrepreneurs aiming to achieve and sustain profitable growth in their businesses. Co-authored by Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution builds upon the foundational concepts of The Innovator’s Dilemma, offering practical strategies to overcome the challenges that often lead even successful companies to falter. It explains predictable patterns of success and failure in innovation, providing a circumstance-based theory that helps leaders make informed decisions.

The book is designed for anyone seeking to build or revitalize a growing enterprise, whether within an established corporation or as a start-up. It dives deep into nine critical decisions every manager must make, from identifying the right customers to structuring their organization and securing capital. By applying the book’s frameworks, readers will learn to predictably lead their companies toward sustainable, disruptive growth, turning seemingly random outcomes into a clear path to success.

CHAPTER ONE: The Growth Imperative

This foundational chapter establishes the urgent need for sustainable growth and challenges the common perceptions about why companies fail to achieve it. It highlights the immense pressure from financial markets for continuous acceleration in growth, often leading to significant investment losses when growth strategies falter. The core argument is that the outcomes of innovation are not random but are instead predictable when managers understand the underlying forces at play.

The Relentless Pressure for Growth and Its Cost

Financial markets exert intense pressure on executives to grow faster and faster, as shareholder value creation is tied to profitable growth. The book notes that once a company’s core business matures, the pursuit of new growth platforms entails daunting risks. Historically, only about one company in ten is able to sustain growth rates that lead to above-average shareholder returns for more than a few years. Often, the very attempt to grow leads to massive destruction of shareholder value, as illustrated by AT&T’s $50 billion losses in various growth initiatives over a decade. This phenomenon is not unique to tech giants, as shown by Cabot Corporation’s failed ventures into advanced materials in the 1980s, which were eventually shut down.

Why Sustaining Success is So Hard

The book debunks common explanations for the difficulty in sustaining growth. It dismisses the idea that poor management is the primary cause, arguing that the vast majority of good managers still fail to sustain growth, implying a deeper, systemic issue. It also refutes the notion of risk aversion, citing numerous examples of companies betting billions on new ventures. The most dangerous misconception is that creating new-growth businesses is simply unpredictable, leading to approaches like “letting a thousand flowers bloom” or “failing fast.” The authors assert that these strategies treat symptoms rather than the root cause, which is a lack of understanding of the underlying processes.

Predictability Through Understanding Processes

The authors argue that to achieve predictable innovation, one must understand the forces that shape ideas into business plans. These forces, while acting on unpredictable individuals, are similar in their mechanism, timing, and impact. The example of the Big Idea Group (BIG) versus a major toy company illustrates this. While the toy company struggled to find exciting new ideas, BIG consistently found and developed successful new toys. The difference lay not in the creativity of individuals, but in the shaping process that filtered and refined ideas. Middle managers, driven by the need for credible market data and personal career incentives, often shape new ideas to resemble past successes, leading to “me-too” innovations and missing true disruptive opportunities.

The Role of Good Theory in Driving Predictability

The quest for predictability is not quixotic; it requires a body of well-researched theory that provides contingent statements of “what causes what and why.” The book presents a three-stage model for building solid theory:

1. Describe the phenomenon: Observe and characterize what innovators do and the results of their actions.
2. Classify into categories: Identify meaningful differences in complex phenomena to highlight crucial distinctions.
3. Articulate a theory: Explain the causal mechanism and how it results in different outcomes based on categories or situations.
   The critical stage is getting the categories right. Just as a doctor needs to diagnose based on specific conditions, not just symptoms, managers need theories that categorize circumstances, not just attributes. Theories built on circumstance-based categories are highly practical, allowing managers to predict outcomes based on the specific situations they face. The authors contend that “shoddy categorization” often leads to “one-size-fits-all recommendations” that cause failures in many circumstances.

CHAPTER TWO: How Can We Beat Our Most Powerful Competitors?

This chapter delves into the concept of disruptive innovation as the most effective strategy for new-growth businesses to overcome powerful incumbent competitors. It highlights why incumbents are often “motivated to flee rather than fight” when faced with disruption, and how to intentionally shape a business idea to achieve this asymmetric motivation.

The Disruptive Innovation Model: A Powerful Competitive Lens

The Disruptive Innovation Model identifies three critical elements:

1. Customers’ ability to utilize improvement: There’s a rate at which customers can absorb performance improvements, represented by a gently sloping line. Products that exceed this “good enough” threshold become overserved.
2. Innovating companies’ improvement trajectory: Companies typically improve products faster than customers can utilize them (steeply sloping lines). This often leads to overshooting customer needs.
3. Sustaining vs. Disruptive Innovation:
   • Sustaining innovations target demanding, high-end customers with better performance. Incumbents almost always win these battles because they have the resources and motivation to fight for their best customers and highest profit margins.
   • Disruptive innovations introduce simpler, more convenient, and less expensive products that initially appeal to new or less-demanding customers. They are initially “not as good” as existing products but offer other benefits.
     The core of the innovator’s dilemma and solution lies in asymmetric motivation: incumbents are motivated to move up-market and ignore disruptive threats, making them easier to beat.

Disrupting Integrated Steel Mills with Minimills: A Classic Example

The disruption of integrated steel mills by minimills serves as a prime example. Minimills, which melt scrap steel in electric arc furnaces, could produce steel at a 20% lower cost than integrated mills. They initially produced poor-quality steel suitable only for concrete reinforcing bar (rebar), a low-margin product that integrated mills were happy to abandon. As minimills improved, they progressively moved up-market into more profitable segments like angle iron and structural beams, each time being met with little resistance from integrated mills that preferred to focus on even higher-margin products like sheet steel. This up-market migration, driven by the minimills’ need for profitability, ultimately led to minimills like Nucor dwarfing traditional giants, proving that disruption is a rational, predictable outcome of managers facing the innovator’s dilemma.

The Role of Sustaining Innovation and Its Limits for Entrants

The book acknowledges the importance of sustaining innovation for existing businesses. However, it strongly advises against new companies attempting to launch with a purely sustaining innovation if their goal is to build a new-growth business and topple incumbents. Starting a new company with a sustaining innovation and then selling out to an industry leader can be profitable, as seen in the healthcare industry or Cisco’s acquisition strategy. But if an entrant directly competes with a better product for an incumbent’s best customers, the incumbent will be motivated to fight and likely win, as demonstrated by IBM and Kodak’s failures against Xerox in high-speed copiers, or RCA’s struggle against IBM in mainframes.

Disruption is Relative: The Internet Example

A key insight is that an innovation is disruptive only relative to a specific business model. The Internet, for instance, was a sustaining innovation for Dell Computer, which already sold directly by mail and phone, enhancing its existing business. However, the exact same direct-selling-over-the-Internet strategy was highly disruptive to Compaq’s business model, which relied on retail distribution. This means a new venture must ensure its strategy is disruptive to ALL significant incumbent firms in the targeted market. If it’s sustaining for even one powerful player, the odds of success are significantly lower.

A Disruptive Business Model: A Valuable Asset

A disruptive business model is a powerful asset because it allows a company to generate attractive profits at discount prices needed to win at the low end. As the disruptor moves up-market, much of the incremental pricing flows directly to the bottom line. This highlights why established firms seeking to capture disruptive growth need to do so from within an autonomous business unit with a cost structure that provides ample headroom for profitable up-market migration. The constant up-market movement of incumbents, driven by the need to maintain margins, inadvertently creates the space for their own disruption.

Two Types of Disruption: New-Market and Low-End

The book differentiates between two types of disruption by adding a third dimension to the model: new customers and new contexts for consumption.

• New-Market Disruptions (competing with “nonconsumption”): These create a new value network by making products so affordable and simple that they enable a whole new population of people to own and use something they previously couldn’t (e.g., Canon’s desktop photocopiers vs. corporate copy centers, Sony’s transistor radio vs. no radio for teenagers). Incumbents often feel no threat until these disruptions are in their final stages.
• Low-End Disruptions: These attack the least-profitable, most overserved customers at the low end of an existing value network (e.g., steel minimills attacking rebar, discount retailers like Wal-Mart attacking department stores’ hard goods). Incumbents are motivated to flee these segments due to unattractive margins.
  Many disruptions are hybrids, combining elements of both, like Southwest Airlines (targeting non-flyers and low-end customers) or Charles Schwab (creating new investors and stealing from full-service brokers). The prevalence of disruptive companies like Sony, Toyota, Honda, and Canon in Japan between 1960 and 1980 underscores disruption as a primary wellspring of growth, while their absence in the 1990s explains Japan’s economic stagnation.

Shaping Ideas to Become Disruptive: Three Litmus Tests

Managers can intentionally shape ideas into disruptive strategies using three litmus tests:

1. New-Market Disruption Potential:
   • Is there a large population of people who historically lacked the money, equipment, or skill to do this for themselves, and therefore went without or paid experts?
   • Do customers need to go to an inconvenient, centralized location to use the product/service?
     An affirmative answer to at least one (and usually both) indicates new-market potential.
2. Low-End Disruption Potential:
   • Are there customers at the low end who would be happy with less (but good enough) performance at a lower price?
   • Can we create a business model that earns attractive profits at the discount prices needed to win these overserved customers?
     An affirmative answer to both indicates low-end potential.
3. Disruptive to All Significant Incumbents:
   • Is the innovation disruptive to ALL major established players in the industry? If it’s sustaining to even one, that incumbent will likely win.
     Applying these tests helps predict competitive outcomes. For example, the book analyzes Xerox’s potential to disrupt HP’s ink-jet printing, concluding a low-end strategy is unlikely due to cost structures, but a new-market disruption (e.g., an embedded printer in a notebook) could work by appealing to a new consumption context. Similarly, it suggests solar energy’s potential in developing nations (competing against non-consumption) rather than developed markets, and that online banking is likely a sustaining innovation for most established banks, not disruptive.

CHAPTER THREE: What Products Will Customers Want to Buy?

This chapter challenges traditional market segmentation methods, arguing that they often lead to product failures. Instead, it advocates a circumstance-based segmentation that focuses on the “jobs” customers are trying to get done, providing a more reliable path to creating products customers will enthusiastically buy.

The Problem with Traditional Market Segmentation

Despite vast efforts in market segmentation, most new product development fails, with three-quarters of investment yielding no commercial success. The core issue, according to the authors, is that traditional segmentation by product type, price point, or demographics/psychographics is flawed. These methods are based on attributes of products or customers, which can reveal correlations but not causality. To predict what customers will buy, marketing theory needs to be built on circumstance-based categorization.

“Hiring” Products to Do “Jobs”: A New Perspective

The book introduces the concept that customers “hire” products or services to do specific “jobs” that arise regularly in their lives. This perspective shifts the focus from customer attributes to the circumstances in which customers buy and use products. The functional, emotional, and social dimensions of these jobs define the true market segments. The critical unit of analysis is the circumstance, not the customer.

The Milkshake Example: Uncovering Hidden Jobs

A vivid example is given from a quick-service restaurant trying to improve milkshake sales. Traditional market research, segmenting by customer demographics (e.g., “the milkshake customer”), led to product improvements (thicker, chocolatier) that didn’t boost sales. A new approach focused on observing what job customers were trying to get done when they “hired” a milkshake.

• Morning customers bought milkshakes for a long, boring commute: They needed something to make the commute more interesting, stave off hunger until 10 AM, and be consumable with one hand without mess. The milkshake competed against bagels, bananas, and coffee, and surprisingly, did the job better.
• Evening customers (parents) bought milkshakes to placate their children and feel like “reasonable parents.” Here, the thick milkshake failed because it took too long for kids to consume.
  This revelation showed that a single product was being “hired” for very different jobs, and attempts to average customer feedback led to a “one-size-fits-none” product. By understanding the job, the restaurant could develop different improvements (e.g., fruit chunks for morning commuters, smaller, less viscous shakes for kids) that would grow the market by stealing share from other product categories (e.g., bagels, cookies) and by appealing to nonconsumers.

Gaining a Disruptive Foothold with Job-Based Segmentation

Identifying “foothold opportunities” for new-market disruptions requires managers to position a product squarely on a poorly addressed job that many people are trying to get done. Sony’s founder, Akio Morita, was a master at this, building twelve new-market disruptive businesses between 1950 and 1982 (e.g., pocket transistor radio, portable TV). Morita and his team observed what consumers were trying to do and married those insights with miniaturized, solid-state electronics to create more convenient and less expensive solutions. The shift in Sony’s innovation strategy in the 1980s, when Morita withdrew and marketers with MBAs began using sophisticated, quantitative, attribute-based techniques, coincided with the end of Sony’s disruptive odyssey.

Sustaining the Disruption: Choosing the Right Improvements

Once a disruptive foothold is gained, the next challenge is to identify the right sequence of sustaining improvements to move up-market. For low-end disruptions, this is often intuitive (e.g., minimills moving from rebar to structural beams). For new-market disruptions, it requires inventing the upward path.
The BlackBerry serves as an example: if RIM segments by product category (“handheld wireless devices”), it might try to add competitor features like digital cameras or full Word/Excel software, leading to a commodity arms race. However, if RIM segments by “jobs to be done” (e.g., “use small snippets of time productively“), the implied improvements are different: better wireless telephony, financial news headlines, simple games. These differentiate the product and allow it to compete against things like newspapers and boredom, not just other handhelds. The book suggests that Japanese mobile phone success with camera-equipped phones for teenagers (new way to have fun) makes sense, but similar features for Western business users (who “hire” phones for work) may fail.

Why Executives Segment Counterproductively: Four Reasons

Despite the benefits of job-based segmentation, managers often fall back on counterproductive, attribute-based schemes due to four forces:

1. Fear of Focus: Sharply focusing on one job means clarifying what the product is not for, which can seem to sacrifice quantifiable growth opportunities from other segments.
2. Senior Executives’ Demand for Quantification: Managers often “hire” market research to quantify opportunity size rather than understand customer behavior. Corporate IT systems are often structured around products, customers, or organizational units, leading managers to define markets along available data rather than actual jobs. This results in phantom targets and makes it impossible to predict product success.
3. Structure of Channels: Many retail and distribution channels are organized by product categories (e.g., a “drills” aisle), limiting innovators’ flexibility in focusing on jobs. This often forces new-market disruptors to seek new, disruptive channels.
4. Advertising Economics and Brand Strategies: Marketers segment by attributes to facilitate communication and media buys. However, this causes products to do “several jobs poorly, and none perfectly.” Purpose brands (e.g., Kodak Funsaver, Marriott’s Courtyard, Fairfield Inn) can overcome this by linking a brand directly to a specific job or circumstance, allowing companies to differentiate and strengthen their corporate brand.

The Dangers of Asking Customers to Change Jobs

Innovations rarely succeed if they require customers to prioritize jobs they haven’t cared about before. Digital cameras succeeded not by making users want to edit “red-eye” (a low-priority job), but by making it easier to verify image quality instantly and share photos electronically (jobs they already prioritized). The book suggests that e-textbooks for college students are unlikely to succeed if they focus on enhanced learning, as many students prioritize “passing courses without reading the textbook.” A “Cram.com” service that helps students cram more effectively would likely be more successful as it aligns with an existing, high-priority job. The core principle: identify what customers are already trying to do, and help them do it better.

CHAPTER FOUR: Who Are The Best Customers for Our Products?

This chapter focuses on identifying the ideal initial customers for new-growth businesses, particularly for new-market disruptions. It argues that targeting “nonconsumers” who struggle to get a job done with existing solutions is the most fertile ground for sustainable growth.

Identifying Ideal Customers for Low-End vs. New-Market Disruptions

• Low-End Disruptions: Ideal customers are current users of mainstream products who are overserved (willing to accept less performance for a lower price). Success hinges on a business model that can earn attractive returns at discount prices.
• New-Market Disruptions: Identifying these customers (or “nonconsumers”) is trickier. They are people who are trying to get a job done but lack the money or skill to do it with existing products, leading them to either “go without” or use inconvenient/expensive alternatives. The book refers to this as competing against nonconsumption. If there’s no “job needing to be done,” the opportunity isn’t viable (e.g., early internet “appliances” for households without computers).

New-Market Disruptions: Three Case Histories Illustrating the Pattern

The chapter presents three historical examples to illustrate a consistent pattern of new-market disruption:

The Disruption of Vacuum Tubes by Transistors

Bell Laboratories invented the transistor in 1947, which was disruptive to vacuum tubes. While incumbents like RCA tried to make transistors “good enough” for existing products, Sony entered in 1955 with the battery-powered pocket transistor radio. This product was inferior in sound quality but offered portability and low power consumption, appealing to teenagers (nonconsumers who couldn’t afford large radios). Sony then introduced portable TVs in 1959 for those lacking space or money for large sets. Incumbents felt no threat, as Sony wasn’t competing for their high-end customers; in fact, the losses of low-margin customers initially “felt good.” When transistors eventually improved, Sony and its new retail channels (discount stores like F.W. Woolworth, which couldn’t sell vacuum tube products due to service requirements) rapidly displaced incumbents, who were trapped by their high-cost structures and traditional distribution.

Angioplasty: A Disruption of Heart-Stopping Proportions

Prior to the 1980s, many heart disease patients went untreated. Balloon angioplasty emerged as a new-market disruption, allowing cardiologists (a new group of providers) to treat less-seriously ill patients with a simple, inexpensive procedure, even if initial efficacy was low (50% restenosis). If marketed as a better alternative to cardiac bypass surgery, it would have failed. Instead, it competed against “nothing at all” for nonconsumers. This created a huge new market. Initially, bypass surgery continued to grow because angioplasty diagnostics found new patients too sick for the procedure. But as angioplasty technology (e.g., stents) improved, it began pulling patients from the bypass market. This disruption also shifted care from hospitals to cardiac care clinics, disrupting traditional channels.

Solar Versus Conventional Electrical Energy

Solar energy struggles to compete with conventional electricity in developed countries due to cost and intermittency. However, if targeted at the two billion people in South Asia and Africa with no access to electricity, solar energy becomes disruptive. For these nonconsumers, even enough power for a light at night is a vast improvement. This changes the performance hurdle, potentially allowing for cheaper photovoltaic cell designs (e.g., roll-to-roll plastic cells). The lesson: profitable innovation often comes from targeting nonconsumption, starting simple and small, rather than trying to beat existing, highly evolved solutions in established markets.

Extracting Growth from Nonconsumption: A Synthesis

Four elements define the pattern of successful new-market disruption:

1. Targeted customers lack money or skill: They want a job done but existing solutions are too expensive or complicated.
2. Product compared to “nothing at all”: Customers are delighted with simple, inexpensive solutions because their alternative is nonconsumption. The performance hurdle is modest.
3. Foolproofedness through sophistication: Disruptors use sophisticated technology to make products simple, convenient, and foolproof for less skilled users.
4. New value network and channels: Disruptive innovations create new markets, often requiring new distribution channels and new venues for product use (e.g., Kmart for Sony, sporting goods stores for Honda motorcycles, online platforms for Intuit’s QuickBooks).
   This pattern works because incumbents perceive these new markets as irrelevant or unprofitable, leading them to ignore the threat.

What Makes Competing Against Nonconsumption So Hard?

Established companies consistently try to cram disruptive technologies into mainstream markets, leading to failure, due to a fundamental mechanism:

Threats Versus Opportunities

Research by Clark Gilbert (based on Kahneman and Tversky) shows that framing an innovation as a threat elicits a stronger response than framing it as an opportunity. When visionary executives see disruption coming, they frame it as a threat to their existing business to secure resources. This leads them to focus on protecting current customers and enhancing the technology for the mainstream market, forcing the disruptive technology to compete on a sustaining basis, which almost always fails against incumbents. For entrants, disruption is pure opportunity, driving them to target new markets.

How to Get Commitment and Flexibility

The solution:

1. Frame the innovation as a threat during the resource allocation process to secure adequate resources.
2. Shift responsibility to an autonomous organization that can frame it as an opportunity.
   This allows the new unit to develop a new business model, find different suppliers, and target different customers. Companies that keep the disruptive effort within the mainstream organization often fall into self-cannibalization. The book advises approving budgets for disruptive projects based on “fit with the pattern” (the four elements of new-market disruption) rather than numerical projections, as numbers are unreliable in uncertain new markets.

Reaching New-Market Customers Often Requires Disruptive Channels

A company’s “channel” includes not just distributors and retailers, but any entity that adds value or creates value around the product (e.g., computer makers for Intel’s microprocessors, physicians for healthcare products). There needs to be symmetry of motivation across the entire value chain. If a product doesn’t help all entities in the channel move toward higher-margin business, it will struggle.

• Retailers and distributors need to grow through disruption: Like minimills, retailers need to keep moving up-market to avoid commoditization. Disruptive products that offer “fuel” for their up-market migration will be embraced. For example, Honda’s Super Cub motorcycles succeeded by distributing through power equipment and sporting goods retailers who gained new, higher-margin product lines, rather than traditional motorcycle dealers.
• Channels become spent: Once a disruptive product helps a channel disrupt its competitors and those competitors are gone, margins erode, and the channel may de-emphasize the product. This happened to Sony as discount retailers moved on to other products.
• Salesforce motivation: A company’s own salesforce, especially if commissioned, will prioritize products that offer higher commissions and fit their existing successful sales processes. Disruptive products require disruptive channels, not just a mandate for existing salespeople to sell them.
• Customers as Channels: For component manufacturers, end-use products are channels. For service providers, the product is a channel to the end-use customer. For example, Intel microprocessors fueled the up-market migration of PC makers. In healthcare, new technologies that enable less-specialized physicians to perform procedures in their offices (pulling business from expensive clinics) provide “fuel” for those physicians to move up-market.

CHAPTER FIVE: Getting The Scope of The Business Right

This chapter explores how to determine which activities a new-growth venture should handle internally versus outsource, and when to opt for proprietary architectures versus open industry standards. It challenges the common “core competence” theory, arguing that the decision should be driven by the evolving nature of product performance and market needs.

The Pitfalls of “Core Competence” in Outsourcing

The traditional “core competence” theory suggests that if an activity is your core competence, you keep it internal; otherwise, you outsource it. However, the book argues this is often misleading. IBM’s decision to outsource the microprocessor to Intel and the operating system to Microsoft for its PC business in the early 1980s is a prime example. While seemingly logical at the time—allowing IBM to focus on system design and marketing—it inadvertently empowered the two companies that would capture most of the industry’s profits. This demonstrates that what’s “noncore” today might become critically proprietary in the future. The crucial question managers should ask is: “What do we need to master today, and in the future, to excel on the trajectory of improvement that customers will define as important?”

Interdependence vs. Modularity in Product Architecture

The answer lies in understanding product architecture through the concepts of interdependence and modularity:

• Interdependent Architecture: Components are designed and made in a way that depends on each other; one part cannot be created independently. This optimizes performance, functionality, and reliability. Such architectures are inherently proprietary as each company creates its own optimized design. When product functionality is “not good enough,” companies with interdependent architectures have a competitive advantage and must be integrated (control design and manufacture of critical components). Early mainframe computers and automobiles were built with interdependent architectures.
• Modular Architecture: Components fit and work together in well-understood, highly defined ways (clean interfaces), allowing independent development and assembly. This optimizes flexibility and speed, but often at the sacrifice of peak performance due to standardization.

Competing with Interdependent Architecture in a Not-Good-Enough World

When a product’s functionality and reliability are “not good enough” to meet customer needs, the imperative is to make the best possible products. In this scenario, proprietary, interdependent architectures offer a competitive advantage. To achieve maximum performance, engineers need freedom in design, which standardization (inherent in modularity) would limit. This forces companies to be vertically integrated, controlling every critical component. Historically, dominant companies like IBM (mainframes), Ford and GM (automobiles), RCA, Xerox, and US Steel achieved their near-monopoly power during the “not-good-enough” era precisely because their integrated, interdependent approaches allowed them to push the performance frontier.

Overshooting and the Shift to Modularization

The situation changes dramatically when products become “more than good enough” (overshooting customer needs). Salespeople hear customers say, “Why can’t they see our product is better? They’re treating it like a commodity!” This signals a performance surplus. Customers are still willing to pay for improvements, but the definition of “not good enough” shifts. What becomes inadequate is the lack of speed, convenience, and customization.
This new competitive pressure forces a gradual evolution toward modular architectures. Modularity enables companies to introduce new products faster (by upgrading individual subsystems) and to respond conveniently to specific customer needs. This has a profound impact on industry structure:

• Dis-integration: Modular interfaces allow independent, non-integrated organizations to specialize in components or subsystems.
• Disrupting Incumbents: These non-integrated competitors, with lower overheads and greater flexibility, disrupt the integrated leaders.
  The three conditions for an effective modular interface are specifiability, verifiability, and predictability. When these are met, outsourcing and specialization thrive.

From Interdependent to Modular Design—and Back: The Computer Industry Example

This progression is a recurring cycle. In the mainframe industry, IBM’s initial integrated dominance gave way to a more modular System 360 in 1964, which created new growth opportunities but also allowed non-integrated suppliers to thrive. The minicomputer and personal computer industries followed similar paths:

• Minicomputers: Digital Equipment Corporation (DEC) initially dominated with its proprietary, interdependent architecture. As performance became “good enough,” less integrated but faster competitors like Data General gained share.
• Personal Computers: Apple Computer initially made the best desktop computers due to its integrated, proprietary architecture. However, once functionality became “good enough,” IBM’s modular, open-standard architecture (relying on Intel and Microsoft) became dominant, relegating Apple to a niche.
  The driver of this modularization and dis-integration is the pace of technological improvement outstripping customer utilization. This shifts the basis of competition, forcing a move to modular designs, which in turn enables dis-integration. This means integration, initially a competitive necessity, can later become a competitive disadvantage.

The Drivers of Reintegration: When Performance Becomes “Not Good Enough” Again

The cycle can reverse. If customers’ demands for functionality shift discontinuously upward, a performance gap can re-emerge, flipping the industry back to a “not-good-enough” situation where integration again becomes critical for competitive advantage. For example, in the early 1990s, PC customers began demanding seamless transfer of graphics and spreadsheets into word processing. This created a performance gap that Microsoft filled by interdependently knitting its Office suite into Windows, outperforming specialized, non-integrated software firms. Similarly, in optical telecommunications, the demand for more bandwidth shifted the industry back towards integration as companies like Corning had to interdependently design fiber and amplifiers. The general rule: integrate across interfaces where performance is “not good enough” relative to customer needs.

Aligning Architecture Strategy to Circumstances

• Attempting to Grow a Non-Integrated Business When Functionality Isn’t Good Enough: It’s tempting to start as a non-integrated specialist (lower cost, less daunting). However, if the product functionality is truly “not good enough” and specifiability, verifiability, and predictability (conditions for effective modular interface) are not met, then this strategy often fails. The failure of many early CLECs (Competitive Local Exchange Carriers) in providing DSL, due to complex, unpredictable interdependencies with incumbent phone companies’ systems, is an example.
• Appropriate Integration: In contrast, Japan’s NTT DoCoMo and J-Phone succeeded with wireless internet by adopting a more integrated approach, carefully managing interfaces with content providers and handset manufacturers. Their proprietary systems, while “inefficient” by modular standards, allowed them to overcome technological limitations and create a seamless customer experience when performance was “not good enough.” This suggests that competing proprietary systems are not always wasteful when functionality is inadequate.

Being in the Right Place at the Right Time

Companies initially successful with interdependent, proprietary architectures must adapt as the market evolves. When their products overshoot customer needs, they must modularize and open up their architectures, aggressively selling their subsystems as modules to other companies whose low-cost assembly capabilities can grow the market. This allows them to “skate to where the money will be,” shifting their focus to the components or subsystems that are now “not good enough” and thus can command higher profits. The central message: companies will prosper when they are integrated across interfaces in the value chain where performance is “not yet good enough.”

CHAPTER SIX: How to Avoid Commoditization

This chapter reveals the predictable process of commoditization and its reciprocal, de-commoditization. It teaches managers how to identify where profit pools are shifting within a value chain and how to position their companies to capture value in areas where differentiation is still possible.

The Inescapable Process of Commoditization

The book challenges the notion that commoditization is a random or inevitable end-state for all products. Instead, it’s a predictable process driven by overshooting and modularization, as described in Chapter 5.
The process of commoditization occurs in six steps:

1. Proprietary product emerges: A company develops a proprietary product with an interdependent architecture that excels when the product is “not good enough,” earning attractive profits due to differentiation and economies of scale.
2. Overshooting customer needs: The company continues to improve the product, eventually exceeding the functionality and reliability that customers in lower market tiers can utilize.
3. Change in competition basis: This overshooting shifts the basis of competition in those market tiers from functionality to speed, convenience, and customization.
4. Evolution to modular architectures: The need for speed and flexibility drives the product architecture towards modularity.
5. Industry dis-integration: Modularity facilitates the break-up of the industry into specialized component suppliers and assemblers.
6. Product differentiation vanishes: It becomes difficult to differentiate products as competitors access the same components and standards, leading to subsistence profits. This process starts at the low end and moves up-market.
   Overshooting is the crucial link: it drives both disruption and commoditization. A company in a “more-than-good-enough” circumstance is vulnerable to both: either disruption will steal its markets, or commoditization will steal its profits.

De-commoditization: The Reciprocal Process and Where Profits Shift

Ironically, as one part of the value chain commoditizes, a reciprocal process of de-commoditization occurs elsewhere, creating new opportunities for profit. The book introduces the Law of Conservation of Attractive Profits: when modularity and commoditization cause profits to disappear at one stage, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage in the value chain.
This happens because:

1. Low-cost assemblers must move up-market: Once modular product assemblers drive out higher-cost competitors, their own profits erode. To sustain profitability, they must rapidly move up-market to compete against higher-cost, proprietary products.
2. Performance-defining subsystems become “not good enough”: To enable their products to move up-market, assemblers demand ever-better performance from key components. These “performance-defining subsystems” become the new “not good enough” frontier.
3. Subsystem architectures become interdependent and proprietary: Suppliers of these critical components are compelled to develop increasingly proprietary and interdependent designs to enable their customers (the assemblers) to achieve superior performance.
4. New profit pools emerge for subsystem suppliers: These leading subsystem providers can now sell differentiated, proprietary products with attractive profitability.
   Example: The PC Industry’s Value Chain: In the 1990s, profits for PC assemblers (like Dell, Compaq) were squeezed as PCs became “good enough” and modular. However, profits shifted to Intel (microprocessors) and Microsoft (operating systems) because their products were “not good enough” for what assemblers needed to differentiate, driving them to develop proprietary, interdependent designs. Money also flowed through DRAM makers to Applied Materials (semiconductor manufacturing equipment) because equipment functionality was “not good enough.”
   The key insight: industries are not inherently profitable or unprofitable; profitability depends on the circumstance at each point in the value-added chain. IBM’s 2.5-inch disk drives (for notebooks) were highly profitable in the 1990s because capacity was “not good enough” and their architecture was interdependent, while their 3.5-inch desktop drives (modular and “good enough”) earned subsistence profits.

Core Competence and the ROA-Maximizing Death Spiral

Companies undergoing commoditization often miss the shift in profit pools because of investor pressure to increase Return on Assets (ROA) and a misguided application of “core competence” theory.

• ROA Pressure: When product assemblers face commoditization, they cannot increase the numerator (profit) or differentiate their product. Their only option is to shrink the denominator (assets) by outsourcing.
• The Death Spiral: This leads to a “death spiral” where assemblers outsource more and more activities (circuit board fabrication, motherboard assembly, entire computer assembly, supply chain management, even design) to “noncore” suppliers like Components Corporation. Each outsourcing decision reduces assets and temporarily boosts ROA, leading to positive stock market reactions.
• Supplier’s Advantage: The component supplier, by taking on these “noncore” activities, ironically becomes more integrated and moves up the value chain, gaining opportunities to develop optimized internal architectures that drive the performance of the modular end-products. Examples include Intel’s shift to chipsets/motherboards, Nypro Inc. (custom injection molding) moving into complex subassemblies, and Bloomberg L.P. integrating forward on Wall Street by automating analytics and trading.
  The lesson: core competence is a dangerously inward-looking notion. Competitiveness is about what customers value, not just what you’re good at. Companies should focus on where the money will be, not where it has been.

Good Enough, Not Good Enough, and the Value of Brands

Brands also become commoditized and de-commoditized. They are most valuable where performance is “not yet good enough,” filling the gap between customer needs and product fears. When performance becomes “more than good enough,” the power of the brand on the end-product atrophies.

• Brand Migration: Branding power shifts to points in the value chain where new things are “not yet good enough” – often performance-defining subsystems or the retail interface (where speed, simplicity, and convenience are lacking).
• Example: PC Brands: In early computing, IBM’s brand commanded premiums due to system complexity and unreliability. Later, as PCs became “good enough” and modular, Intel and Microsoft’s brands (for the “not good enough” microprocessor and OS) gained power.
• Example: Automobiles: In mainstream automobiles, as functionality overshoots, the brand power is shifting from the car assembler (e.g., Ford, GM) to subsystem vendors (e.g., Cummins or Caterpillar engines). The decision by GM and Ford to spin off Delphi and Visteon is seen as a move to shed “where the money has been” to focus on “where the money is.”
• Example: Apparel: As clothing quality became “good enough” globally, branding power shifted from product brands (Levi’s, Gant) to channel brands (Talbot’s, Abercrombie & Fitch, Gap), because the new “not good enough” was the simplicity and convenience of the purchasing experience.
  The implication: managers must vigilantly watch for these shifts, which begin at the periphery of the market, not the core, to reposition their firms and catch waves of de-commoditization.

CHAPTER SEVEN: Is Your Organization Capable of Disruptive Growth?

This chapter explores why many innovations fail due to organizational capabilities that, while effective in sustaining circumstances, become disabilities when pursuing disruptive growth. It introduces the RPV framework (Resources, Processes, Values) to assess organizational capabilities and guides executives on how to structure teams and organizations for disruptive success.

Understanding Organizational Capabilities: Resources, Processes, and Values

The book defines an organization’s capabilities (what it can and cannot accomplish) using the RPV framework:

• Resources: The most tangible elements – people, equipment, technology, product designs, brands, information, cash, and relationships. Resources are generally visible, measurable, and flexible (can be bought, sold, hired, moved).
  • Manager Selection (The “Right Stuff” vs. School of Experience): A common mistake is selecting managers based on “right stuff” attributes (e.g., “good communicator,” “decisive”). The more reliable circumstance-based theory of Professor Morgan McCall suggests that management skills are shaped by past experiences (schools of experience). A manager’s capability depends on the types of problems they have wrestled with. For disruptive ventures, managers need experience with uncertainty, market definition, new channel creation, and managing expectations within a stable corporate culture. The failure of Pandesic, a joint venture between Intel and SAP, is attributed to selecting highly successful executives who lacked experience in launching new, disruptive businesses from scratch.
• Processes: The patterns of interaction, coordination, communication, and decision making through which inputs are transformed into value. Processes can be formal, informal, or cultural habits. They are designed for specific tasks and, unlike resources, are inherently inflexible; a process that enables efficiency in one task often creates disabilities in others. Crucial processes for innovation often involve market research, financial projections, budgeting, and resource allocation. Organizations typically lack processes for handling disruptive innovations because they occur intermittently.
• Values: The standards by which employees make prioritization decisions. These guide what is deemed attractive or unattractive (e.g., which order to take, which product idea to pursue). Over time, values evolve to align with a company’s cost structure and income statement, ensuring survival.
  • Gross Margin: If a company’s cost structure requires a 40% gross margin, ideas promising lower margins will be deprioritized or killed.
  • Size Threshold: As a company grows, the size of new opportunities needed to be “interesting” increases. A $10 million opportunity for a $40 million company is insignificant for a $40 billion company needing $10 billion in new revenue. This means large companies lose the capability to enter small, emerging markets.
    Values often act as constraints, defining what an organization cannot do.

The Migration of Capabilities and The Challenge of Change

Capabilities migrate over time from resources (people) to visible processes and values, and then to culture (unconscious habits). It’s easier to change capabilities when they reside in people; much harder when embedded in processes, values, or culture.
The core dilemma for established companies is that they need to create new capabilities for disruptive growth while their mainstream business is still healthy, which requires maintaining the existing resources, processes, and values that drive its success. This demands a tailored approach to managing change.

Selecting the Right Organizational Home for a New Disruptive Business

The RPV framework helps decide where to house an innovation:

• Sustaining Innovations: Incumbents almost always win. Their existing processes and values are designed for this, making them highly capable. These should be developed within the mainstream organization.
• Disruptive Innovations: Incumbents almost always lose. Their processes and values act as disabilities. These require an autonomous organization.
  • Disruption is Relative: What’s disruptive to one company might be sustaining to another (e.g., Internet retailing for Dell vs. Compaq). If an innovation is sustaining to an incumbent, it should be integrated. If disruptive, it needs autonomy.
  • Autonomous Organization: Essential for disruptive success. Autonomy isn’t about geographical separation or ownership, but freedom to create new processes and build a unique cost structure that makes initial low-margin opportunities attractive. Merrill Lynch’s online trading was integrated and became a sustaining tool for existing brokers, rather than a disruptive low-cost offering.

Creating New Capabilities: Make or Buy?

Executives can create new capabilities by “making” them internally or “buying” them through acquisition.

Creating Management Bench Strength

Developing managers for disruptive growth requires intentionally schooling them in situations where they wrestle with the unique problems of new business creation (e.g., uncertainty, market definition, building new channels, managing expectations). This means identifying managers with the ability to learn from varied experiences, rather than just “right stuff” attributes or an unbroken string of successes in stable businesses. The book suggests that most large corporations lack the “courses” in their internal schools of experience to train managers for disruption, necessitating a more proactive approach to development or external hires.

Making New Processes

New processes for disruptive innovation require heavyweight teams. These are dedicated, co-located teams pulled from functional organizations, designed to interact differently and forge new ways of working when unpredictable interdependencies exist. They are distinct from lightweight or functional teams, which exploit existing processes. Chrysler’s minivan platform teams (vs. component-based teams) and Medtronic’s pacemaker development illustrate how heavyweight teams can accelerate new process creation.

Creating New Values

New prioritization criteria (values) can only be created by establishing new business units with new cost structures. Charles Schwab’s online brokerage (an autonomous venture with a much lower cost structure) is a prime example. Its $29.95 online trades were initially disruptive to its mainstream business but became the company’s core, changing its corporate values. Autonomy allows a new venture to be profitable at low-price points, which the mainstream organization’s values would dismiss as unattractive.

Buying Resources, Processes, and Values (Acquisitions)

Acquisitions can bring new capabilities, but success is spotty.

• If the acquired company’s processes and values drive its success, it should be left autonomous. Daimler’s acquisition of Chrysler is a cautionary tale: Chrysler’s success came from its processes (e.g., heavyweight product design) and values (low overhead); integrating it into Daimler’s larger structure likely destroyed these capabilities.
• If the acquired company’s resources (people, products, technology) are the primary rationale, then integration into the parent’s processes makes sense, leveraging existing capabilities. Cisco’s acquisitions of small, early-stage firms (primarily for their engineers and products) were successful because Cisco efficiently integrated these resources into its established processes, discarding the nascent processes and values of the acquired firms.

The Costs of Getting It Wrong

Misaligning the organizational context with the innovation type leads to failure:

• Bank One’s WingspanBank.com: Set up as an autonomous unit for online banking. However, online banking is a sustaining innovation (customers already have accounts; no clear low-end disruption). As a sustaining innovation, it should have been integrated into Bank One’s mainstream business to leverage existing processes and values, rather than creating a separate, costly venture that competed head-on in an already served market. It failed.
• F.W. Woolworth’s Woolco: Established as an autonomous discount department store, which was disruptive from a values standpoint (lower gross margins, higher inventory turns) and required different processes. When Woolworth integrated Woolco’s management, buying, and logistics into the mainstream, Woolco’s margins were forced up, and its inventory turns declined, making it unprofitable. It failed.
  Organizations cannot disrupt themselves if the disruptive venture is housed within the mainstream business unit. The processes and values of the existing organization will inevitably force the new business to conform to its established model.

CHAPTER EIGHT: Managing the Strategy Development Process

This chapter focuses on the process of strategy formulation, arguing that how strategy is developed is often more crucial than the strategy’s content itself. It introduces the concepts of deliberate and emergent strategies and highlights the critical role of the resource allocation process in determining actual strategy.

Two Processes of Strategy Formulation: Deliberate and Emergent

Strategy is defined through two simultaneous processes:

• Deliberate Strategy: This is a conscious, analytical, top-down process. It’s based on rigorous data analysis (market growth, customer needs, competitor strengths) and often involves formal planning with discrete beginnings and ends. Deliberate strategies are appropriate when the future is predictable and all important details can be correctly encompassed and understood by those responsible for implementation.
• Emergent Strategy: This strategy bubbles up from within the organization through the cumulative effect of day-to-day prioritization and investment decisions made by middle managers, engineers, salespeople, and staff. It results from managers’ responses to unforeseen problems or opportunities. Sam Walton’s decision to build Wal-Mart stores in small towns (driven by logistical efficiency) is a classic example of an emergent strategy that later became deliberate.
  Emergent processes should dominate when the future is hard to read, especially in the early phases of a company’s life or when circumstances portend that past formulas may no longer be effective. Deliberate processes are best once a winning strategy is clear, as effective execution becomes paramount.

The Crucial Role of Resource Allocation in Strategy Development

The resource allocation process is the filter that determines which deliberate and emergent initiatives get funded and implemented. Actual strategy is manifest only through the stream of new products, processes, services, and acquisitions to which resources are allocated. This process is complex, diffused, and often invisible, occurring at every level.

• Values as Drivers: Resource allocation is powerfully driven by the organization’s values, which are the criteria for prioritization decisions. Middle managers, for instance, filter ideas based on what they believe senior management will approve.
• Cost Structure: A company’s cost structure determines the gross profit margins it needs, making it difficult for managers to prioritize proposals that don’t meet these margins.
• Size Threshold: The size threshold for new opportunities increases with company size, leading larger companies to filter out smaller, potentially disruptive, opportunities as “not big enough to be interesting.”
• Other Influences: Short managerial tenures (driving focus on quick payoffs), salesforce incentive compensation, customer demands, and competitor actions also exert powerful, often subconscious, influence on resource allocation.
  The resource allocation process determines what a company actually does, not just what it intends to do.

An Illustration of Resource Allocation in Strategy Making: The Case of Intel

Intel’s shift from a DRAM company to a microprocessor company in the 1980s is a classic example of emergent strategy driven by resource allocation.

• Initial Focus: Intel began as a DRAM manufacturer.
• Emergent Shift: In the early 1980s, intense Japanese competition drove DRAM gross margins down, while microprocessors consistently earned attractive margins. In monthly production scheduling meetings, capacity was systematically diverted from low-margin DRAMs to high-margin microprocessors based on the organization’s value of “gross margins per wafer start.”
• Senior Management Realization: Despite this operational shift, senior management continued to invest heavily in DRAM R&D. Only in 1984, during a financial crisis, did management explicitly recognize that Intel had become a microprocessor company and formalized the exit from DRAMs.
  Intel’s strategic shift was primarily the result of daily, decentralized resource allocation decisions, not a top-down mandate. Once the successful microprocessor strategy became clear, senior management then took deliberate control of resource allocation, aggressively focusing investments on that business.

Match the Strategy-Making Process to the Stage of Business Development

• Early Phases (Emergent): Research shows that over 90% of successful new businesses initially succeed with a strategy different from what founders deliberately planned. The crucial role of senior management is to learn from emergent sources what is working and then cycle that learning into the deliberate process.
• Later Phases (Deliberate): Once a viable strategy emerges, managers must aggressively execute it in a deliberate mode, seizing control of resource allocation to focus investments.
  Companies often fail because they implement a deliberate strategy too early (when the right strategy is unknown) or fail to switch to a deliberate mode once a winning strategy is clear.

Managing Two Fundamentally Different Strategy Processes: A Rare and Tricky Skill

The biggest challenge for corporations is managing both emergent processes (for new-growth businesses) and deliberate processes (for established businesses) simultaneously.

• The Prodigy Mistake: Prodigy Communications (Sears/IBM joint venture) was an early online pioneer that invested heavily but failed because it used a deliberate strategy process too rigidly. When users unexpectedly started using e-mail more than content/shopping (an emergent signal), Prodigy tried to filter it out (by charging extra for email) instead of adapting its strategy and infrastructure. AOL, entering later, capitalized on this emergent demand.
• The PDA/Palm Example: Many major computer makers (Apple Newton, HP Kittyhawk) invested massively in developing handheld personal digital assistants (PDAs) based on a deliberate strategy that proved wrong. Palm succeeded because when its initial strategy failed, it shifted to an emergent process (experimenting with electronic personal organizers), and then aggressively executed that viable strategy.
  The key for executives is to avoid “one-size-fits-all” deliberate strategy systems and instead constantly monitor which strategy process is appropriate for each business unit.

Points of Executive Leverage in the Strategy-Making Process

Executives can exert leverage through three key actions:

1. Control Initial Cost Structure: Managers must ensure a new venture’s initial cost structure is low enough to make small orders from ideal disruptive customers financially attractive. Overfunding too early makes the venture dependent on large, immediate revenues, forcing it to compete against consumption in existing markets.
2. Accelerate Emergent Strategy (Discovery-Driven Planning): This rigorous method helps clarify the strategy faster. Instead of assuming the future, it involves:
   • Making targeted financial projections first.
   • Identifying the assumptions that must be true for those projections to materialize (the assumptions checklist).
   • Implementing a plan to learn by testing the most critical assumptions quickly and inexpensively.
   • Investing significantly only after assumptions are validated. This prevents massive investment in flawed initial strategies.
3. Manage the Mix of Emergent and Deliberate Strategies: CEOs must personally and repeatedly intervene to ensure that each business follows the appropriate strategy-making process (emergent for new disruptions, deliberate for established ones). This prevents the “amnesia” where executives forget how a successful strategy emerged and rigidly apply deliberate methods to all new ventures.

CHAPTER NINE: There Is Good Money and There Is Bad Money

This chapter delves into the critical choice of capital sources for new-growth businesses, arguing that the type of money (and the expectations attached to it) profoundly impacts a venture’s success. It identifies the ideal capital as patient for growth but impatient for profit, contrasting it with money that is impatient for growth but patient for profit, which often condemns new ventures.

The Problem of Investor Expectations: Good Money vs. Bad Money

The book argues that the expectations of capital providers heavily influence a venture’s ability to succeed. The traditional categorization of capital (venture vs. corporate, public vs. private) is flawed because it focuses on attributes, not circumstances.

• Good Money: Patient for growth but impatient for profit. This is ideal for disruptive ventures.
  • Patient for growth: Allows disruptive markets (which are initially small) time to mature and an emergent strategy to evolve.
  • Impatient for profit: Forces early validation of the business model and low fixed costs, ensuring that customers are truly willing to pay a profitable price and preventing ventures from pursuing flawed strategies for too long. Early profitability also provides a critical buffer against corporate downturns.
• Bad Money: Impatient for growth but patient for profit. This is detrimental in the early stages of a disruptive venture.
  • Impatient for growth: Pressures ventures to target large, existing markets (sustaining innovations) rather than initially small disruptive ones. This leads to inflated projections and aggressive, risky spending.
  • Patient for profit: Allows ventures to accrue large losses while pursuing the wrong strategy, delaying critical market feedback.

The Death Spiral from Inadequate Growth: How Good Money Turns Bad

The book outlines a five-step self-reinforcing downward spiral that often dooms companies:

1. Company Succeeds: A young company finds a winning formula through an emergent strategy, then deliberately focuses all investments to exploit it. This drives up-market movement and healthy margins, while new disruptive opportunities are ignored.
2. Company Faces a Growth Gap: Despite success, the company faces a gap between expected growth (already discounted into stock price) and the even higher growth needed to exceed investor expectations and create shareholder value. Executives announce unrealistic growth targets.
3. Good Money Becomes Impatient for Growth: Confronted with a large growth gap, the corporation’s values shift. Any project not promising to be “very big very fast” is filtered out. Disruptive innovations, which start small, are forced to project growth in large, existing markets, leading to strategies competing against consumption.
4. Executives Temporarily Tolerate Losses: To meet inflated projections, ventures ramp up expenses significantly before revenues materialize. Executives rationalize huge losses as necessary for long-term wins. This overfunding forces a high-cost structure, making disruptive customers (who are delighted by simple, inexpensive products) financially unattractive. The money has become “impatient for growth but patient for profit”—bad money for new-market disruption.
5. Mounting Losses Precipitate Retrenchment: Revenues fall short, losses mount, and the stock price gets hammered. A new management team cuts all spending not essential for the core business, sacrificing new ventures. The company refocuses on the core, temporarily boosting the stock, but then faces an even larger growth gap, looping back to step 3. This cycle continues until the company is acquired or fails.

Managing the Dilemma of Investing for Growth

The dilemma is that good money for growth is only available when a company is already growing healthily. When core business growth sags, capital becomes poison for new ventures. The only way to preserve good money is to invest it when it’s still good—when the core business is healthy enough to be patient for growth. This is why private companies, less subject to public market pressures, often have capital more appropriate for new ventures.

Use Pattern Recognition, Not Financial Results, to Signal Potential Stall Points

Executives should avoid relying solely on financial results as signals, as these reflect past investments, not current health. Financial results are especially misleading for disruption, as moving up-market financially “feels good” while a disruptive threat builds. Instead, managers should use pattern recognition (e.g., the litmus tests from Chapter 2) to identify potential stall points before the financial data confirms the problem, at which point it’s often too late. The MBA program example illustrates this: financial data showed health, but the pattern of disruption (overshooting customer needs, new disruptive entrants) was already present.

Create Policies to Invest Good Money Before It Goes Bad

To avoid the death spiral, companies need policies that force them to start early, start small, and demand early success:

1. Launch New-Growth Businesses Regularly When the Core Is Still Healthy: This ensures capital is “patient for growth.” It involves budgeting not just capital, but a number of new businesses to be launched each year with the expectation of success, rather than reacting to a crisis.
2. Acquire New-Growth Businesses in a Predetermined Rhythm: Acquire early-stage disruptive companies before their growth is obvious and expensive. Johnson & Johnson’s Medical Devices and Diagnostics (MDD) group successfully grew by acquiring disruptive businesses (e.g., Ethicon Endo-Surgery for endoscopic surgery, Cordis for angioplasty, Lifescan for glucose meters, Vistakon for disposable contact lenses). This group grew 11% annually compared to the Consumer Products group’s 4% (which acquired non-disruptive businesses).
3. Start Small: Divide Business Units to Maintain Patience for Growth: Keep operating units relatively small. A decentralized company (e.g., a $20 billion corporation with twenty $1 billion business units) maintains values that see smaller disruptive opportunities as attractive, unlike a monolithic $20 billion company that needs multi-billion-dollar new revenues annually. This explains why companies like HP, J&J, and GE (composed of many smaller, autonomous units) have successfully transformed.
4. Demand Early Success: Minimize Subsidization of New-Growth Ventures: Expect new-growth businesses to generate profit relatively quickly. This forces them to test assumptions about customer willingness to pay and keeps fixed costs low. It also provides a critical “insurance policy” against being cut off when the core business struggles. Honda’s initial struggles in the U.S. motorcycle market forced it to rely on the unexpected success of its 50cc Super Cub, leading to the discovery of a new-market disruption because it couldn’t afford to sustain losses on its larger, problematic bikes.

Good Venture Capital Can Turn Bad, Too

The “corporate vs. venture” distinction is less important than the willingness or inability to be patient for growth. Just as corporate capital can turn bad, so can venture capital. In the late 1990s, many venture capital firms received massive inflows of capital, forcing them to make larger, earlier-stage investments than before. Their “values changed”: they had to demand that ventures “become very big, very fast,” just like corporate capitalists. This led to overfunding, inflated valuations, and ultimately, massive losses when these early-stage companies failed to deliver. The current paucity of early-stage capital is partly a result of this “death spiral” in the VC world.
The central message: Be patient for growth, not for profit. This requires a Zen-like ability to pursue growth when it’s not yet financially necessary and to demand early profitability as a discipline that validates the business model and protects the venture.

CHAPTER TEN: The Role of Senior Executives in Leading New Growth

This concluding chapter outlines the critical, unique roles of senior executives in creating and sustaining new waves of disruptive growth. It emphasizes that while disruptive innovation is currently reliant on strong individual leadership, it can be embedded into a repeatable “disruptive growth engine” through specific policies and processes.

Three Key Jobs for Senior Executives in Leading New Growth

Senior executives have three critical roles:

1. Near-term: Stand Astride the Sustaining-Disruptive Interface: Personally make judgments about which corporate resources and processes should be imposed on new disruptive businesses and which should be exempted. This is crucial because, currently, there are no established processes for managing disruption; it relies on individual judgment and resources (the CEO).
2. Longer-term: Shepherd the Creation of a “Disruptive Growth Engine”: Develop a repeatable process that consistently launches successful disruptive growth businesses. This moves the capability for disruption from individual resources to organizational processes.
3. Perpetual: Sense and Teach: Continuously monitor for changing circumstances (often at the low end of the market or in non-consumption) and educate others to recognize these signals, initiating projects and acquisitions to turn threats into growth opportunities.

A Theory of Senior Executive Involvement: Beyond “Magnitude of Money”

The common theory that senior executives should only handle “big decisions” (based on monetary magnitude) is flawed. While large investments require oversight, senior managers often lack the detailed information to make the best decisions due to asymmetry of information (data resides in divisions, middle managers filter information). For sustaining innovations, where capable processes exist, senior executive involvement often cannot improve decision quality; delegation is effective.
However, for disruptive innovations, which are initially small but critically different, senior executive involvement is essential. Disruptive businesses lack established processes and fit poorly with mainstream values, meaning that only a senior executive with sufficient power can:

• Endorse the use of appropriate corporate processes for the new venture.
• Break the grip of inappropriate processes and decision rules from the mainstream organization.
• Ensure that the venture’s plans are shaped by different criteria and that the values of the mainstream business (which typically filter out disruptive ideas) are bypassed.
• Coach managers on using emergent strategies and adapting to circumstances.

The Importance of Meddling: Nypro, Inc. Example

The case of Nypro, Inc., a precision plastic molder led by CEO Gordon Lankton, illustrates when and why a senior executive needs to “meddle” in disruptive initiatives. Lankton created systems to foster sustaining innovation in his plants (e.g., monthly performance reports, inter-plant boards, global meetings) to achieve uniform, improving capability. However, when he sensed a shift in the basis of competition from high-volume, high-precision molding to high-variety, low-volume, rapid-response manufacturing, his organization’s established processes failed to adapt.
Lankton developed “Novaplast” technology for quick-setup, short-run molding. He made it available to plants, hoping they would adopt it, but they largely rejected it because they found “no business that could be run economically on the machines” with their existing processes and values (which prioritized high-volume, high-precision work). The few plants that kept it used it for existing high-volume orders. This showed that Nypro’s established innovation engine shaped Novaplast into a sustaining technology, missing the disruptive opportunity. To succeed at this disruption, Lankton would have needed to create new sales and operating organizations with different compensation, processes, and performance measures. This highlights why the CEO must personally stand astride the interface to create and nurture disruptive ventures.

Can Any Executive Lead Disruptive Growth?

A sobering realization from the authors’ research is that most companies that successfully caught a subsequent wave of disruption were still being run by their founders. Founders often have the political clout and self-confidence to override established processes for disruptive opportunities. However, there are exceptions: some major, often diversified, professionally managed companies (e.g., Johnson & Johnson, Procter & Gamble, GE, later IBM and HP) have successfully launched or acquired disruptive businesses. This suggests that in diversified corporations, established processes for creating or acquiring new businesses, and for managing them autonomously, can assist professional CEOs in driving disruption.

Creating a Growth Engine: Embedding the Ability to Disrupt in a Process

To build a repeatable “disruptive growth engine”, companies need four critical components:

1. Start Before You Need To (Policy-Driven Rhythm): Launch new disruptive growth businesses regularly when the core business is still healthy, not in response to financial distress. Budget a specific number of new businesses to be launched each year, ensuring patience for growth.
2. Appoint a Senior Executive to Shepherd Ideas: This executive (CEO or comparable) must be well-versed in disruptive innovation theory, capable of coaching, and empowered to exempt ventures from established processes and ensure appropriate resource allocation criteria. This role evolves from direct monitoring to overseeing processes.
3. Create a Team and a Process for Shaping Ideas: Establish a small corporate-level team dedicated to collecting disruptive ideas and molding them into propositions that fit the litmus tests (from Chapters 2-6). This team needs deep theoretical understanding and repeated practice. They should coach new ventures on discovery-driven planning (Chapter 8).
4. Train the Troops to Identify Disruptive Ideas: Educate employees (especially sales, marketing, engineering) to identify disruptive opportunities and direct them to the “movers and shapers.” This “makes the lowest level competent” in spotting potential disruptions and funneling them into appropriate channels.

Key Takeaways: What You Need to Remember

Core Insights from The Innovator’s Solution

• Disruption is Predictable: Innovation outcomes are not random; they are shaped by predictable forces that can be understood and harnessed.
• Circumstance is King: Success in innovation depends on matching strategies to specific circumstances (e.g., “not good enough” vs. “more than good enough” product performance). One-size-fits-all approaches fail.
• Disrupt or Be Disrupted: For new-growth businesses, a disruptive strategy (targeting nonconsumption or low-end overserved customers) offers a much higher probability of success against powerful incumbents, who are motivated to flee rather than fight.
• Jobs, Not Just Customers: Segment markets by the “jobs” customers are trying to get done, not just their attributes or product categories. This reveals true competitive landscapes and unmet needs.
• Profit Pools Shift: Commoditization is inevitable in one part of the value chain, but it triggers de-commoditization and new profit opportunities in adjacent parts. “Skate to where the money will be.”
• Organizational Capabilities are Disabilities: The processes and values that make an organization excellent at sustaining its core business become its disabilities when confronted with disruptive opportunities.
• Good Money is Patient for Growth, Impatient for Profit: Capital that demands rapid scaling and tolerates sustained losses early on is “bad money” for disruptive ventures. Early profitability validates the model and secures long-term support.
• Strategy is Emergent, Then Deliberate: New disruptive ventures need flexibility and a discovery-driven approach in their early stages; aggressive, deliberate execution only comes once a viable strategy emerges.
• CEO’s Unique Role: Senior executives are critical in overriding established processes and values, championing disruptive ventures, and building a repeatable growth engine.

Immediate Actions to Take Today

• Assess Your Innovation Ideas: Apply the three litmus tests for disruption (Chapter 2) to your current product or business ideas. Is it truly disruptive to all significant incumbents?
• Re-segment Your Market: For a product you want to grow, identify the “jobs to be done” that customers are hiring it for. Observe actual usage, don’t just survey preferences.
• Evaluate Your Current Channels: Determine if your existing distribution and sales channels are motivated to sell a disruptive product (do they gain “fuel” for their own up-market move?). If not, start thinking about disruptive channels.
• Review Organizational Fit: For any new venture, analyze its alignment with your organization’s Resources, Processes, and Values (RPV). Decide whether it needs an autonomous unit or a heavyweight team.
• Analyze Your Capital’s “Patience”: If seeking funding, ensure the capital (internal or external) is patient for growth but impatient for profit.
• Implement Discovery-Driven Planning: For nascent ventures, prioritize testing critical assumptions over massive upfront investment.

Questions for Personal Application

• What “jobs to be done” are our customers hiring our core products for, beyond the obvious functional benefits? Are there ancillary jobs that could be better served?
• Where are our current products overshooting customer needs? What new “not good enough” dimensions of competition are emerging (speed, convenience, customization)?
• In our industry’s value chain, where are the profit pools shifting due to commoditization and de-commoditization? Where will the money be in 5-10 years?
• Which of our organization’s existing processes and values might act as disabilities for a truly disruptive new venture? How can we either bypass or transform them?
• If we were to launch a new disruptive business today, what would be its initial cost structure and how would it influence our ability to attract and delight ideal early customers?
• How can we, as leaders, foster an environment where emergent strategies can be recognized and nurtured, while still maintaining disciplined execution of established strategies?