by Christian Sarkar and Elizabeth Ferrarini

EL: What are your views on Nick Carr's Harvard Business Review article, "IT Doesn't Matter"?

CC: In chapters 5 and 6 of Innovator's Solution, I talk about how you start out in the early era of an industry's history when the functionality and reliability of the product aren't good enough. The way you compete is to make more reliable and higher performing products. In order to do that well, you need to have an interdependent architecture that's a proprietary system. You then get to the point where you've overshot what customers can use.

At this point, a process of commoditization begins to set in. It has two dimensions: First, having overshot you keep trying to improve the product. People will accept the improved product; however, they won't pay much money for the improvements. Customers often don't need all of the improvements.

The other dimension of commoditization surrounds the argument of now having to compete differently. You're faced with the need to market so that every customer gets exactly what they need when they need it. If you achieve this, you can responsibly market to smaller and smaller niches in the market. To compete at this level, you need to have the architecture of the product evolve from a proprietary interdependent one to a modular architecture. When you have a modular architecture where the product's performance is really driven by the subsystem that you snap together, like your personal computer, then modularity finishes the commoditization job. You can no longer differentiate your product from the others on the basis of product performance because everyone has the same modules.

In the first realm of commoditization, the functionality and reliability are determined in the architecture of the product. The components themselves don't make much of a difference. In the other realm of commoditization, the components or the subsystems make all the difference, and the architecture doesn't make much difference.

In chapter 6, the very move in this direction at a stage of value-added precipitates a reciprocal of decommoditization of the adjacent stages. Usually, that's where what's not good enough gets resolved. Carr's point is a little bit consistent with this view. There was an era when you could gain a competitive advantage by having information technology that (1) others didn't have, and (2) you had processes within your company to integrate that technology into your strategic planning, product development processes, and pricing better and faster than others. Now, the ability to capture that information, process it, and deploy it to the people who need it is almost modular, in the sense that any company can get it. Carr overstates this point a bit. Things are headed in this direction, and thus information technology becomes a commodity you must have. You just can't differentiate yourself.

EL: Let's talk about a specific example - about five years ago, StorageNetworks built an IT infrastructure from commercially available hardware, raised more than $200 million, and offered organizations a third-party source for immediate storage, likened to that of a public service utility. EMC validated the concept. StorageNetworks couldn't make a go of that business and offered backup stores and eventually started licensing its software. StorageNetworks went Chapter 11 and couldn't even find a buyer. What went wrong here?

CC: I haven't really studied this company in depth. So, I can only surmise. With the caveat that I haven't crawled inside, I will tell you some of the things I worry about as I watch that. First, Chapter 8's key assertion is the only thing you know for sure at the beginning is, you don't know what the right strategy is. Likewise, you don't know who are the right customers, and what jobs are they trying to get done. You start out with a deliberate strategy where you think this is the right thing. You almost have to know for sure you are wrong. Therefore, you have to get in the market quick with a little of this and then figure out what'll work.

In Chapter 8, I cite a colleague's study of 400 Harvard Business School graduates who started new companies. Half have been successful; half haven't been. The half that succeeded didn't entirely trust the strategy they used when they raised money. They ended up selecting another strategy that enabled them to succeed. Ninety percent of this group said they ended up doing something completely different from what they intended to do. The difference between the successes and the failures wasn't that the successful ones got it right the first time. They just had money left over after they got it wrong. They learned from their mistake in time to shift gears.

In Chapter 9, I talk about good money and bad money. Bad money is a lot of money flowing into something with the willingness to accept big losses. You have the expectation that the more you spend, the more you will earn later. The money is spent in the expectation that your strategy is right.

We would be in error to say that somewhere in that space where StorageNetworks was there wasn't a great business opportunity. It's more accurate to say, like everyone else, their initial strategy wasn't right. They spent a lot of money pursuing that strategy. The problem was that they employed a deliberate strategy aggressively from the beginning, and spent to get big fast.

EL: How do you fix the disconnect between upper management's ideas and what the market will accept?

CC: It is a combination of Chapters 8 and 9. Too much money is a huge curse. Enough money can get you into the market as quickly as possible. Chapter 3 talks about segmenting the market by the job people are trying to get done. The faster you can get into the market and get people to pay real money for real products, the better. Then you need to figure out what were these people trying to get done for themselves when they bought your product. You can then begin to focus on helping them get the job done better and better. As you learn what works and how the customers are using your product, you reach the point where you can aggressively spend money to grow. It's the premature outlay of huge amounts of money in pursuit of the wrong strategy that is the thing to avoid. You need to have an experimental mindset.

In my own language, I try not to say, "innovative" and "non-innovative." Most companies are innovative, but in different ways. An established company is usually very good in sustaining innovation; usually, established companies pull off radical sustaining innovations. But sometimes they overshoot and flame out. The disruptive innovation is a different kind of innovation. I would rather work for an innovative company; the question is which one.

As I live with the ideas in the Innovator's Solution, history might judge the concepts in Chapter 3 - segmenting markets in ways that cause us to fail - might judge this to be the most important chapter in the book.

We always have an overwhelming tendency to frame the market we are targeting by the boundaries defined by product categories, or product points, or the demographics of the customers. We think about industry verticals. When we target products that markets that are defined by demographics of customers or by the product's characteristics, we are playing the crapshoot game of determining whether or not there is a valid customer need. We define our business as helping a customer get a job done -- one that he is already struggling to get done and has no satisfactory means of doing so -- the probability that product will contact with the customer is very high. You need to look at what is the customer trying to get done and does your product or service help that customer get it done better. Or, does it make it easier for them to do what they aren't trying to get done. The latter is a failure.

We give a little example in Chapter 3. It's about investments in Internet-based or electronic learning technologies that are oriented as trying to help college students learn more. These technologies usually never work. If you think about what college students are really trying to do, they want to pass the course without really having to study. If the same effort was focused on crammed.com, making it easier for them to cram, you help them try to do what they are already trying to get done. This works.

Carr makes the comment about commoditization (Oracle and SAP struggling to sell better products at higher and higher prices). If the IT industry has lost a bit of its luster, history will show IT vendors have got to segment the market by product categories and by the attributes of customers, rather than the fundamental jobs people are trying to do in an organization. Say an IT professional wants to know, should I join this organization or does the organization I am working with have high potential. If there's a depth of what the customer is trying to accomplish, then I would be excited about working there.

EL: What are the symptoms of a business or an industry that's ready for disruption? You mention companies that produce products with features no one uses. What are some of the other attributes to look for?

CC: There are two types of disruptions - low-end and new market. The possibility that a low-end disruption, which is covered in Chapter 2, might occur only if two conditions are met: There have to be customers at the low end of the market who don't value and won't pay for further improvement. The second condition for that to happen is that someone has to figure out a lower-cost business model that can be attractively profitable at the discount prices required to win the business of those customers at the low end. If these conditions are met, then a low-end disruption most likely will occur.

The new market disruption is based on an entirely new market sector. If there is a population who are trying to get something done, but they can't to do it for themselves satisfactorily because they don't have the skills or money to buy the product, they have to rely on the expensive and inconvenient help of experts. If that population exists, that is the requisite condition for new market disruption. The second reason for new market disruption is, can I technologically come up with a market that is so affordable and simple to use that I can enable this new population who are trying to get it done, but can't get it done without my product. If these two conditions exist, then a market is a new market disruption.

EL: Your company - Innosight - is a disruptive company in the management consulting space. How do you differentiate yourself from the McKinsey's and the Bains?

CC: The trajectory that the consulting firms are on is higher billings, per partner, per client. Partners make more money by putting more people on the ground. These projects tend not to be strategically related, but operations-effectiveness-type consulting in mergers and acquisitions and integration. That has become the bread and butter of those companies. The way we try to help a company is to go in and spend a day going over theory. We have this conviction that theory is a very useful thing. It's a statement of what causes what and why. Managers use theories every day. In a way, we give them virtual glasses so they can see these theories.

On the second day, we have them make a list of 20 or more of the new business ideas or growth product ideas that have been kicked around in this company. Let's look at each one of those ideas through this lens. Almost always, there are three or four that just pop out and managers say we haven't been giving this much thought because it is not a sustaining innovation. However, when you look at it through the theories lenses, the ideas have enormous potential. As we go through the day, we say an idea has enormous potential, but the way they've been thinking about it doesn't meet with what we say in Chapter 3. Most likely, they've been studying the wrong customers for that idea. You can take an idea and start to shape it so it conforms to the pattern of successful, disruptive companies.

By the end of the second day, they have several products they say could be successful. Then we have them go through a market study phase in which we try to send them to market by the job customers are trying to get done. They need to answer, how big is this market? It does involve finding some people to watch and then asking them a unique set of questions. When you just purchased that product, what job were you trying to get done? And when you didn't buy that product, what else did you purchase to get the job done? And there's a methodology for converting those insights into an estimate for how big is the job.

The third day is devoted to working with the team to create a business plan that can get funded and implemented.

EL: When creating businesses to commercialize high-potential innovations, you have six questions, six decisions you ask people to make. Can you go over them with us?

CC: The questions are fairly simple:

1. Whether the new business should be set up to operate autonomously. Opportunities that require developing new skills and using new business models ought to be kept separate from the main business.
2. The activities the company should build versus the activities it should buy. The new business needs to control activities that allow it to improve performance along dimensions that matter most to customers.
3. How the new business should interact with "value network" participants, such as suppliers and channel partners. The new business must help its value network partners move up their own improvement trajectory. People don't do what doesn't seem sensible to do.
4. Which managers should be appointed to run the new business. Managers should have wrestled with challenges (attended "schools of experience") they know they will encounter.
5. How should the new business set its strategy. In all likelihood, the new business needs to use an "emergent" strategy process that lets it experiment and learn from the marketplace.
6. Who should fund the new business. The new business needs investors whose prioritization criteria matches the business's needs. For truly disruptive innovations, this typically means being patient for growth, but impatient for profits.

People assume an answer to these questions without really asking. They often don't have a theory or strategic framework to think them through. You never have a "one-size-fits-all" answer. There are no best practices. "Best practice" is flawed thinking - it causes innovation to fail.

For example, should the business be autonomous or not? There is a model in Chapter 7 of resources, processes, and values. The organization needs to be autonomous if its normal processes of prioritizing things would place other priorities over this one. The organization can't succeed if the responsible people are over-prioritizing. You can do the same thing with processes. A process is designed to do a particular thing. If the process won't facilitate success, then you need a different process. Then you need a separate team.

The concept of getting the right people is one of the most important ideas for an organization. You shouldn't segment markets by the attributes of the product. You shouldn't segment people by their personal attributes. You need, instead, to segment them by the way they solve problems during earlier times in their career. You make a list of what kinds of problems this management team is going to confront. Once we know this, we have to make sure we have people on the team who've seen problems like this before.

You never want to say, well, those idiots failed because they had the wrong strategy. You have to ask "Why did they have the wrong strategy?" Almost always, they've used the wrong process to come with the strategy that failed. We show two fundamentally different processes: one is a top-down analytical project that is followed by implementation, and the other way is get into the market to try to experiment with what works and what doesn't.

Who should fund the business? During the era of being out in the market experimenting, then the money has to be patient for growth, and impatient for profit. Once you have it figured out and you know what strategy is going to work, then the money can demand growth.

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Christian Sarkar is the editor-in-chief of christiansarkar.com; his articles and work can be seen there, and on onewwworld.com.

Elizabeth Ferrarini is an IT consultant from Boston MA.