When I am embarking on a new innovation consulting project, I like to go back and re-read my notes from works that never lose their relevance and continue to resonate with clients.

Notes from Clayton Christenson, The Innovator’s Dilemma

It pays to be a leader in a disruptive innovation
• Leadership in sustaining innovations gives little advantage
• Leadership in disruptive innovation creates enormous value

But established companies typically fail in the face of disruptive change
• Companies get organized to satisfy current customer’s needs and to facilitate design and production of current products. This organization can then prevent the organization most conducive to developing a disruptive product (Henderson and Clark).
• Competencies developed for improving the current product may not be applicable for developing a disruptive product (Clark)
• Above two theories don’t adequately describe what happened in disk drive and excavator industries. Value Networks explanation: Companies tend to invest in innovations that fit the needs of their “value network,” which defines the hierarchy of importance of characteristics for current customers. Current customers reinforce this by not needing the innovation. (Christenson)
• New entrants find markets with different value networks for innovations
• Companies are more likely to seek additional markets upward rather than downward because up-markets are defined and promise larger margins and the investment the companies have gotten used to making for product improvements demand higher margins. Also existing customers move up-market and take their suppliers with them. This leaves a vacuum below, e.g., flash memory instead of disk drives. [Basecamp instead of MS Office] • New entrants also move up-market which brings them into competition with established companies. New entrants tend to improve faster than established companies and so they will eventually disrupt.
• Middle managers avoid career risk of backing innovations for which no market or a down-market is identified. They screen out these opportunities so senior managers don’t even see them as an option. Even if a senior manager decides to pursue a potentially disruptive innovation, there will be resistance if not outright thwarting at the middle management layer (most likely passively through reluctance to allocate resources) [see HBS case on Kodak].

What established companies need to do
• Be able to recognize and enter different value networks
• Align disruptive innovation with the “right” customers by embedding the innovative project in a part of the organization (new if necessary) that serves the customers for the innovation and doesn’t have to meet same revenue/margin demands as incremental/sustaining innovation
• Be prepared to go through an iterative process that is failure tolerant because forecasting the market is impossible. This process should be a learning process that goes beyond focus groups to actual observation of new customers and new applications.
• Use the resources of the big organization but not its culture and processes
• Don’t try to push the growth of an emerging market (Apple Newton) and don’t wait until the market is large enough to be interesting. Instead match the organization size to the growing market so that its goals are satisfied by the organically growing market and so it’s cycles match the rhythm of the market. Acquisition may be the solution.
• Assess the capabilities of your organization and set up a structure (existing organization, lightweight teams, or heavyweight teams) that makes up for the deficiencies in the existing situation.

[Note: these “recommendations are repeated by Govindarajan in 10 Rules for Strategic Innovators]