Tibor Dőry

Innovation and excellence

Management methods for innovation transformation

The innovator's dilemma and the innovator's solutions

In this chapter, we have shown that it matters greatly what kind of innovations and developments a company spends its profits on and for what purpose. According to research conducted on American companies by Clayton Christensen, author of the international business bestseller The Innovator's Dilemma and former professor at Harvard Business School, it is a big mistake to think that continuously improving our own products and services will enable us to stay ahead of our competitors' similar products and developments in the market. Nevertheless, consumer goods companies spend at least half of their innovation budget on such developments (Christensen, 1997).

In reality, consumers often only use a small part of the continuous improvements in product quality and functionality, so it is likely that customers do not actually need many of the new features. Consider, for example, how many of the features of the cars we drive or our smartphones we actually use, and yet we have to buy them all, which significantly increases the price and at the same time narrows the size of the market. Christensen's research in the 1990s confirmed that if, under pressure from senior management to achieve constant growth, companies only develop products that generate profit, they may even go bankrupt, as in the case of KODAK mentioned earlier. In contrast, a better solution is for companies to tailor their already popular products to another market segment or customer base and sell them to them as well. According to the results of the study, the most successful innovations are so-called breakthrough innovations, which offer users previously unknown, untapped benefits and create a completely new market.

The essence of The Innovator's Dilemma can be summarised as follows: working harder, being smarter, investing more aggressively and listening more closely to customer needs are only effective and good solutions if the current technologies and product portfolio are renewed. However, these management methods are ineffective and can even lead to undesirable results if the company is engaged in disruptive or radical innovation. Most of the large companies studied failed because of their management. Managers made decisions by the book and played the game as it should be played. A common problem is that established decision-making and resource allocation processes do not allow for the development of disruptive technologies and radical innovations. Most companies simply do not have processes in place to listen to customers, carefully monitor competitors' moves, and invest resources in designing and manufacturing higher-performance, higher-quality products that can generate greater profits.

The following observations from Christensen's book can provide important lessons for today's business leaders:

Many market-leading companies are simply held captive by their customers. They lack the energy and capacity to do anything else and typically do not experiment with new products or services because they do not believe that their current customers will like the new product/service, thus missing out on the opportunity to serve new customers/markets. They do not see much point in costly and disruptive technologies and radical innovations that require long development times, but by the time they are convinced otherwise, it is usually too late and they lose out in the market competition.

Developing and launching a new product/service is an extremely complex task. In order for a company to successfully accomplish this task, it must combine business logic with organisational energy and momentum to make the extraordinary effort worthwhile. It is important to emphasise that it is not only the needs of the company's customers that hold the company captive. Responsibility should not be immediately shifted to customers, because the companies' own financial structure and organisational culture may be an even greater cause of captivity and rigidity.

Decision-making and resource allocation processes play a key role. Companies are successful in introducing new products/services when they design these processes in such a way that they allow them to listen carefully to their customers, closely monitor their competitors' moves, and invest significant resources in developing higher-performance, higher-quality products. The reason for this is that quality products/services generate greater profits.

The solution is, in principle, simple. If a company wants to implement disruptive or radical innovations, it is definitely not recommended to focus on a long-established and turbulent market crowded with competitors, but rather to solve a previously unsolved problem (e.g. PayPal) or create a new market need (e.g. Apple products).

This suggestion sounds very simple, but its implementation poses a number of challenges. Clayton Christensen must have sensed this need on the part of company managers, because six years later, in 2003, he wrote The Innovator's Solution, in which he presents a number of solutions for effectively dealing with innovation dilemmas. Even in the 2020s, we recommend this book as essential reading for innovation managers and company executives. The book does not provide precise answers, but rather theoretical considerations that can be used to find intuitive solutions for your own company. Below are some of the innovator's solutions (Christensen–Raynor, 2003):

Never try to compete with a dominant market player with a slightly improved product. Large companies have the resources, large customer base and motivation to overcome the threats posed by new competitors. In almost all cases, the larger, long-established player wins because its resources simply allow it to offer more value and serve its customers with new product developments. Solution: enter the market from below with a product that is not yet as good as that of the big competitors, but is significantly cheaper, lighter or more convenient. It is important to start by targeting a lower profit margin, because the big players tend to let go of low-margin business and focus on increasing high margins. In fact, they flee rather than fight. That is why it is an effective strategy to use disruptive, significantly different business ideas in the battle with competitors. This type of disruption strategy works because it is much easier to defeat competitors if they are motivated to flee rather than fight.

Customers "rent" products to perform certain "tasks". According to Christensen's research, most attempts to bring new products to market fail, with more than 60% of all new product development efforts never reaching the market. Approximately 40% of products launched fail to achieve their objectives and are quickly withdrawn from the market. Overall, three-quarters of the costs incurred in bringing new products to market are wasted. Solution: companies' marketers need to abandon the market segmentation approach, which groups customers based on product type, price sensitivity, demographic and psychographic characteristics. This approach should be replaced with one that answers the question: what are the circumstances under which a customer needs a product, which leads them to buy it? In other words, the critical unit of positioning is the circumstance, not the customer.

Use the definition of strategy to develop disruptive innovations. Every manager asks what the strategy should be when starting a new growth business, but they tend to forget a more important question. What process do we use to formulate the strategy? Since innovative ideas are often vague and require constant refinement and transformation, the question of how to define the strategy becomes important. There are two basic processes of strategy formation: deliberate and emergent. Deliberate strategy is more common. It is analytical and rigorous, and is formulated after a thorough review of factors such as market segment size and dynamics, customer needs, competition intensity, and planned results and returns. Deliberate strategies can be considered appropriate if the following three conditions are met:

The strategy must contain all the important details necessary for success, and those implementing the strategy must fully understand these details.
If the organisation needs to take collective action, this must be made as meaningful as possible for all employees.
The results must be achieved with as little external political, technological or market influence as possible.

The above conditions are rarely met simultaneously, and it is often necessary to adapt to new directions or make adjustments. The emergent strategy consists of a cumulative series of daily decisions on resource investment and prioritisation, which are made at the middle management and employee levels. The strategy we see is the result of the resource allocation process, not the inputs to the process. This type of strategy should dominate when the future is difficult to predict and it is not yet clear which direction the company will take. Solution: when no one could foresee the future of desktop computers, it was necessary to find a viable strategic direction that was effective. Management then took control of the resource allocation process and deliberately directed the strategy from the top down.

Appoint employees based on their learning ability and results. What kind of managers and employees should we hire? For management positions in newly established companies, we need to look for professionals who have the right skills and a track record of success, based on which we can expect further success from them. According to Christensen's research, at least half of all innovation initiatives failed because the wrong people were chosen to lead them. Whether someone can perform well in a new position depends on their previous experience and how it fits with the new task. Managers who have been successful in different business units also have key skills for innovation projects because they are familiar with the company's operations and processes, decision-making mechanisms and cost control. But even the best can encounter difficulties with disruptive or radical innovation projects, which may require radically different skills. Solution: The primary importance is not that managers successfully handle problems, but that they are able to cope with them and continuously develop their skills and intuition so that they can successfully meet the challenge the next time. Dealing with failure and learning from it are critical skills in the school of experience.

Be patient with growth and impatient with profit! One of the main difficulties in financing disruptive innovation is that the market size is small at the outset, so the return also appears small. This is because disruptive innovations must start at the bottom of the market and work their way up, eventually breaking the dominance of the current market leaders.

We consider the money a company invests in new growth initiatives to be "smart money" as long as the core business is healthy. However, if this situation changes and the core business deteriorates, smart money becomes bad money. Growth becomes increasingly important, almost compulsive, and new innovation initiatives suddenly have to grow very large and very quickly. This pressure prevents innovators from taking the time to rethink their strategy and find the truly disruptive innovations, the breakthroughs that can really put the company on a growth path. A good example of this is the Dyson case mentioned earlier. The company is able to finance its new innovation projects (e.g. a radically new type of desk lamp) from its core business, the global sale of bagless vacuum cleaners, and then develop them to perfection over several years. Solution: regularly launch new innovation projects with growth potential when the company's core activities are doing well and generating sufficient revenue and profit. When financial results begin to deteriorate, it will be too late to rush into new development projects. In addition, the use of profits from core activities to cover losses from new growth projects should be minimised. Be impatient for profit and patient for growth!

It should not be forgotten that recent financial results actually reflect the results of investments made years earlier to develop processes and create new products and businesses. Financial results measure how healthy the business was, not how healthy it is now.

Launching disruptive innovation projects is a repeatable process. However, even large international companies do not regularly launch disruptive innovations. In general, we can say that innovation projects should be launched before they are actually needed. Active innovators launch innovation projects when the company's sales and revenues are growing (see Figure 11). It can take three to five years for a single initiative to be fully implemented and brought to market. Therefore, budgets should not be planned for capital investments, but for new innovation projects with growth potential that can be launched each year.

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Figure 11. When are innovation projects needed?

Source: based on Wulfen (2021).

Solution: In order to achieve continuous innovation, it is important to appoint a senior manager whose dedicated task is to manage innovation ideas and allocate resources. This person is responsible for explaining the differences between disruptive and incremental innovations to senior management and owners (or their representatives). Another task is to create a team whose job is to further develop and manage ideas. The problem for companies is not a lack of good ideas. The problem is rather that ideas often lose their disruptive potential. Of course, disruptive, radical innovation ideas are riskier, so they typically do not receive management approval or a larger development budget for their implementation. That is why a team is needed that is capable of shaping disruptive innovation ideas into proposals that will win the support of management and allow their development to begin.

The innovation success factors, recommended actions and typical behaviour patterns presented in this chapter will hopefully inspire readers to apply some of them in their own work environments.

Tartalomjegyzék

Kiadó: Akadémiai Kiadó

Online megjelenés éve: 2026

ISBN: 978 963 664 182 5

Menedzsment

The aim of the book "Innovation and Excellence" is to inspire and encourage company leaders, managers, and experts to initiate and implement innovation transformations with the help of professional literature and corporate case studies. Another important goal is to help develop the innovation capabilities of small and medium-sized enterprises in particular by sharing simple, proven management methods that can be tested in practice.

The first part of the volume reviews the factors of corporate excellence and success, then highlights the possible sources of innovation, with a focus on the role of users and employees. The empirical section presents a detailed description of the supportive role of the workplace environment and creative working conditions based on corporate case studies (AUDI, BOSCH, MELECS). The volume concludes with a description of selected tested practical methods and management techniques that readers can try out in their own businesses.

Hivatkozás: https://mersz.hu/dory-innovation-and-excellence//

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