The Innovator's Solution

by Clayton Christensen

  Both of these theories get the categories wrong. A better, circumstance-based theory can help managers decide which decisions ought to be made at which levels. For those decisions that the mainstream processes and values were designed to make effectively (sustaining innovations, primarily), less senior executive involvement is needed. It is when senior executives sense that the processes and values of the mainstream organization were not designed to handle important decisions in an organization (which is typically the case in disruptive circumstances) that a senior executive needs to participate. Because the plans for disruptive businesses by definition need to be shaped by different criteria, and because the values of the mainstream business have evolved to weed out the very sorts of ideas that have disruptive potential, disruptive innovation is the category of circumstance in which powerful senior managers must personally be involved. Sustaining innovation is the circumstance in which delegation works effectively. A senior-most executive is the only one who can endorse the use of corporate processes when they are appropriate, and break the grip of those processes and decision rules when they are not.

  Another reason why senior executives need to stand astride the interface between sustaining innovations and disruption is that managers of the mainstream business units need to be fully informed of the technological and business model innovations that are developed in the new disruptive business, because disruption often is where the most important improvements for the future of the entire corporation are incubated. If senior managers have properly schooled themselves in sound theories of strategy and management, they can coach the managers of important growth businesses on both the sustaining and disruptive sides of the interface to take the actions that are appropriate to each particular circumstance. Ensuring that deliberate and emergent strategy processes are employed in the right circumstances and that managers are hired whose experience is a match for the problems at hand are ongoing challenges on both sides of the divide.

  The Importance of Meddling

  One of our favorite teaching case studies about Nypro, Inc., illustrates when and why a senior-most executive needs personally to shepherd the creation of disruptive growth businesses.6 Nypro is an extraordinarily successful custom injection molder of precision plastic parts. Much of the company’s innovative culture and financial success can be attributed to its owner and recently retired CEO, Gordon Lankton.

  Nypro’s customers are global manufacturers of health care and microelectronic products. They require worldwide sourcing of plastic components whose complexity and dimensional tolerances demand the most sophisticated molding process capabilities. Nypro seeks to offer a uniform capability from any of its twenty-eight plants—whether in North America, Puerto Rico, Ireland, Mexico, Singapore, or China—under the mantra “Nypro is your local source . . . worldwide.” If Nypro sought to achieve this uniform capability by barring any plant from deviating from standard, company-wide procedures, it would kill innovation at the very level where it best occurs—the plants. Most of the important process innovations that help Nypro to make ever-better products are developed by engineering teams working to solve customer problems in far-flung individual plants, out of the eyesight and earshot of senior management. This situation is a stereotype of the dilemma that confronts most companies in one way or another: Companies need uniform capability but flexibility to change, and senior managers typically can’t even see what innovations are being considered and developed, let alone decide which ones merit investment.

  In response to this challenge, Lankton created a system to surface the most important and successful innovations so that he could evaluate which improvements should be adopted by all plants, thereby enabling Nypro to offer a uniform but ever-improving global manufacturing capability. A key element of this system was a monthly financial reporting system that rank-ordered the plants’ performance along a number of important dimensions that Lankton judged to be the drivers of the company’s near-term financial performance and its long-term strategic success. These reports showed, for all to see, which plants were doing better and which needed to improve. Plant managers were evaluated on the measures of plant performance in these reports, and their reputation vis-à-vis each other was affected by the relative ranking of their plants. The system, in other words, provided ample motivation for managers to search for any innovation that would improve their performance and relative ranking.

  Lankton created interlocking boards of directors for each plant, so that each board was composed of managers and engineers from several other plants. This kept information flowing among plants. The company augmented this with several global meetings each year for plant managers and engineers, in which they exchanged news about what process and product innovations each had implemented, and what the results had been. In time, there emerged a culture in which managers were intensely competitive to get ahead of each other, and yet were cooperative in sharing the process innovations each had developed.

  Lankton watched carefully whenever one plant’s successful innovation began to be adopted by managers at other plants. This was a signal to him that the idea had merit. After several respected managers had copied another plant’s process innovation, Lankton had enough evidence to decide that the innovation should be implemented, and would then mandate that it become a standard practice worldwide. This method tested and validated sustaining innovations first, and then accelerated the implementation of those that had proved to be important.

  By the mid-1990s it had become clear to Lankton that Nypro’s world was changing. His engineers could mold millions of complicated plastic parts per month to extremely tight tolerances. Even though there were a few applications that needed even greater precision, Nypro’s capabilities were more than good enough for the majority of the market, and other competitors had improved to compete favorably against Nypro’s cost and quality. Lankton sensed, in other words, that the basis of competition in his markets was beginning to change. He noted that the type of business that had led to Nypro’s success—very high-volume, high-precision molding—wasn’t growing nearly as rapidly as the demand for a wider variety of parts with smaller volumes. Some of these parts demanded high precision as well, but it was the ability to respond quickly with that precision that loomed as the key to success.

  Sensing a change of circumstance and crafting a response is a role that only the CEO can fill. Lankton sensed this shift masterfully—but when he left it to the organization to implement the required change, it couldn’t. Here’s what happened.

  To prepare Nypro for this shift in the basis of competition, Lankton commissioned a project at the company’s headquarters to develop a machine called “Novaplast” that could be set up in less than a minute.7 The technology’s unique mold design enabled economical, low-pressure molding of a variety of precision parts in short run lengths.

  To be consistent with the company’s practice, Lankton chose not to compel all plants to begin using the new machine. He made sure that all managers understood how the technology worked and what its strategic purpose was. He then made the machine available for plant managers to lease, hoping that this approach would minimize barriers to experimentation and adoption—and, as usual, to see whether those whose judgment he had learned to respect cast their votes for the technology. Six of Nypro’s plants leased the machine, but within four months four of those had returned their machines to headquarters. The reason: They had concluded that there just wasn’t any business that could be run economically on the machines. The two plants that kept the Novaplast machine had a long-standing order from a major manufacturer of AA-sized batteries to provide a thin-walled plastic liner that fit inside the metal casing of these batteries. The plants molded millions of these liners every month, and for unique reasons it turned out that the Novaplast machine could crank these parts out with higher yields and lower costs than could Nypro’s conventional high-volume, high-pressure machines.

  The end of the teaching case pictures Lankton puzzling about this outcome
. Why was it that he had seen so clearly the growing demand for rapid delivery of a widening variety of short-run precision parts, and yet his plants hadn’t been able to land any of that business for their Novaplast machines? Was it a victory or a failure that Novaplast’s ultimate success came from a very high-volume, standard, high-precision part?

  The answer is that this is exactly the result we would expect from the processes and values that supported the existing business model. Nypro’s finely honed innovation engine shaped Novaplast as a sustaining technology, because this is exactly what the system was designed to do—to shape every investment to help the company make money in the way it was structured to make money. An organization cannot disrupt itself. It can only implement technologies in ways that sustain its profit or business model. The consequence for Nypro of allowing the standard process to remain in control is that (so far) the company has missed the chance to create a major new disruptive growth business.

  To succeed at this disruption, Lankton would have needed to create a sales organization whose compensation structure energized salespeople to pursue this high-variety, low-volume-per-part business. He would have needed to build an operating organization whose processes were tuned to this work and to create measures of performance that were different from those that drove success in the core business. None of the processes of the core business could make these judgment calls correctly. This is why the CEO needs to stand astride the interface between mainstream business units and new disruptive growth businesses.8

  Can Any Executive Lead Disruptive Growth?

  Because the processes and values of the mainstream business by their very nature are geared to manage sustaining innovation, there is no alternative at the outset to the CEO or someone with comparable power assuming oversight responsibility for disruptive growth. Can only certain of these executives exercise this oversight effectively, or is it possible for any senior person to succeed? We noted in chapter 2 that most of the companies whose stock we wish we had owned in the past fifty years took root with a disruptive strategy. A few—but not many—of these companies subsequently caught or created other waves of disruption that kept the parent corporation growing at a robust pace for a time.

  One of our most sobering realizations is that within the population of companies that successfully caught a subsequent wave of disruption and stayed atop their industries, the vast majority were still being run by the company’s founder at the time they tackled the disruption. Only a few companies that were run by professional (non-founder) managers have succeeded in creating new disruptive growth businesses. Table 10-1, although not exhaustive, illustrates what we have sensed.9

  Table 10-1

  Founder-Led Companies That Launched New Disruptive

  Businesses

  Company Disruptive Growth Business CEO/Founder

  Bank One Monoline credit cards (purchase of First USA) John McCoya

  Charles Schwab Online brokerage Charles Schwabb

  Dayton Hudson Discount retailing (Target Stores) The Dayton family

  Hewlett-Packard Microprocessor-based computers David Packard

  IBM Minicomputers Thomas Watson Jr.c

  Intel Low-end microprocessors (Celeron chip) Andrew Grove

  Intuit QuickBooks small business accounting software; TurboTax personal tax assistance software; putting Quicken money management software online Scott Cook

  Microsoft Internet-based computing; SQL and Access database software; Great Plains business solutions software Bill Gates

  Oracle Centrally served software (applications service provider) Larry Ellison

  Quantum 3.5-inch disk drives Dave Brown/ Steve Berkley

  Sony Transistor-based consumer electronics Akio Morita

  Teradyne Integrated circuit testers based on CMOS processors Alex d’Arbeloff

  The Gap Old Navy low-price-point casual clothing Mickey Wexler

  Wal-Mart Sam’s Club Sam Walton

  aMcCoy was not the founder, but was the primary architect of the acquisition strategy that drove Bank One to its prominence.

  bThe company’s co-CEO, David Pottruck, strongly assisted Charles Schwab in this effort.

  cAgain, Watson was the son of the founder, but was the primary driver of IBM’s success in mainframe digital computing.

  It’s worth noting that these founder-led organizations were also essentially single-industry firms (that is, relatively undiversified when they faced the disruption), which, as chapter 9 noted, can make creating a new disruptive business even harder. We suspect that founders have an advantage in tackling disruption because they not only wield the requisite political clout but also have the self-confidence to override established processes in the interests of pursuing disruptive opportunities. Professional managers, on the other hand, often seem to find it difficult to push in disruptive directions that seem counterintuitive to most other people in the organization.

  Table 10-2 shows, however, that there are some exceptions to the principle that only founders seem able to drive disruption. We know of five major companies that were run by professional managers at the time they launched successful disruptions. Of these, Johnson & Johnson, Procter & Gamble, and General Electric are all icons of diversification. IBM and Hewlett-Packard were relatively undiversified when their founders launched those companies’ first successful disruptive businesses; hence, they are listed in table 10-1. Later, when professional managers were running the show, these two firms launched or acquired additional disruptive businesses, but did so when the firms had become much more broadly diversified.

  We suspect that because the professional managers of the companies listed in table 10-2 undertook their new disruptions in the context of a diversified, multibusiness corporation, it was easier for them to succeed. Although their capabilities as managerial resources were undoubtedly important in these actions, there were precedents and processes for creating or acquiring new businesses and managing them appropriately that assisted the professional CEOs in creating disruptive growth.10

  Table 10-2

  Professionally Managed Companies That Launched New

  Disruptive Businesses

  Company Disruptive Growth Business

  General Electric GE Capital

  Hewlett-Packard Ink-jet printers

  IBM Personal computers

  Johnson & Johnson Glucose monitors, disposable contact lenses, equipment for endoscopic surgery and angioplasty

  Procter & Gamble Dryel home dry cleaning, inexpensive power toothbrushes, Crest brand tooth-whitening strips

  Creating a Growth Engine: Embedding

  the Ability to Disrupt in a Process

  Launching a single successful disruptive business can create years of profitable growth for a company, as GE Capital did for its parent during the years when Jack Welch was at its helm. Disruption blessed Johnson & Johnson’s medical devices and diagnostics group, as we noted in chapter 9. Hewlett-Packard’s disruptive ink-jet printer is now the profit driver of the entire corporation. If it feels so good to disrupt once, why not do it again and again?

  If a company launches a sequence of growth businesses, if its leaders repeatedly use the litmus tests for shaping ideas or acquiring nascent disruptions, and if they repeatedly use sound theories to make the other key business-building decisions well, we believe that a predictable, repeatable process for identifying, shaping, and launching successful growth can coalesce. A company that embeds the ability to do this in a process would own a valuable growth engine.

  Such an engine would have four critical components, as depicted in figure 10-1. First, it needs to operate rhythmically and by policy, rather than in response to financial developments. This would ensure that new businesses get launched while the corporation is still growing robustly, and that new businesses would not be pressured to grow too big too fast. Second, the CEO or another senior executive who has the confidence and the authority to lead from the top when necessary must lead the effort. This is particularly important in th
e early years, when success still depends more on resources than on processes. Third, it would establish a small corporate-level group—movers and shapers—whose members develop a practiced, repeatable system for shaping ideas into disruptive business plans that are funded and launched. Fourth, it would include a system for training and retraining people throughout the organization to identify disruptive opportunities and to take them to the movers and shapers.11

  Step 1: Start Before You Need To

  The best time to invest for growth is, as we noted in chapter 9, when the company is growing. To build what will be a respectable growth business in five years, you have to start now. And you need to add new units to the portfolio of growth businesses in a rhythm that is dictated by the growth needs of the corporation five years hence. Companies that build while they are growing can shield their nascent high-potential businesses from Wall Street pressure, giving each one the time it needs to iterate toward a viable strategy and take off. Keep Wal-Mart in mind. In 2002 it generated nearly $220 billion in revenues. But from the time it opened its first discount store, it took a dozen years in today’s dollars until it passed the billion-dollar revenue threshold. Disruptions need a longer runway before they take off to huge volumes, so you have to start them before your annual report suggests that you’re leveling off.

  FIGURE 10 - 1