204. How corporates stay successful. Lessons from The Innovator's Dilemma part 2

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Episode Transcript

Hello smart people!

How are you today?

In this lesson, we are going to cover part 2 of the Innovator’s Dilemma - when new technologies cause great firms to fail, by Clayton Christensen.

My name is Sophia Matveeva, and I am the founder of Tech for Non-Techies, an executive education company. I’ve also lectured on tech and entrepreneurship at Oxford University, London Business School and Chicago Booth, and written for the Harvard Business Review.

We are covering lessons from The Innovator’s Dilemma, because the ideas in this book are hugely influential in silicon Valley.

In fact, I interviewed the former CFO of Netflix, David Wells on the Tech for Non-Techies podcast, and he told me that they used the book’s concepts in their management strategy.

And we all know how it worked out for them!

This lesson is useful both for people who work in large companies and for people in the entrepreneurial ecosystem: meaning founders and investors.

This is because, large successful companies cannot stay successful unless they innovate. Innovation means opening up new value pools: this means finding new ways to provide value to customers and to charge for it.

So, if you have ambitions to be in the C Suite of a major corporate, you have to know these innovation principles, because you will have to use them.

Netflix displaced Blockbuster, but Burberry has been around since the 19th century and they were the first luxury business on Facebook. So not every corporate is going to get old and crusty and just die off.

And, if you are in the tech ecosystem, you have to evaluate which corporate is a real threat to a start-up’s growth and which one isn’t. If you’re a founder, this will also help you plot your exit strategy, as you will see in this lesson.

Do you I have your attention now?

In part 1, that’s the lesson before this one, we learned why great companies fail. Main point: it is not because they are stupid or complacent. The very thing that caused their greatness also caused their failure (here’s what Christensen writes in the book).

“In the case of well managed firms, good management was the most powerful reason they failed to stay atop their industries. Precisely because these firms listened to their customers, invested aggressively in new technologies, that would provide their customers more and better products of the sort they wanted, and because they carefully studies market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership.”

In this lesson, we are going to cover what to do about this sorry state of affairs.

Here are four things that corporates can do to keep innovating and stay successful as new technologies emerge.

Number 1:

Give the new product to new customers, not existing ones.

I’ll show you what that means in practice with a case study in a minute, but now, remember what we learned in lesson one of this video: a new invention is usually cheaper and crappier than the main product the company is selling.

This is why, the fancy rich customers that a corporate currently has will not want the cheap crappy thing, so don’t try to sell it to them.

Here is an example: you know the printers you have in offices? They are huge and they look expensive, right? Then think of the printer you might have at home. It’s much smaller and cheaper?

And this illustrates my point: Hewlett-Packard, which we will call HP, began selling laser jet printers in the 1980s. Laser jet printers are the huge things you had in offices. They produced higher quality printing.

Then, a new technology was invented called ink-jet printing. The quality wasn’t as good. The corporates that were buying laser printers wouldn’t want to compromise on quality. Imagine, would a law firm, a bank or a consultancy settle for a crappier printer than their competitors?

I am clutching my pearls at the thought!

But who didn’t care? People who wanted printers at home. I don’t have a massive office printer at home, and you don’t either.

So, by creating this simpler and cheaper product, HP opened a whole new market for themselves. They expanded their value pool, and thus carried on being a rich successful corporate.

Lesson Number 2 for how corporates can stay successful in times of technological change:

Match the size of the organisation to the size of the market.

In the previous video we talked about how incentives in big companies are literally the things that stand against innovation.

If you’re unit leader in a corporate and your annual target is $50m for an existing product, you are completely focused on that.

If you hear that you could make a new product could make $1m a year, you’re just not going to spend your time on it.

This is why big corporates don’t go after small opportunities.

This is why, giving innovation projects to teams that are already working on the company’s main products doesn’t work.

You have to either have a spin off, so create your own skunkworks, or buy a start-up and let them focus on new products for new markets.

You need to have a unit that cares about small markets, and isn’t trying to make $50 million by day and scratch out a living by night. That doesn’t work.

Lesson number 3: try lots of things that don’t work until you find one that does (and make sure you have the money to keep going)

Christensen says that innovation teams need to expect to fail at first. And I want to clarify this point, because it is important, so pay attention: failure is not appropriate for every part of the organisation.

Big companies are successful because they sell a great product in a predictable way. For example, let’s look at McDonald’s: a Big Mac is going to taste the same whether you’re in a McDonald’s in Milan or in Chicago.

It is a predictable product (you know what you’re going to get when you hand over your money) and the marketing strategy has been refined for decades: advertising, franchising, branding and so on.

This is called sustaining innovation. If you work on sustaining innovation, your job is to keep selling more Big Macs to more people, and making sure they all taste great.

For sustaining innovation, your failure tolerance is low.

You already have the recipe for a product people love and you have a blueprint for how to sell it. There is no excuse to mess up here.

But, when a company invents a new thing, this is called disruptive innovation.

In disruptive innovation, you don’t yet know exactly who will love your product or why.

Did you know that YouTube started off as a dating site? That clearly didn’t work out, so they carried on trying out different use cases for different markets.

Something worked in the end, as you can see!

When you create a new thing, inevitably, your first few attempts are not going to go well.

Reid Hoffman, to co-founder of LinkedIn says that “if you’re not embarrassed of your first product, you’ve released it too late.”

So, the aim for making a new thing is not to sell lots of stuff from day 1. It is to learn.

Who wants this product? Why do they want it? How do they use it once they have it?

You have to try lots of things that don’t work until you find one that does. And, you have to make sure that you have the money to keep trying new approaches, so don’t blow your budget on your first idea.

Here is what Clayton Christensen says in the book:

Research has shown that the vase majority if successful new business ventures abandoned their original business strategies when they began implementing their initial plans and learned what would and would not work in the market.

The dominant difference between successful ventures and failed ones, generally, is not the astuteness of their original strategy. Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources (or having the relationships with trusting backers or investors) so that new business initiatives get a second or third stab at getting it right.

Those that run out of resources or credibility before they can iterate toward a viable strategy are the ones that fail.”

And now let’s get to our final lesson in this video:

Lesson 4: to innovate successfully, the innovation unit needs to use the big corporate’s resources, but not its values and and processes.

Remember that to create something new, the corporate needs to establish a separate unit or even buy a start-ups.

One of the reasons for this is that big corporates have processes for big corporates.

Have you ever gone through a hiring process at a large company? You might have 8 interviews, a psychometric test and then do a case study.

And after all this effort, you might end up waiting to get an answer about whether you’re hired or not for another 2 months, as they do the same process with 5 other people. This isn’t great, but it happens, and corporates can survive this.

Startups have to move faster, otherwise they run out of money and die.

For this, startups within a corporate need different processes.

So, if you have set up a skunkworks within your organisation, or if you’ve bought a start-up, do not force them to have your processes. Because that literally defeats the entire point.

You know that quote from Mark Zuckerberg “Move fast and break things,” - this is what it’s referring to.

If you want to learn more about how large companies innovate, then I have a super useful free guide for you.

My company, with the help of researchers from the University of Chicago, investigated how the most interesting companies in the world approach innovation.

We identified 6 different types of innovation. In this guide, you will learn what these 6 paths are, and also when to apply them. Also, I made it quite fun and applicable to your personal life, as well as to business.

Let’s make both more exciting!

Why not?

The link to the guide is in the show notes, or at techfornontechies.co/innovation-guide

On that note, thank you very much for giving me your attention today. I really appreciate the time that we got to spend together.

If you enjoyed this lesson, make sure to subscribe to Tech for Non-Techies on YouTube, or on Apple or Spotify.

Have a wonderful day, and I’ll see you next week.