You're the top performer in your market. Your products are of such a high quality that they exceed the requirements of all but the most demanding customers, and you're the only one able to serve them. Clear sailing ahead, right? Wrong, according to HBS professor Clayton M. Christensen in "Skate to Where the Money Will Be," an article published in the November 2001 Harvard Business Review.

"In markets where product performance is outstripping customer need, the market leader is vulnerable," write Christensen and coauthors Michael Raynor (DBA '00) and Matt Verlinden. "Newer entrants can compete based upon cost, customization, or convenience, and they can start winning business at the lower end."

Profit is maximized, the authors suggest, in situations where product quality is not yet meeting customer requirements. Here, products with tightly interdependent, proprietary architectures are required to achieve better and better results. When the product the customers use isn't good enough, its architecture is proprietary and its manufacturers make money. When it's more than good enough, its architecture becomes modular, built around industry standards, and attractive profits are hard to earn. Typically when this happens, the components and subsystems are the things that become not good enough - and that's where attractive profits get made. An example is the computer industry, where profit shifted from manufacturers down to operating system providers, to the manufacturers of heads and disks, and then to producers of chip-manufacturing technology, as each area in turn became the focus for innovation to improve performance.

Old-school wisdom suggested that market leaders should "stick to their knitting" and outsource components of modular systems. However, being an assembler of such parts presents only marginal profit opportunity. Staying in the innovative segment of an industry may mean, in fact, manufacturing a key subsystem and even becoming a provider to competitors. The willingness to make such shifts and the resources to execute them efficiently can help keep large firms in front of the profit curve despite a high level of integration, Christensen, Raynor, and Verlinden assert.

"To the extent a company like IBM maintains the flexibility to couple and decouple operations rather than irrevocably sell them off, it has an even greater potential to thrive than a nonintegrated company," the authors say.

- Laura Singleton (MBA '88)

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