In The Innovator’s Dilemma, Clayton Christensen explains why established companies are ill-suited to innovation, particularly disruptive innovation that undermines the core business. Christensen describes three categories of institutional capabilities: resources (people, assets, customer and supplier relationships, etc.), processes (how inputs are transformed into outputs) and values (what is important to the organization).
He explains that these capabilities are typically developed in that order over time. First, the company has some good resources, then it evolves efficient processes, and then it develops its core values. When a new business starts up within an established company, it needs to go through the same sequence, but it is now battling the established company’s values and processes.
Christensen explains that established companies have three broad options to build innovative business units with the right resources, processes and values. These are:
- Acquire a new company and keep it as a standalone entity with its own processes and values.
- Create new capabilities internally, which he demonstrates is difficult to do because these violate the fundamental purpose and success formula of the established business.
- Create capabilities through a spin-out. The question then becomes how separate versus integrated does the spin-out need to be? Christensen offers a useful framework to determine the nature of the spin-out based on its fit with established company values and processes.
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