June 2002

The Rules of Innovation

Continued from page 2

By Clayton M. Christensen

Pick the Scope Needed to Succeed

The second set of variables that affects the probability that a new business venture will succeed relates to its degree of "integration." Highly integrated companies make and sell their own proprietary components and products across a wide range of product lines or businesses. Nonintegrated companies outsource as much as possible to suppliers and partners and use modular, open systems and components. Which style is likely to be successful is determined by the conditions under which companies must compete as disruption occurs.

In markets where product functionality is not yet good enough, companies must compete by making better products. This typically means making products whose architecture is interdependent and proprietary, because competitive pressure compels engineers to fit the pieces of their systems together in ever more efficient ways in order to wring the best performance possible out of the available technology. Standardization of interfaces (meaning fewer degrees of design freedom) forces them to back away from the frontier of what is technologically possible-which spells competitive trouble when functionality is inadequate. This helps explain why IBM, General Motors, Apple Computer, RCA, Xerox and AT&T, as the most integrated firms during the not-good-enough era of their industries' histories, became dominant competitors. Intel and Microsoft (raps about the latter's supposed lack of innovation aside) have also dominated their pieces of the computer industry-compared to less integrated companies such as WordPerfect (now owned by Corel)-because their products have employed the sorts of proprietary, interdependent architectures that are necessary when pushing the frontier of what is possible. This also helps us understand why NTT DoCoMo, with its integrated strategy, has been so much more successful in providing mobile access to the Internet than nonintegrated American and European competitors who have sought to interface with each other through negotiated standards.

When the functionality of products has overshot what mainstream customers can use, however, companies must compete through improvements in speed to market, simplicity and convenience, and the ability to customize products to the needs of customers in ever smaller market niches. Here, competitive forces drive the design of modular products, in which the interfaces among components and subsystems are clearly specified. Ultimately, these coalesce as industry standards. Modular architectures help companies respond to individual customer needs and introduce new products faster by upgrading individual subsystems without having to redesign everything. Under these conditions (and only under these conditions), outsourcing titans like Dell and Cisco Systems can prosper-because modular architectures help them be fast, flexible and responsive.