How to Solve the Innovator’s Dilemma
The profound realization behind SpaceX’s Starship system.
In this brief article, we explore SpaceX’s approach to disruptive innovation and what lessons can be learned by C-level executives engaged in digital transformation.
On September 29th, 2017 at the International Astronautical Congress (IAC) in Adelaide, Australia, SpaceX CEO and Lead Designer Elon Musk provided an update to his 2016 presentation regarding the long-term technical challenges that need to be solved to support the creation of a permanent, self-sustaining human presence on Mars.
Buried amongst the flurry of daunting engineering challenges and impressive development updates on the BFR platform (since renamed “Starship”) were some valuable insights into how SpaceX solved one of the most fundamental problems of innovation — how to pay for it.
This problem will be familiar to many senior executives embarking on the digital transformation of an established business — most of the firm’s resources are tied up supporting the mainstream revenue-generating business, so there are little or no resources available for innovation projects.
This dilemma is famously described in detail by the late Harvard Professor Clayton Christensen in his best-selling book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.
The Funding Problem
According to Musk, the funding problem had occupied him and his team for much of the past year. And he realized just how important it was to solve it.
“The most important thing that I want to convey in this presentation is … I think we’ve figured out how to pay for it. This is very important!”
Why was this even a problem for Musk?
Most of his companies (SpaceX included) have been started from scratch using investment in the form of private or venture capital. In this scenario, you have a blank sheet of paper — just raise the money, and off you go.
But the problem Musk faced with SpaceX was quite different.
As of late 2017, SpaceX had already developed three different rocket platforms: Falcon, Falcon 9, and Falcon Heavy. These platforms had been designed for two main purposes: launching satellites into low-Earth orbit, and supply missions to the International Space Station (ISS).
Developing a new rocket platform capable of reaching Mars would require many new capabilities that could not be supported by the existing platforms.
We can think of the Falcon rocket platforms as SpaceX’s “legacy technology stack”, and the new BFR/Starship platform as the “future state platform”.
How do you develop a new platform when all your resources are fully engaged in supporting the existing platforms?
Furthermore, there were no obvious or immediate revenue-generating opportunities for the new platform — it would require an enormous amount of upfront investment that would not be offset by new revenue streams.
Does this sound familiar?
This is exactly analogous to the problems described by Christensen, and the situation many established firms find themselves in when trying to innovate.
It is very difficult to build a business case to direct resources away from the mainstream business to focus on new projects that: (i) address no obvious client need, (ii) are unlikely to see an immediate return on investment, and (iii) have no guarantee of success.
A Profound Realisation
SpaceX realized they could not support their legacy platforms and build out a new platform at the same time. To put it another way, there would be no new money for the future state platform.
This led him to a brutal conclusion. He would have to make the current platforms redundant. He would have to build one platform that replaces all his legacy systems. All resources could then be applied to the new system.
In his own words:
“This is really quite a profound realization — that if we can build a system that cannibalizes our own products, that makes our own products redundant, then all of the resources — which are quite enormous — that are used for Falcon 9, Heavy, and Dragon, can be applied to one system.”
The implications of this statement are huge.
Rather than “just” supporting all the new capabilities required to reach Mars, the new platform would also have to support all of the existing capabilities supported by the legacy platforms.
As if that wasn’t a big enough challenge, SpaceX also wants to significantly enhance its existing revenue-generating services.
The list of requirements for the Starship platform include:
- achieve a marginal cost per launch accounting for reusability
- enable the launch of significantly larger and more satellites than before
- transport crew and cargo to the ISS
- lunar surface missions, enabling the creation of a Moonbase
- transportation to Mars and creation of a base on Mars
- long-distance travel on Earth
“We believe we can do this with the revenue we receive for launching satellites and servicing the space station. All of our resources will turn towards building BFR.”
Lessons Learned
Here is the valuable insight of SpaceX— in order to develop a new platform, you have to redirect the focus of the whole organization to replace legacy platforms with the new, while also growing existing revenue-generating services.
In some respects, this is a very high-risk business strategy as there is no room for error. But, as Christensen points out, doing nothing is not an option either — if you do not innovate, you will (eventually) be disrupted.
Furthermore, we can extract some core guiding principles for C-level executives to follow:
- Innovation funding is a Zero-Sum Game — there is no new money for innovation, so difficult business decisions must be made about how to redirect resources away from the mainstream business.
- Focus on one strategic platform — make a clear choice between the “old” and the “new”, and communicate this decision through the organization. Pragmatically, this is a decision about the rate at which you redirect resources to work on the new platform — but it is critical that the entire organization understands that every dollar spent on a legacy system is regret spend.
- Find ways to significantly improve your mainstream business — use the new platform to drive a step-change for your established businesses, as well as enabling new business opportunities. This keeps you ahead of the competition and generates more revenue to accelerate the development of the new platform.
- Create continuous innovation — make it easy to adopt new technologies, decommission legacy systems and processes, and launch new products. Incentivize the organization around these values to recognize and reward innovation.
“If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation — that is the fundamental determinant of competitiveness. “ — Elon Musk
Watch the full presentation on YouTube.
Martin Swanson is Co-Founder of Atomic Wire, a technology firm that helps to stimulate, support, and sustain high growth by leveraging stream processing to enable real-time decisions, with zero-error. We help clients design and deliver a streaming data architecture — the signature DNA of disruptive companies that want to react to events in real-time to gain a competitive advantage. Previously Head of Innovation at UBS’s Group Operations division, Martin led the digital transformation strategy for a global post-trade environment with over 10,000 operations staff and an annual TCO of CHF 1.5bn. Martin has over 20 years of experience working with Tier 1 banks and market infrastructure providers and has held senior technology roles in post-trade processing for securities, derivatives, and FX products.
