The Innovator's Acquisition Solution

Last month I polished off Clayton Christensen's The Innovator's Dilemma, blown away by its simple-yet-paradigm-shifting message: Great companies led by great managers fail when faced with disruptive innovation, not because they lack the necessary management skills to be successful, but precisely because they have the necessary management skills to be successful.  Great managers listen to their best customers and their best investors, and each demands ever-higher quality and ever-higher margins, respectively.  Naturally, great managers thus ignore lower-quality and lower-margin product innovations.  But with continuous improvement, when lower-quality becomes good-enough-quality (coupled with other desirable features) for the worst customers, those customers flock to the new innovation, and the great manager decides to move upmarket to solve for only the best customers.  Then the innovation becomes good-enough-quality for better customers, and they flock to the new innovation, forcing the great manager further upmarket.  This cycle continues until the great manager is left with no customers.

At each step in the cycle, the manager has the same choice: Solve for better customers with a higher-margin product, or solve for worse customers with a lower-margin product?  The correct choice is obvious.  But after so many cycles, the manager ends up with no market.  This is the innovator's dilemma.

In my Strategic Management of Technology and Innovation class, we recently discussed the subject of this very innovator's dilemma.  After class, I approached the professor (Dr. Jeffrey Covin) about writing a term paper on the topic.  He suggested I read Christensen's follow-up book, The Innovator's Solution, which I'm now about halfway through.

The Innovator's Solution recaps a lot of the material from its predecessor, but it begins to add a bit more detail about how to address the dilemma as a corporate innovator.  The crux of the strategy is to treat a disruptive innovation (which can be defined as a product that is not competitive with the category standard (e.g. iPod) on the main dimension of performance (song capacity), but which brings other potential advantages (superior portability), AND which can be improved on the main dimension of performance (song capacity) faster than the demands of the market) as a new and separate potential venture.  When evaluating such an opportunity, a manager should approach it as a seed investor would, not as a manager of an established company would.  If he evaluates the opportunity against other established-business opportunities (i.e. sustaining innovations on established products), he will inevitably choose to not pursue it vis-a-vi the innovator's dilemma.  What's more, the manager needs to pursue the opportunity by spinning off an (relatively) autonomous venture to isolate it from the demands of the larger business.  For example, an established business may have a policy to not pursue accounts worth less than $1 million, but a disruptively innovative product may have to start out with small accounts to gain traction.

And that is the point that interests me the most: How does a corporate innovator effectively create a new venture and isolate it from the main business to allow it to blossom?  In my own experience at Intuit, I was able to watch such a new venture form via acquisition, when the company acquired Mint.com.  I witnessed management first try to integrate Mint into Intuit's existing personal finance business, then subsequently back off and try to isolate it.  I plan to use this situation as a case study to further explore disruptive innovation.