Trapped in the Wrong Value Chain?

Here's some food for thought about innovation. It sounds pretty theoretical, but bear with me. There are important practical implications.

Clayton M. Christensen, author of the fascinating business best-seller, The Innovator's Dilemma,  has an article in the new Harvard Business Review on how conventional financial wisdom can have a dampening effect on innovation. It's only mildly interesting, but it caused me to re-visit his first book, which has some very important ideas for small and midsized businesses.

The point of The Innovator's Dilemma is that good managers, paying attention to key customers' needs, tend to allocate resources to improving their current offering, rather than looking for new (and often uncertain) opportunities in new markets. In disk drives, for example, the leading players in the 'eighties were focused on improving capacity and price per megabyte (important for so-called minicomputers), while the upstarts that eventually put them out of business focused on light weight and size (important for the emerging desktop computer market). In mechanical excavators, the market leaders focused on bucket capacity and reach (key factors for commercial contractors), while the innovators focused on speed and maneuverability (key to residential contractors).

In other words, if you're a supplier to OEMs and listen to your customers' needs, you may do well over the short run, but you may miss huge opportunities in emerging markets where the criteria for winning are quite different.

History teaches us that only smaller, agile companies succeed in finding and exploiting these opportunities – companies like yours.

For example, if you're a supplier within the American automotive value network (to use Dr. Christensen's terminology), you may be in a similar position to the suppliers of disk drives for IBM's mainframe computers in the 'eighties. Most of your efforts are probably going into squeezing cost out of your products, and you're facing brutal competition from other suppliers who are trying to do exactly the same thing.

The way out of this difficult situation may be to allocate at least some resources to a new and growing market where price isn't the key factor. That might mean looking into emerging needs of the military establishment, or perhaps recreational items, e.g. motorized skateboards, surfboards and jet skis.

To be clear, I don't have a crystal ball, and pursing these particular markets may well be totally inappropriate for your company. What is appropriate, in my opinion, is giving some thought to markets where you can win through innovation that goes beyond price/performance.