Foundations for Growth: How to Identify and Build Disruptive New Businesses

Many companies proudly think of themselves as innovative. The great majority of them, however, are adept at producing only sustaining innovations — products or services that meet the demands of existing customers in established markets. Few companies have introduced genuinely disruptive innovations, the kind that result in the creation of entirely new markets and business models. And yet the motivation to pursue such innovations should be urgent. In almost any industry you care to examine, the most dramatic stories of growth and success were launched from a platform of disruptive innovation.1

Most managers understand that significant, new, sustainable growth comes from creating new markets and ways of competing. But few of them make such investments. Why? Because when times are good and core businesses are growing robustly, starting new generations of growth ventures seems unnecessary; when times are bad and mature businesses are under attack, investments to create new growth businesses can’t send enough profit to the bottom line quickly enough to satisfy investor pressure for a fast turnaround.

The second problem is virtually insurmountable, so senior managers must rethink their reluctance to start new ventures in good times. After all, business units that are growing robustly today will become mature, and thus vulnerable, in the future. The only way a corporation can maintain its growth is by launching new growth businesses when the core units are strong. Our research indicates that if senior managers pursue this path — and if the growth businesses they start or acquire are truly disruptive — companies will find it less difficult and risky than many have supposed to create wave after wave of new growth.

Image courtesy of Flickr user justinrussell.

For more than a decade, we have studied innovative successes and failures at large and small companies. (To have a truer sense of whether a disruptive strategy may work in the future, it’s at least as important to understand what hasn’t worked as what has.) We studied some ventures through the lens of history while tracking other initiatives in real time. As a result, we have devised two sets of litmus tests that senior managers can use to shape business plans to improve their chances of success.

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References

1. See C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston: Harvard Business School Press, 1997).

2.Christensen, “The Innovator’s Dilemma,” 126.

3. See J.L. Bower, “Managing the Resource Allocation Process” (Homewood, Illinois: Richard D. Irwin, 1972).

4. J.L. Funk, “The Mobile Internet: How Japan Dialed Up and the West Disconnected” (Hong Kong: ISI Publications, 2001).

5. Our choice of wording in this paragraph is important. When customers cannot differentiate products from one another on any dimension that they can value, then price is often the customer’s basis of choice. We would not say, however, that when a consumer buys the lowest-priced alternative, the axis of competition is cost-based. The right question to ask is whether customers will be willing to pay higher prices for further improvements in functionality, reliability or convenience. As long as customers reward improvements that have commensurately higher prices, we take it as evidence that the pace of performance improvement has not yet overshot what customers can use. When the marginal utility that customers receive from additional improvements on all of these other dimensions approaches zero, then cost is truly the basis of competition.

6. We have published in greater detail elsewhere on the recommendations in this section. See, for example, C.M. Christensen and M. Overdorf, “Meeting the Challenge of Disruptive Change,” Harvard Business Review (March–April 2000): 66–76.

7. For a cogent account of how to recognize and train managers who are capable of succeeding in such situations, see M.W. McCall, “High Flyers” (Boston: Harvard Business School Press, 1996).

8. For strong evidence, see A. Bhide, “The Origin and Evolution of New Businesses” (New York: Oxford University Press, 2000).

9. New ventures that are successful and growing will, of course, continue to consume cash long after they begin to show profit. Our point is that the ventures should not be allowed to consume large amounts of profit. This is not short-sighted. It is a management mechanism that forces the venture’s executives to iterate as quickly as possible toward a viable strategy and business model.

10. For an exceptionally insightful — and frightening — analysis of this problem, see “Stall Points: Barriers to Growth for the Large Corporate Enterprise” (Washington, D.C.: Corporate Strategy Board, 1998).

11. The concept of an aggregate project plan was first developed by S.C. Wheelwright and K.B. Clark in “Revolutionizing Product Development” (New York: Free Press, 1992). Their concept has been extended to the corporate resource-allocation process in a note by C.M. Christensen, “Using Aggregate Project Planning To Link Strategy, Innovation and the Resource Allocation Process,” Harvard Business School note no. 9-301-041 (Boston: Harvard Business School Publishing Co., 2000).

12. R.G. McGrath and I. MacMillan, “Discovery-Driven Planning” Harvard Business Review (July–August 1995): 44–54.

1 Comment On: Foundations for Growth: How to Identify and Build Disruptive New Businesses

  • Shengzhou Wang | February 19, 2014

    Disruptive New Businesses is very important with the shifting from industrial-economy to internet-economy. We must redefine the business and creat new path.

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