Wednesday, July 11, 2012

How Steve Jobs Solved The Innovator's Dilemma or How ClaytonChristensen Got Apple Wrong

On page 408 of Walter Isaacson's "Steve Jobs" biography, Harvard innovation guru Clayton Christensen is quoted as saying in Wired "If Apple continues to rely on its proprietary architecture...the iPod will likely become a niche product."  Steve Jobs read Christensen's book "The Innovator's Dilemma" and solved the paradox that has brought down many a successful company. 

As one who has read Christensen and followed how he got Apple wrong, I think it is worth taking a blog to talk about why the highly regarded academic expert on innovation was outsmarted by Steve Jobs--a real innovator. 

Let's back up and define the innovator's dilemma. By doing what good companies are supposed to do--focus on pleasing their most profitable customers--industry leaders are paving the way for their own demise. How? By ignoring disruptive technologies--the new, cheaper innovations that initially target small customer segments but evolve to displace the reigning product.

From Dr. Christensen's website:

Disruptive innovation
describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market’, eventually displacing established competitors. 

An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.  Characteristics of disruptive businesses, at least in their initial stages, can include:  lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. 

Because companies tend to innovate faster than their customers’ lives change, most organizations eventually end up producing products or services that are too good, too expensive, and too inconvenient for many customers.  By only pursuing “sustaining innovations” that perpetuate what has historically helped them succeed, companies unwittingly open the door to “disruptive innovations”.

In its simplest form,
the dilemma is management practices that allow companies to be leaders in mainstream markets sustaining and improving products they have innovated are the same practices that cause them to miss the opportunities offered by disruptive technologies.

In other words, well-managed companies fail because they are well managed.
Paul Smalera of Reuters puts it this way:

Christensen shows how well-managed, profitable companies can become abject failures in a breathtakingly short time by doing all the right things: They refine their existing products to be better and better. They cater to their best, biggest customers. And they try to grow their profit margins with every passing quarter. But it turns out the path they’re on is something like C.S. Lewis’s gently sloping road to Hell.

So when Christensen predicted the iPod would be cannibalized by disruptive technologies if Apple did not license its FairPlay digital rights management to other device makers or allow other online stores to sell songs for use on an iPod, he was wrong because Steve Jobs and his team solved the innovator's dilemma!

When Apple nearly closed after the John Sculley era they were three months away from a bankruptcy.  Jobs returned as iCEO and restored the passion that created Apple before profits. 

His philosophy was make great products that solve problems customers don't know they have with products they do not realize they need yet.  By not falling into the trap of sustaining profits to please investors with more profits, Apple innovated a solution to the innovator's paradox. 

Steve Denning of Forbes said in 2010 that Apple, Amazon, and others who have solved the dilemma have developed a: 

consistent ability to innovate and to disrupt their own businesses with innovation...
The stakes are high. Firms that opt not to change won’t survive. The choice for them is clear: delight your customers or die.Those nations that don’t change will not prosper. The choice for them is equally stark: promote continuous innovation or accept economic decline." 

The foundation of this blog is America is the leading creative power in the global world because we are still the leader in ideas, innovation, and entrepreneurship.  So once again, we learn that "innovate or die" is how Apple overcame the innovator's dilemma.  

The lesson: Do not make maximum profitability your company goal.  Focus on creating value for your customers with great products, and if that disrupts and cannibalizes your own products--you have solved the innovator's dilemma.

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