ConservationOfAttractiveProfits

March 29, 2004
I don't get this yet, but I want to. I own a copy of “The Innovator's Solution” and wish I had the stuff in there down as well.

[The following is an excerpt from The Natural History of Software Platforms (c) 2004 David Stutz, licensed under a cc attribution license]:
I believe that anyone trying to create the proverbial “really good business” in software should read and understand Christensen's thoughts. Unfortunately, those who look for it in Christensen's latest book, “The Innovator's Solution,” will find only a short write-up, which in my opinion doesn't do the idea justice. (Hopefully, he will expand on it in the future!) In lieu of that, here is a short description of “the conservation of attractive profits” in Christensen's own words [Harvard Business Review]:
Products are most profitable when they are not “good enough” to satisfy customers’ needs. This is because to make them performance competitive, engineers must use proprietary, dependent architectures. Use of such architectures makes product differentiation straightforward, because each company pieces its parts together in a unique way.

Once a product's performance is good enough, companies must change the way that they compete. The innovations for which customers will pay premium prices become speed to market and the ability responsively and conveniently to give customers exactly what they need, when they need it. To compete in this way, companies are forced to employ modular architectures for products. Modularity causes the products to become undifferentiable and commoditized. Attractive profits don't evaporate, however...

They move elsewhere in the value chain, often to subsystems from which the modular product is assembled. This is because it is improvements in the subsystems, rather than the modular product's architecture, that drives the assembler's ability to move upmarket towards more attractive profit margins. Hence, the subsystems become decommoditized and attractively profitable.

Related blog entries:
The original Ray Ozzie post which prompted Stutz's post above.
Ozzie's brief reply to Stutz.
All of this info obtained via Chris Anderson's blog entry.


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