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The Sustainability Innovator's Dilemma

May 18, 2018

In Clayton Christensen's modern business classic The Innovator's Dilemma he presents his research, largely from the disk drive industry, that points to a creativity quandary for modern companies:  the resources, processes and values that have led to their success also blind them to opportunities which leads to their failure.  Or at least their failure to take advantage of what he calls "disruptive innovation" (a trending term in business circles these days).

 

I revisited this book recently and pondered what it tells us about business' move toward more responsible models of sourcing, production and value capture.  After all, I have read that it and the sequel The Innovator's Solution is required reading at places like Amazon and Microsoft. It must possess some important key concepts.  Can we glean any lessons from it for sustainable business? 

 

Christensen points to two particularly paradoxical management commitments that create the innovator's dilemma:

  • listening to and satisfying today's best customers
     

  • investing in product improvements and capital projects with short term returns

He points out that this is good management.  This is what we teach in our business schools.  And this is what has created the success of the enterprise.  The "innovator's dilemma" is that these same organizational capabilities become, in his words, liabilities when it comes to disruptive innovation. 

 

These industry transforming innovations, begin at the low-margin part of the market where demand is usually small and highly unpredictable.  Read:  easy to ignore.  And to advance your career, you are paid (in money and prestige) to ignore such distractions.  Who wants to make the case for a new product that doesn't satisfy a clear need for the current market?

 

 

Those working sustainable business should glean at least three lessons from Christensen:

 

1. Organizational Capabilities Framework

His Organizational Capabilities Framework highlights the fact that not just people have capabilities, organizations have them also. You could put the same skilled person in two different organizations and get different results.  He provides many examples of how an organization's "capabilities"--which he buckets into "resources, processes and values"--enable the firm to serve their current market and disable them from doing otherwise. 

 

Bottom line:  for firms to switch resources or processes or values to sustainability is a major undertaking.  The whole purpose of processes and values in particular is that they are unchanging, focused and stable over time so that quality and reliability are ensured.  Therefore, most changes within the existing enterprise will be what he calls "sustaining innovations":  incremental improvements to existing products and processes.  Larger changes require something entirely different...

 

 

2. Separation Breeds Innovation

A rigorous finding from his research is that a separate entity must be created that is design specifically around disruptive innovations which are characterized by:

  • small markets

  • unknown and unknowable product uses

  • focus on testing and prototyping

  • financial structures built for experimentation (inexpensive, fail-fast efforts with quick design-build-learn cycle times)

Firms that try to do this internally almost always fail.  The inertia of the existing organizational capabilities takes over and, like white blood cells attacking an infection, will kill the innovation.

 

The separate entity must have it's own P&L and be structurally separate from the enterprise.  In higher education, the Red House at Georgetown is one such example. 

 

 

3. Disruptive Innovation is Focused on Customer Needs in the Short-term not Long-term Sustainability 

Christensen's framework addresses the high-pressure situation faced by CEOs of publicly held companies needing to grow to meet or exceed quarterly earnings projections.  The pressure to continuously grow requires constant sustaining and disruptive innovation.  His intent was to study why large companies fail to miss out on innovations that disrupt their industry.  His study only defined "innovation" as a product improvement that increased attributes within the customers' current needs, not planetary needs or the needs of, for example, apparel workers in the supply chain or future generations. 

 

His work read widely as I mentioned above.  It seems to be used by large companies to acquire smaller, more innovative enterprises or to set up so-called "skunk works", separate entities focused on future innovations. Some grow into major enterprises like Google Ventures

 

Arguably this could--and probably does--lead to greater concentration of wealth and technological prowess.

 

The book does provide a model for understanding, using traditional financial metrics, the growth trajectory of technology alongside the growth of customer demands.  This could be used to predict the disruptive capacity of sustainable technologies for social innovation. But until financial markets price-in social and environmental risk, it is difficult to understand how his work advances the most important innovations needed in business. 

 

 

The sustainability innovator's dilemma is that the needs of the planet and of distant people in the supply chain are disconnected from the needs of paying customers.  

 

Christensen's work tells us that companies can address this unknown opportunity best by creating what might be called a Social Innovation Lab.  Most companies instead establish an internal sustainability office.  Those offices are perhaps a necessary business function that supports sustaining innovations and keeps watchdogs groups at bay.  But breakthroughs in product innovation and business models needs something entirely different.