Ask Clay Christensen if it’s possible to predict successful innovation and his answer may surprise you. “It might seem like a crap shoot, but it’s not. The key is to understand the jobs consumers are trying to get done in their lives—then we can find the causal mechanism and harness it to create solutions, and that’s when innovation becomes predictable.”
A Harvard Business School professor, TED speaker and disruptive innovation expert, he’s been touted by Forbes as “one of the most influential business theorists of the last 50 years.” He’s also a five-time recipient of Harvard Business Review’s McKinsey Award and received a Lifetime Achievement Award from the Tribeca Film Festival.
Last week, Christensen joined Casey Carl, Target’s chief strategy & innovation officer, for an Outer Spaces talk at our Minneapolis headquarters. There, he shared insights on the theory of disruptive innovation and some practical advice from his groundbreaking research in helping others become disruptors and innovators. Many examples came from his published works, including “The Innovator’s Dilemma” (one of Casey’s favorites!) which have become required reading for businesses sustaining successful growth and managing through change. Read on for a few highlights from his talk.
Can you walk us through the key principles of innovation theory?
“To start with, it’s important to not use “innovation” as a generic term—there are many different types of innovation, and we deploy them in different ways in the marketplace. I focus on these four:
Potential products. These are innovations that don’t yet exist—they’re born when a job arises in consumers’ lives that they need to get done. When a business comes along and develops a product that gets the job done, consumers will reach out and pull it into their lives.
Disruptive innovations. These transform existing products that used to be expensive or inaccessible into something affordable, easy to attain, so they reach many more people. This is where growth occurs, because you’re competing against non-consumption, rather than established competitors.
Sustaining innovations. These make good existing products better, which is very important to a company—it’s the mechanism that keeps profits and margins strong and helps us beat competitors. Most innovations you see are this type. But by nature, they don’t create growth, just profit.
Efficiency innovations. These allow us to do more with less—important, because they create free cash flow that lets businesses cycle around and identify new potential innovations to disrupt the competitors.
Successful businesses need to have a balance between all of these, a portfolio, so it doesn’t sacrifice one in its importance for others.”
How can companies manage through change and find a good balance?
“When a business is getting disrupted, the hardest place in the world to create change or a new disruption is within the old business model. Leaders and employees have to manage both old and new approaches, and that’s really difficult, cognitively and culturally. There’s no single right answer, because each business is different.
In some industries, the way we measure financials is no longer useful—it’s deceiving because it doesn’t take innovation into account in the right ways. Investing in creating new, disruptive innovations makes the internal rate of return (IRR) go down; using free cash flow to create more free cash flow makes it appear that we’re winning. There’s so much capital everywhere, and the cost is zero, so how do we use it to improve? One thing I recommend is measuring return-on-investment (ROI) of good people—that’s what’s in short supply. Invest in people who understand what needs to be done, and how to organize things differently.”
What other metrics should a business use to measure success?
“The key is making sure to measure success using metrics that are relevant to your business and its innovations. Here’s an example:
In a study I did about the steel industry, a group of competitors called mini-mills started melting scrap in electric furnaces and selling it as concrete reinforcing bar (or “rebar”) at very bottom of the market, and then went up market and killed the integrated steel companies. The reason those steel companies were so easily disrupted? They used gross margin percent to measure their success, which leads businesses to lop off the lowest profit gross margin and add higher gross margin products to the high end, managing their way up to higher gross margins. But if they’d used another metric, net profit per ton, they’d have kept their volume at at the bottom of the market, and allocated overheads in a logical way.
The moral of the story? The metrics we use to measure are a choice—so always go for the ones that makes the most sense for your business.”
How important is it to understand your consumer base?
“We’re all taught to listen to our customers, but make sure you’re paying attention to the right ones. Your best, most demanding customers will always ask you to make better products that they will pay higher prices for. But if the consumers at the bottom of your market aren’t happy? They’ll just go somewhere else. So listen to those customers too—they’re the ones that lead you to innovation.”
Want more inspiration? Hear what more of our Outer Spaces innovation speakers had to tell the Target team.
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