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Seeing What's Next: Porter, Drucker and Christensen







Seeing What's Next: Porter, Drucker and
Christensen

Seeing What's Next: Porter, Drucker and
Christensen
03/17/2005 04:25 AM

ProcessofExposition
The Idea: An overview of Michael Porter's, Peter Drucker's, and Chris Christensen's approaches to innovation research.


Research is probably the most undervalued, and poorly done, process in Western business. It's not rocket science, but doing it well takes practice, a disciplined process, and strong creative, analytical and communication skills.

Clay Christensen's new book Seeing What's Next is essentially a book about doing good research, directed at accurately predicting the future of your business, or of an entire industry, and the market forces that affect it. Whereas most predictions of the future done by analysts and accountants are essentially projections, and assume little or nothing will change except perhaps the volume and margin of sales, any really useful, strategic prediction must be a forecast, which identifies what will, or might, significantly change, disrupt the market and the status quo, and how your company can react to these anticipated changes. The forecast is the net result of these anticipated external market and non-market changes and your company's planned response to them.

The key to being able to competently anticipate such changes is knowing where to look and knowing what to look for. Michael Porter, in his book Competitive Strategy, identifies 'five forces' that provide one approach to doing so:
  • Suppliers: How many there are, how their offerings differ, how their pricing structures differ, where/how they get their supplies, how expensive it is to switch suppliers, what substitute supplies might be available, whether suppliers could become competitors, and how much an impact their price has on your price
  • Customers: How much power they have to affect your price, how much they buy, what different customer segments exist, how your and others' brands are perceived, how price-sensitive they are, whether they could become competitors, how your products are differentiated in customers' eyes, what motivates them to buy, what substitutes for your product could become available, and how many there are and how they are distributed
  • Competitors: The fierceness of competitive actions and price-cutting, the costs of abandoning an overly-competitive product and doing something else, the number and diversity of competitors, fixed costs and margins, the growth rate and stage of maturity of the industry, production capacity, the cost to customers of switching suppliers, customer loyalty to your and to competitors' brands, differences between your and competitors' products, and the size and profitability of the market
  • Potential New Entrants: Cost, capital requirements and learning curve to new competitors entering your market, availability of supplies and distribution channels to new entrants, impact of government regulation on ease of entrance, economies of scale, value of brand and cost-of-switching advantage to incumbents, ability of incumbents to retaliate quickly against new entrants, intellectual property (patents etc.)
  • Potential New Products: New substitute products and technologies and their attributes, cost of switching to customers, customers' buying criteria and propensity to change to a novel product versus just changing brands, price/performance ratio of new vs. current products
The last two of these five forces are the source of what Christensen in his earlier books called disruptive innovations -- the ones that are often not foreseen when your focus is intently on customers, suppliers and competitors.

So one way to predict the future for your company would be to do thorough research in each of these five areas, see what changes are occurring or what changes your company could precipitate, and how those changes and your company's responses to them would 'play out' in the marketplace. It is not uncommon for research of this nature to use scenario planning techniques -- to write several different 'stories' of how these changes might play out, and allow management and experts in the industry to assign probabilities to each before deciding what actions to take.

I have already written about Drucker's approach, in his book Innovation and Entrepreneurship, to knowing where to look and what to look for. For completeness, my synopsis charts of his innovation process are reproduced in the charts below. His 'where to look' is the seven innovation sources illustrated in Fig.2 below. His approach to analyzing these potential 'change producers' is described in Fig.3 below. His approach to identifying what changes may be coming is similar to Porter's -- look for the sources, do your research, and then analyze the implications critically -- but he slices the 'universe of change possibilities' differently:
DruckerInnov1a
DruckerInnov2a
In Seeing What's Next, Christensen offers yet another way of parsing this 'universe of change possibilities'. What is most different about his book is that he devotes the bulk of it to applying his approach in detail to predict 'what's next' in five industries: education, air transport, semiconductors, health care and telecom, and in global markets. Here's a summary of his theory of where to look and what to look for:

Customers:
  • Undershot Customers (those dissatisfied with current product limitations): Look for signs whether existing or new providers are addressing these dissatisfactions through 'sustaining' innovations (incremental or radical).
  • Overshot Customers (those for which current products are too complex or expensive): Look for signs whether new or existing providers are introducing low-end 'disruptive' innovations, whether providers from niche or other markets are entering this space because their offering is simpler or cheaper and meets requirements, and whether new standards are emerging that allow commoditization of the product at a radically lower price.
  • Non-Customers (those that are not currently using the industry's products): Look for signs whether new or existing providers are introducing new products that are simpler, cheaper or more convenient and bringing new customers into the market.
  • Non-Market Forces: Look for signs whether new regulations or government policies are making it easier for new competitors to enter the market space.
Competitors:
  • SWOT: Compare the strengths and weaknesses of current and potential competitors (tangible and intangible resources they have access to, processes and skills they have at their disposal, response to past challenges, their strategies, structure, historical priorities and business model -- the way they make money.
  • Asymmetries: Assess what each competitor is doing that others can't or won't do (e.g. go after niche markets, compete in the low end of the market, dramatically shift processes or business model in response to new market opportunities)
Strategies:
  • New Entrants: Assess whether potential new entrants are flexible, experimenters and fast learners; whether they have the internal skills and experience to enter the market effectively; and whether their investors are patient for growth yet demanding of high margins -- all of these signal success in entering the market.
  • Creation of New Value Network (suppliers, customers, alliance partners): Assess whether new entrants' initial target customers, selected suppliers and strategic allies are sufficiently 'freestanding' (different from incumbents') to prevent incumbents from co-opting them before they can effectively enter the market.
  • Incumbents: Assess whether incumbents have established their own separate innovative organizations or internal innovative capability to launch its own disruptive innovations.
Just as a reminder, here from my earlier article are Christensen's definitions of sustaining innovations and disruptive innovations:
  • Sustaining Innovations are new, higher-margin, significantly more valuable products and services brought to an existing market, a known group of customers. Large corporations, who 'have' most of those customers, have a huge advantage in introducing such innovations.
  • Disruptive Innovations are new products and services that extend the market to a whole new class of customers (usually down-market, by introducing a cheaper version or alternative). As these innovations improve they gradually start to eat away at the up-market version, sometimes destroying it.  (His books have many examples of both types, the most famous disruptive innovations being the Mini-computer and then the PC which largely destroyed the mainframe computer market).
I like all three models -- Porter's, Drucker's, and Christensen's -- and if I were to be assigned to do some innovation research today, I would use a combination of all three approaches, looking at the markets, and potential markets, and the forces that drive them, from all three perspectives. That way you can actually get a '3-D' forecast of the future of your, or your client's, business or industry, or the entire economy.

I would also integrate into the research process Imperato and Harari's Thinking the Customer Ahead approach, a type of primary research (i.e. face-to-face, as contrasted with secondary research, which is looking at written documents in the public domain) that entails helping the customer to imagine where their business is headed, and then working backwards to assess the implications of that on where your client's business is headed. I would use the Pyramid Principle methodology to document the research and perform the analysis. And I would probably structure the results as scenarios or future-state stories, embedding the results of the identified strategic innovation and differentiation responses I would recommend the client undertake.

If you want to practice applying these theories and doing your own research, analysis and "what's next" forecasting, here are three intriguing exercises:
  1. Tivo won many awards for its invention of the personal video recorder, which had all sorts of interesting attributes: the ability to record automatically by interfacing with online program guides, the replacement of the much-loathed VCR, the ability to strip out commercials, the ability to do 'instant replays' on the fly on any program. But it has not been terribly successful or profitable. Could it reinvent itself or is the advent of competitive PVR technologies built into TVs, satellite systems, and PC video software its death knell?
  2. The decision by Mercedes not to introduce its Smart Car into the US market has the industry abuzz, as has its failure to make a profit in Europe. Now, GM is considering introducing a lower-end similar vehicle for $3,000 into the Chinese market, but is concerned about whether this could cannibalize its own markets. What will the future hold for these vehicles?
  3. The Apple iPod has been enormously successful, even being able to command a premium price over comparable products made by reputable manufacturers. If you were Sony, what would be your competitive response to the iPod?




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For those who haven't read The Innovator's Dilemma or The Innovator's Solution, he recaps the definitions of the two main categories of innovation:
  • Sustaining Innovations are new, higher-margin, significantly more valuable products and services brought to an existing market, a known group of customers. Large corporations, who 'have' most of those customers, have a huge advantage in introducing such innovations.
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He then goes on to say, in response to a question about whether public companies, being bottom-line (profit) rather than top-line (revenue) focused, are inherently incapable of innovation and hence doomed to fail, "The evidence is just overwhelming that is true." That's a remarkable statement, and vindication of my claim that the current price/earnings ratios of most public companies, which anticipate continuing double-digit annual profit growth for decades to come, are absolutely preposterous.

Not only will disruptive innovations eventually kill market leaders, he says, but those that want to survive will have to create new, autonomous organizations or business units to compete in the new 'disrupted' marketplace -- the inertia of the 'old', disrupted organization is deadly, and cannot hope to transition to the new market reality fast enough to survive. IBM was the only survivor of the mainframe PC companies, he says, because they did exactly that when they entered the Mini-computer and PC markets -- they established completely separate, autonomous divisions headquartered in different cities.

[An interesting aside for regular readers of this weblog: Christensen, in the process of discussing how disruptive innovations take over a market, suggests something that may be disheartening to entrepreneurs who want to take a low-risk, low-sweat Natural Enterprise approach: The race is to the quick, meaning the entrant who can bring in a lot of new investment quickly to commercialize the innovation will likely dominate the market. Big risk, big return. Entrepreneurs need to recognize their limitations -- trying to bit off more than you can chew is more likely to lead to bankruptcy than the brass ring. There are still lots of opportunities for natural entrepreneurs to make a very comfortable living, without significant risk, by innovating on a scale they can manage and which they can finance organically. There is much to be said for modesty in business.]

Christensen goes on to suggest, as a corollary, that going, or staying, private can be a better route to sustainable innovation than being a public company. While an IPO can be a great way to raise cheap money, it then exposes your company to the insatiable and unreasonable expectations of passive shareholders, forcing you to take your eye off both innovation and strategic vision, in pursuit of short-term profitability targets that, in the long run, are often dysfunctional. That creates a great quandary -- because private companies have much less access to cheap capital, they are also less equipped to capitalize on innovation, even though they are better equipped to produce it.

Now Christensen gets to the most important point in the interview, though he does so strangely. He starts by saying it is dangerous to listen too much to your customers, because they are, by definition, satisfied with what you do now, and hence won't force you to be innovative. But his real point is that it is by talking to prospective customers (who he calls non-customers) that you discover why they are not buying from you today, that can lead you on the path of innovation (by finding out why). I think that's a bit black-and-white: It suggests you have either 100% 'market share' of a customer or none. In my experience there are lots of opportunities to sell more to existing customers, and since you have strong relationships with those customers they may be able to help you identify opportunities to sell more to them through innovation, than 'non-customers' who don't know your capabilities and with whom you don't have a relationship that can buy you time, trust and candour from them. But there are still three important points here:
  • While the best innovative ideas come from talking to customers and determining their unmet needs, 'customers' should include prospective customers, not just current ones, and
  • There is some danger that a customer who knows you for product or service X will not want you, or not imagine you being able, to produce Y as well: Your excellence in one area can actually detract customers who are aware of that excellence from helping you innovate in another area.
  • If you're going to try to innovate in a new area, set up a separate, autonomous business unit to do so, so interference from, and to, the existing business is minimized.
He goes on to talk about the folly of the traditional product line/demographic market segmentation, trying to find patterns in product category needs by customer age, income level, profession or sex -- leading even sophisticated market-driven companies like P&G to fail with 85% of their new product launches. He re-affirms what I've always believed: Every individual is a market segment of one. The answer, he says, is to segment the market by types of need instead of by demographics. To do this, he says, you need to understand yourself as a customer and consumer, and appreciate that your needs are diverse, dynamic, and ever-changing. The best innovations fill an unmet need, and starting with demographic segments actually obfuscates the identification of needs that transcend demographic boundaries.

He recommends two techniques for honing in on such needs:
  • At brainstorming sessions, get people to identify and then individually rank why people buy each type of product or service (KJ diagramming), and then aggregate the top-ranked reasons to create a profile of the need.
  • Conduct a series of interviews of customers who recently used the product or service, asking each to tell a story about (a) the specific situation that caused them to decide to use the product or service, and (b) the last time they were in a similar situation but used a different product or service, and why; and then aggregate these into a profile of the motivations.
The combination of these two profiles gives you an appreciation for the needs that exist, and the customers' buying behaviours when faced with that need -- excellent grist for the innovation mill.

The interview includes a wonderful quote from Ted Leavitt in a 1960 HBR article called Marketing Myopia: "People don't buy a quarter-inch drill. They buy a quarter-inch hole. You've got to study the hole, not the drill. The drill is just a solution for it." Rob Paterson recently made this point with similar eloquence, coining the word "coolth" for what people were really buying when they bought an air conditioner.

Christensen didn't seem to be prepared for the final question -- where to look for unfilled needs. I guess I need to tell him about my post of last week.

Thanks to the always-excellent Innovation Weekly for the link to the Gartner article, and to John Wark at New Dog Old Trick for the link to KJ diagramming. John also has an interesting recent post suggesting one of the main values of a blog is as a place to organize and store our memories.  For the explanation of my Innovation Process chart, above, please see this article.

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09/17/2002 02:09 PM
The standards consortium offers up a new test compliance to Partner Interface Process (PIP) 3A4 and a new free version of its self-test kit.

i2's Supply Chain Management Suite


i2's Supply Chain Management Suite 03/14/2003 01:28 AM
i2 Technologies' Supply Chain Management suite is designed to function as an end-to-end solution that spans planning, execution, collaboration and event management. The suite comprises strategic planning (months to quarters), demand and supply planning (weeks to days), and supply-chain execution (hours to minutes).

Some Supply Chain Players Are Hot, But
Will RFID Add a Jolt?


Some Supply Chain Players Are Hot, But
Will RFID Add a Jolt?
09/08/2004 07:57 PM
While some supply chain vendors long ago fizzled, others continue to fizzle, including IBM partner Yantra. Companies that manage to thrive in this highly competitive space will get another boost out of RFID -- but not right away, experts say.

Electronics Supply Chain Group Goes
Global


Electronics Supply Chain Group Goes
Global
01/06/2005 10:03 PM
The National Electronics Manufacturing Initiative has added "International" to its name, in a bid to place an increasingly stronger emphasis on the global supply chain.

Manugistics, IBM partner on supply chain
products


Manugistics, IBM partner on supply chain
products
04/15/2004 11:47 PM
The relationship with IBM will allow Manugistics customers take advantage of such IBM services as hosting, on-demand computing and outsourcing support.

Seeing What's Next: Porter, Drucker and Christensen

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