Saturday, February 12, 2005

How do the concept of the Lead User and the concept of the Innovator’s Dilemma fit together?

In a nutshell the difference between Eric von Hippel's Lead User concept and Clayton Christensen's Innovator's Dilemma is that the Lead User concept explains the source of innovations whereas the Innovator’s Dilemma explains the demise of firms that had manufactured innovative products and services.

The figure “Superposition of the Lead User and Innovator’s Dilemma Concepts” elaborates on the difference between these two concepts. What follows is a description of the figure.

The x-axis represents time and the y-axis represents the intensity of need for a solution to a problem. The idea here is that peoples’ needs constantly change. Before a need arises, there is zero intensity but as people change the intensity of the need gradually rises. However, not all people feel the need equally. There will be those who experience the need before others. This is represented by the parallel lines sloping upward. Both lines track a population’s intensity of need. These lines track the populations at the extremes of intensity but the intensity of need of the rest of the population would probably fall between these two lines. There is likely some kind of distribution of need that is represented in the diagram by a normal distribution curve.

Note the red dashed lined labeled the “Innovation Threshold”. One would expect that people would begin to look for ways to address their need (i.e. to look for a solution) when the intensity of need cross some hypothetical threshold. This is the concept of the Lead User, in other words a person who seeks to solve a problem they suffer from that others will soon suffer from. The first people to cross the threshold would be the people tracked by the top line. But we would also expect some time delay between the time that the first people cross the threshold and the time that a solution is actually found. So at some point Lead Users create a solution. On the graph, this is the point at the beginning of the line labeled “Incremental Innovation”.

Invariably what will happen after a Lead User invents a solution to the emerging need is an enterprising company will notice the Lead User innovation and begin to commercialize it. Commercializing means making the solution usable for the population whose intensity of need follows that of the Lead Users. By the time those users cross the Innovation Threshold, commercially available versions of the Lead User solutions are available. Instead of inventing solutions for themselves, these folks just buy the commercially available product or service (we use the term “offerings” to mean products and/or services).

Now we can introduce the part about the Innovator’s Dilemma. The seemingly successful management practice of improving a product so that it addresses customer pain point better and better has its limitations. On the upside, making a product more useful to people with the high need allows a manufacturer to claim a higher premium than the manufacturers of lesser products can claim. However, the population of high-need users is smaller than the population that suffers average need. So as the product gets better and better and more and more expensive, it becomes less and less useful to average users and low-need users. Companies that fail to recognize this issue continue improving their products along the incremental innovation curve at a rate that outpaces the needs of the market. This exposes incremental innovators to upstarts that can sell a product that addresses the needs of the low- and average-need users. Those upstarts don’t command as high of a margin but they make up for it on volume. Furthermore, upstarts naturally follow their own path of incremental innovation to improve their margins. Eventually the upstart is able to take over the entire spectrum of users (from low- to high- need), completely deserting the incumbent. The incumbent faced the Innovator’s Dilemma in having to choose between incrementally innovating to command higher margins from the high-end of the market and curbing innovation to focus on the needs of the mid-market.
In summary, the Lead User concept and the Innovator’s Dilemma describe different aspects of the innovation process. The Lead user concept explains how innovations arise from people looking for solutions to emerging problems that end up becoming endemic to a broader set of people. The enterprising firms that notice these innovations and commercialize them profit from these innovations’ broad appeal. These firms continue improving the base innovation to address the ever-increasing needs of their market. Their rate of incremental innovation out-paces the needs of the market, however. They do this because of the potential to command higher margins from the high-end of the market. However their focus on the high-end exposes them to competition on the low-end. And once a low-end competitors enters, there’s no way for the incumbent to regroup because the changes required span the entire organization of the incumbent.