(by Clayton M Christensen and Michael Overdorf, from "HBR's 10 Must Reads: The Essentials")

Why do so few established companies innovate successfully? When a new venture captures the established firms' imagination, they get their people working on it within organizational structures (such as functional teams) designed to surmount old challenges--not ones that the new venture is facing. To avoid this mistake, ask:

By selecting the right team and organizational structure for your innovation--and infusing it with the right resources, processes, and values--you heighten your chances of innovating successfully.

Selecting the Right Structure for Your Innovation

If your innovation... Select this type of team... To operate... Because...
Fits well with your existing values and processes Functional teams who work sequentially on issues, or lightweight teams--ad-hoc cross-functional teams who work simultaneously on multiple issues Within your existing organization Owing to the good fit with existing processes and values, no new capabilities or organizational structures are called for.
Fits well with existing values but poorly with existing processes Heavyweight team dedicated exclusively to the innovation project, with complete responsibility for its success Within your existing organization The poor fit with existing processes requires new types of coordination among groups and individuals.
Fits poorly with existing values but well with existing processes Heavyweight team dedicated exclusively to the innovation project, with complete responsibility for its success Within your existing organization for development, followed by a spin-off for commercialization In-house development capitalizes on existing processes. A spin-off for the commercialization phase facilitates new values--such as a different cost structure with lower profit margins.
Fits poorly with your existing processes and values Heavyweight team dedicated exclusively to the innovation project, with complete responsibility for its success In a separate spin-off or acquired organization A spin-off enables the project to be governed by different values and ensures that new processes emerge.

In more depth

What managers lack is a habit of thinking about their organization's capabilities as carefully as they think about individual people's capabilities.

Where capabilities reside: its resources, its processes, and its values.

We want to focus on two sets of values in particular that tend to evolve in most companies in very predictable ways. The inexorable evolution of these two values is what makes companies progressively less capable of addressing disruptive change successfully.

The Migration of Capabilities

In the early stages of an organization, much of what gets done is attributable to resources--people, in particular. The addition/departure of a few key people can profoundly influence its success. Over time, the locus of the organization's capabilities shifts towards its processes and values. (One reason that many soaring young companies flame out after an IPO based on a single hot product is that their initial success is grounded in resources--often the founding engineers--and they fail to develop processes that can create a sequence of hot products.) At some successful companies, the processes and values have become so powerful that it almost doesn't matter which people get assigned to which project teams--the company is able to crank out high-quality work year after year because its core capabilities are rooted in its processes and values rather than its resources.

The founder has early influence, and employees experience for themselves the validity of the founder's problem-solving and decision-making methods. Thus processes become defined. Likewise, if the company becomes financially successful by allocating resources according to criteria that reflect the founder's priorities, the company's values coalesce around those criteria. (From here,these processes and values become enshrined as culture, enabling employees to act autonomously but causes them to act consistently.) As long as the organization continues to face the same sorts of problems that its processes and values were designed to address, managing the organization can be straightforward. But because those factos also define what an organization cannot do, they consititute disabilities when the problems facing the company change fundamentally.

Sustaining vs Disruptive Innovation

Sustaining innovations are evolutionary changes in markets, and successful companies are pretty good at responding to them. Disruptive innovations are those that are revolutionary, that create an entirely new market through the introduction of a new kind of product or service, one that's actually worse, as judged by the performance metrics that mainstream customers value.

Sustaining innovations are nearly always developed and introduced by established industry leaders. Those same companies never introduce--or cope well with--disruptive innovations, because the evolution from people to processes and values means that the organization has (through repeated execution) optimized for solving a particular kind of problem--and disruptive innovations are, by definition, not that particular kind of problem. Large companies often surrender emerging growth markets, and smaller, disruptive companies are actually more capable of pursuing them. Startups lack resources, but that doesn't matter--their values can embrace small markets and their cost structures can embrace low margins. Their market research and resource allocation processes allow managers to proceed intuitively; every decision need not be backed by careful research and analysis. All these advantages add up to the ability to embrace and even initiate disruptive change. But how can a large company develop these capabilities?

Creating Capabilities to Cope with Change

Processes are not nearly as flexible or adaptable as resources are--and values are even less so. So when an org needs new processes and values--because it needs new capabilities--managers must create new organizational space where those capabilities can be developed. There are three ways to do that:

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Last modified 02 June 2021