Disruptive innovation kills businesses. We learned that in 1997 from Clayton Christensen’s brilliant book The Innovator’s Dilemma which starkly depicted the phenomenon. What can CEOs do about this seemingly incurable disease?
“Good management” isn’t a solution
In the 13 years since then, we have learned that “good management” isn’t a cure: in fact, as Alan Murray has pointed out in the Wall Street Journal, it’s actually “good management” that accelerates death.
The disasters occurred because managers were following the dictates of “good” management, when management is viewed as optimization. Thus managers studied their customers. They carefully researched the market and new technologies. They meticulously cultivated innovation. They stringently evaluated new development and weighed the cost of new investment against potential gains. And in the process, they missed disruptive innovations that opened up new customers and markets for alternative blockbuster products.
In some cases as at Nokia in 2004, the disruptive innovation that was overlooked came from within the firm itself.
The Innovator’s Solution isn’t a solution
In 2003, Clayton Christensen and Michael Raynor offered The Innovator’s Solution which argued that an organization could cope with disruptive innovation by setting up a separate unit to carry out the innovation. The problem with this reasoning is that the insulation usually breaks down unless the new unit is totally independent. As a result, creating the new unit is not a solution: it’s usually just “deferring the innovators solution.” For the innovation to prosper on a sustained basis, at some point, the parent organization has to come to terms with the change. Typically that doesn’t happen.
Christensen 2009: “Disruption from within never happens”
Can management foster disruptive innovation from within? According Clayton Christensen, the answer is an unequivocal no. In The Innovator’s Prescription, Christensen and his fellow authors write that fostering disruptive innovation within the firm isn’t a solution, because the culture of the existing business will crush the innovation:
“…disruptive innovators invariably find that ensconcing their piece of the system into the old value network kills their innovation—or it co-opts or reshapes their business model so that it conforms to that system. Vice versa never happens.” (Emphasis added)
Some examples of disruptive innovation from within
“Invariably” and “never” are strong words, particularly when we have staring us in the face many examples of disruptive innovation being conducted from within:
Take Apple [AAPL], which successfully disrupted its original computer business with the iPod, the iPhone and now the iPad.
Take Toyota [TM], which successfully disrupted its core business of highly reliable low cost cars with the luxury Lexus and the youth oriented Scion.
Why were these firms successful, when most firms aren’t?
Why traditional management kills innovation
The answer is that Apple and Toyota, and many other lesser-known examples, are practicing a radically different kind of management from traditional management.
Traditional management views the task of management as pushing products and services at customers, of tweaking the supply chain, of parsing and manufacturing demand, of increasing efficiency through economies of scale, with the single-minded goal of making money of shareholders. In this world, the arrival of a disruptive business model will represent a threat to management, to careers, to power structures, to traditional ways of thinking, to client bases, to brands, to corporate culture. Traditional management is looking at the firm and its operations from the inside-out. Anything that challenges the status quo is a threat.
Sadly, this way of managing is increasingly unproductive. As Deloitte’s Shift Index shows, the rate of returns on assets of US firms is only one quarter of what it was in 1965. The life expectancy of a firm in the Fortune 500 is now less than 15 years and heading towards 5 years, unless something changes.
The shift from inside-out to outside-in
What makes Apple and Toyota different is that they are being managed from the outside-in, rather than from the inside-out. They are managing the firm from the customer’s point of view. Instead of trying to “parse and manufacture demand”, they are considering what the customer needs and wants and adjusting what the firm does to meet or exceed these expectations. They have grasped that the new bottom line of business is: is the customer delighted? Or as Guy Kawasaki puts it in his wonderful new book, Enchanted: is the customer enchanted? As Umair Haque has pointed out in The New Capitalist Manifesto, it’s a fundamental shift from outputs to outcomes.
The shift from inside-out to outside-in isn’t an option. It’s the inevitable requirement of an epochal shift of power in the marketplace from seller to buyer. Management has to be transformed because the customer is now in charge.
Continuous innovation with disciplined execution
What’s different about the radically new way of managing is that innovation moves from being an occasional episodic initiative to a continuing way of life.
This means establishing the organizational goal of doing whatever is needed to go on delighting their customers, not just tweaking the supply chain. The firm needs to be permanently focused on generation positive customer outcomes, not merely generating outputs.
It means managers becoming enablers of the people doing the work, rather than controllers.
It means that the firm coordinates its work through dynamic linking, rather than through hierarchical bureaucracy, and with radical transparency so if that employees become aware of a problem, that problem gets communicated openly and quickly solved, rather than festering in the background for years.
It means that communications are conducted in horizontal adult-to-adult conversations, rather than command and control. If not, this too will dispirit employees and kill innovation.
Once these principles are consistently implemented, disruptive innovation from within not only becomes possible. It becomes inevitable.
To learn more
To learn what is involved in management that creates continuous innovation and disciplined execution, you can read recent books like Enchantment, by Guy Kawasaki, The New Capitalist Manifesto by Umair Haque, The Power of Pull by John Hagel, John Seely Brown and Lang Davison, Reorganize for Resilience by Professor Ranjay Gulati, or Leadership in a Wiki World by Rod Collins.
Or my book, The Leader’s Guide to Radical Management (Jossey-Bass, 2010) which provides a comprehensive overview of the principles and practices involved.
If you would like to get together with others who are intent on mastering what’s involved in creating a workplace of continuous innovation and customer delight, please join me, Rod Collins (author of Leadership in a Wiki World, Seth Kahan (author of Getting Change Right) and others for two days on May 12-13 in Washington DC. Cool, innovative and serious fun. More details here.