“The Innovator’s Solution”

I recently finished reading “The Innovator’s Solution” by Clayton Christensen and Michael Raynor, and I enjoyed it very much.  It contains valuable information and advice for managers attempting to navigate the difficult line between sustaining the core business and innovating products and services that create new growth and profits.  Many lessons from the book have been learned, but the following points truly resonated with me.

Chapter 5 – Paraphrase: If products aren’t good enough, integration is the competitive advantage.  If products are more than good enough, modularity is used to compete on speed, responsiveness, and convenience.[1]

In the year 2000, I started my first internet retail business and added a few more in subsequent years, each serving a niche market.  When I first started them, we had to be fully integrated as e-commerce was fairly new.  We created and managed the websites including the secure ordering algorithms, databases for customer information and product information, and website content.  We setup our own phone system to handle calls and took our own photographs of the products for the sites.  We purchased inventory that we held in our own warehouse and packed products up for shipment every day.  Although I no longer have these businesses, I see how internet retail has changed over the years.  Companies have specialized in website templates that provide secure orderings for customers.  Other companies specialize in the database systems for storing inventory and customer information.  Other companies supply phone support for businesses, and others specialize in website optimization to help with marketing products.  UPS and Amazon offer pack-and-ship services for retail businesses so companies no longer have to manage inventory and shipping services.  Companies have also popped up to handle payroll, taxes, and state-required workforce rights postings.  In a few short years, internet retail has gone from highly integrated to highly modular as e-commerce has become more than good enough.

Ch. 6 – page 162 – “ Competitiveness is far more about doing what customers value than doing what you think you’re good at.”[2]

Many companies focus so much on their core competencies that they fail to see where the market is headed, what customers really want, and how they can successfully compete.

Ch. 7 – page 187 – “An opportunity that excites a small organization simply isn’t large enough to be interesting to a very large one.”[3]

This point was the one that my small internet retail businesses were based upon.  I sold niche products with a small following that the larger companies weren’t interested in pursuing.  The amount of incremental revenue for the larger companies was not beneficial for them to pursue, whereas, it was for me.  As my businesses grew, I found that the same action occurred to me as it was no longer beneficial for me to continue pursuing certain markets.

Ch. 8 – page 217 – “a company’s strategy is what comes out of the resource allocation process, not what goes into it.”[4]

This point was a bit painful to read because it represented a poor decision that I made with one of my online businesses.  Cross-Stitches.com sold prefinished cross-stitch products online and did so successfully for several years.  Then I started buying cross-stitch patterns and cross-stitch books to sell, thinking that they would complement the prefinished products.  Unfortunately, it was a poor decision that had not been fully analyzed.  There were dozens more competitors in the cross-stitch pattern market, so my spur-of-the-moment action caused that market to be more competitive and induced pattern retailers to enter into the prefinished market.  Worse than that, my resources were tied up in inventory of books and patterns, so I didn’t have the resources to use for other parts of the business.  To this day, I’m still convinced that the decision to sell books and patterns was the beginning of my company’s downfall.

Chapter 9 – page 236 – “patient for growth but impatient for profit” [5] and page 258 – “Ventures that are allowed to defer profitability typically never get there.”[6]

As discussed previously, I had several e-commerce businesses in the early 2000s.  At the time, I believed that it was important to grow and grow as fast as possible like other internet businesses were trying to do at the time.  I took no salary and put all revenues back into the business to expand our warehouse space, start more e-commerce businesses, purchase more inventory, and pay for more marketing.  I was spending and spending and spending every dime that came in so we could get bigger and bigger.  I completely ignored profits thinking that they would come someday.

Cross-Stitches.com was the main site that had financed the other businesses and financed our rapid growth.  It was a healthy business with growing sales and gross profit margins of 40%.  Then in May 2007, our main supplier started its own e-commerce site with aggressive marketing and advertising.  Sales plummeted.  Cross-Stitches.com was no longer in a position to support the other businesses which were still in the nascent stages of development.  I had pushed for growth and not profitability in the subsequent businesses, so I was in the exact same spot as described in Chapter 9 of the book:

“The dilemma of investing for growth is that the character of a firm’s money is good for growth only when the firm is growing healthily.  Core businesses that are still growing provide cover for new-growth businesses.” …  “It is when growth slows – when senior executives see that the sustaining-innovation pipeline is inadequate to meet investor expectations – that investing to grow becomes hard.  The character of the firm’s money changes when new things must get very big very fast, and it won’t allow innovators to do what is needed to grow.”[7]

The new businesses couldn’t survive without assistance from the core business, and the core business couldn’t fund itself.  I had to make a very difficult decision to close all of them.

Conclusion

This book is very well-written and contains valuable nuggets of information for any manager.  I highly recommend it.