THE NBI GROUP by Clayton Christensen

“So when Tom Joined, there were 15 of these new initiatives going on inside the NBI group at the time, and then he learned that there had been 41 initiatives already funded whose outcome already was known. And then he said, ‘Before you tell me about those 41, could you give me the business plans that the entrepreneurs submitted to get funding? I'm just going to divide them into two piles. This is the pile that I would predict success for and this is the pile that I would predict failure.’

And then, once he had done that, they unmasked the results and it turned out that 7 had been successful commercially, and 34 had failed and had been cancelled. Turns out that Tom picked 6 of the 7 winners correctly and 33 of the 34 failures correctly, when he looked at those business plans through the lenses of the research that I want to show you. And it turns out that there were a lot of the ones that he predicted failure for—that were really quite good business ideas, but they were packaged in a business plan that he thought would doom them to failure. And so looking at the business plans through the lenses of what I want to share with you today caused him to be wrong 6 percent of the time instead of 83 percent of the time, which is the normal corporate average, and 80 percent of the time that venture capitalists are wrong.

So let me go into some of those things, and I just tell you that experience in the hope that you might see that at least there's some evidence that innovation doesn't need to be as unpredictable as it seems. Some of the principles that we've taught that aren't universally true include:

1. You should listen to and respond to the unmet needs of your best customers. Sometimes that's the right thing to do, but as you'll see there are sometimes when that's absolutely the wrong principle to follow.

2. Another one is that you should focus investments in those opportunities that promise the most attractive profit margins. Again, sometimes that's a very misleading principle.

3. That large markets represent the biggest growth opportunities is something that is widely believed and in fact it generally isn't true.

4. That understanding the customer is the key to successful innovation. What I hope to show is that almost always, that's the wrong unit of analysis in innovation.

5. Another principle that is widely practiced is that you should outsource those activities that are low value-added, and that are not your core competencies. Following that principle causes companies to liquidate their business models.

6. And finally, what we learn in finance, that you should ignore fixed and sunk costs, and make investment decisions based on future, marginal outlays and revenues is a principle that causes companies to stick with the capabilities that were critical in the past and not build the capabilities that will be critical in the future.

So I just want to start at the top of the list and go as far down as we can for the next hour. the first two of those falsehoods emerged from some studies we did about why is it that the leaders in some industries so often find themselves at one point widely regarded as unassailably successful, and then decade or two later you see them in the middle of the pack, or in the bottom of the pack.

I'll plot on the vertical axis of this chart the performance of a product or service over time. There are two elements of this model. The first element is that in every market there is a trajectory of performance improvement that customers can utilize. Now, there's a distribution of customers around that mean, and so at the high end of every market there are very demanding people that are never satisfied with the best you can give them, and at the low end of the market, pretty simple folks that can be overserved by very little. So that's the first piece of the model, and in every market there is a projection of project improvement that customers can use.

Now the second element is that in every market there is a trajectory of performance improvement that innovating companies provide as they keep producing new and improved products. The most important finding about this is that that trajectory of technological improvement almost always outstrips the ability of customers to use the improvement. A good way to visualize this is if you go back to the 1980s on the left side of that chart when we were first starting to do word processing on early personal computers. Those of you with a bit of grey hair, you remember how often you had to stop your fingers to let the Intel 286 chip inside catch up to you? Because in the 1980s Intel's fastest chip weren't even fast enough to keep pace with your fingers.”