Investing in Disruption #4: Capabilities Define Disabilities - 7investing

Want access to stock ideas and free investing content? Join our free 7investing email list today!

Investing in Disruption #4: Capabilities Define Disabilities

In Part 4 of Simon's new series on Disruptive Innovation, he explains how an organization's culture can often hinder it from adapting to disruptive competitors.

August 4, 2022

This is Part 4 of a 5-Part series on Investing in Disruptive Innovation. Here is Part 1 of the series, here is Part 2, here is Part 3, and here is a primer on what disruption means and why it’s so important in investing.

As written by Clay Christensen in his book The Innovator’s Dilemma, the fourth principle of disruptive innovation is capabilities define disabilities.

“Culture” means different things to different people. It could mean employees smiling at work because they love perks like a game room and breakfast bar, or it could mean HR professionals quantifying the intangible asset of workforce productivity.

But for those who study disruptive innovation, culture refers to the way an organization makes its decisions.

Companies assign values to the inputs they look at, and they make decisions in different ways. If the company is a monarchy, its CEO might single-handedly decide what factors are most important when making her decision. If it’s a true democracy, everyone’s different perspective might have an equal weight and whatever decision gets the most votes becomes the path forward.

Those are two extremes, and the actual decision-making process for most organizations falls somewhere in the middle. A company’s leadership team typically looks at data to guide their decisions. Over time, managers know what criteria to look for, and that leads to what they ask their finance, operations, or sales employees to do every day. After a few months, leadership huddles back up again to see how they’re performing against their strategic business plans. They’ll find ways to pay out handsome bonuses for stellar performance, then pat themselves on the back publicly on social media forums.

All of this is important because an organization eventually develops capabilities that result from those decision-making processes. Everyone wants to be well-paid and keep the boss happy. So they tend to optimize their own work behaviors based upon whatever metrics the organization prioritizes most highly.

Different industries use different metrics to evaluate their success. Software companies might prioritize new customers joining their platform, banks might judge the quality of their newest loans, and pharmaceutical companies might look at how efficiency they’re progressing new drugs through clinical trials.

The Disruptive Twist

However, those capabilities also inadvertently result in disabilities. Companies tend to get really good at looking at things in a certain light. But this also leaves them vulnerable to blind spots, where they can’t quite see what’s going on beyond their peripheral vision.

You could refer to this as “chinks in the competitive advantage armor”. Organizations love to find ways to grow revenue or save on costs; but it’s much harder to identify vulnerabilities within your current processes. Competitors who look at things differently could find ways to displace your competitive advantages over time.

The 7investing Stock Idea

This disruptive behavior has taken place recently in the solar power industry…

Already a 7investing member? Log in here.