“Notorious RPV” and Innovation in Law (Part 1): On the Importance of Value Configurations

Some recent “law innovation” posts have highlighted the relationship of innovation scholarship to what is happening (or not) in the legal ecosystem.  I can’t help but notice the omission from recent post of Clayton M. Christensen’s seminal “value configurations” theory, first identified in The Innovator’s Dilemma.  This will be a two-part post. First, I’ll summarize his theory below as applied to disruptive technology and business models. In the second post, I’ll highlight how Christensen’s RPV theory helps explain what’s happening in today’s legal innovation ecosystem.  

 “Value Configurations” 

Christensen embarked on a study of the disk drive industry in the 1990s to better understand how and why companies fail. Christensen’s discovered that it was market structures, not technology, that determines what becomes a disruptive innovation. His discovery – that incumbent companies failed because they were well-managed – unlocked an understanding of how disruptive innovation takes root. His research also explains why certain companies seemingly “failed” to navigate the disruption, despite seeing what was coming and, in some cases, themselves having access to the disruptive technology. 

Incumbent companies are locked into “value configurations” with their customers and supply chains that makes it difficult and often uneconomic to implement disruptive technology strategies, because these would not initially meet their customers’ high-end needs. To do so, management would have to ignore existing and specific customer feedback, change existing internal processes and force relationships with new suppliers at a time when there was no ready market among their customer base for the disruption and sales of the innovation would generate lower margins.  In this sense, the way in which an incumbent has organized its resources and processes for its existing customers to make it strong and competitive also serve as constraints on what the incumbent can reasonably choose to do in other contexts and markets. 

Incumbents did engage in innovation, but incremental “sustaining” innovations, such as improving existing product performance and pricing. During this period, disruptive technologies were maturing AND customers were now finding value in disruptive technology features and functionality, permitting the new entrants to move “upmarket” and enabling changes in customer needs. However, by the time consumer needs changed, it was “too late” for the incumbents to innovate who had to retool their supply and manufacturing systems to effectively compete against the new entrants.  

Christensen labelled the first aspect of his research the “resources, processes and values” theory, which I am calling “Notorious RPV”. He referred to the migration of competitors upmarket leading to direct competition with the incumbents the “value chain innovation theory”. 

Christensen shows how disruptors are able to gain footholds in markets with:

• the “non-customers” that are currently not served by the existing market;
• the “overshot” customers, who do not need the full functionality and features (or cost) of the existing market; and
• the “undershot” customers, who are prepared to access the lesser development of the emerging technology or innovation and contribute to its development

New entrants generally focus on these aspects of the market when introducing disruptive technologies and innovations because they are underserved by the incumbents.  

RPV applied to Business Models

The majority of the examples cited in The Innovator’s Dilemma focus on markets characterized by “value-added” business models (such as disk drives and steel), in which finished goods are assembled from raw or semi-worked materials. How does his theory apply to knowledge-based markets, such as law, which operates within a completely different business model than a factory that produces finished goods?

Christensen’s more recent work has investigated how innovative business models or processes, and not just technology, can be disruptive to markets. Building on the work of other innovation academics, he posits three “value configurations” (business models):

• value chain – transformation of inputs into products (factory)
• solution shop – resolving customer problems with expertise (doctors, lawyers, consultants)
• value network – linking customers (eBay, UBER)

Of course, these three value configurations can co-exist in a market, and even within one company.  A company can be primarily a solutions shop, but some aspects of its services can be delivered by value chain or value network.

Similarly, a consumer might be indifferent to which configuration a company offers.  A “hole in the wall” – to borrow an example used by Richard Susskind - can be obtained by the purchase of a drill (value chain), hiring a contractor (solution shop) or fining someone who wants “wall circles” in exchange for wall holes (value network).  

In this sense, we also see that there can be a progression in consumer experience of business models, and Richard Susskind has made a career of arguing that once a solution shop (including in law) has solved a problem multiple times, that solution is eligible to be standardized into something to be distributed by value chain, and law firms need to get ready for this world.  

Christensen’s more recent research has shown that RPV theory explains how a company is constrained in moving from one business configuration (model) to another.  “Companies become constrained by their competencies” suggesting that things are not as “simple” to change as Susskind would have us in law believe.  

“Notorious RPV” reminds us that law firms, as solutions shops, exist within a network of customers, suppliers, employees and partners that will resist changes from a counterparty, and themselves will resist counterparty change as everything within the RPV network tends to homeostasis. 

Christensen’s research suggests that where a company strategically choses to change value configurations, this kind of radical, disruptive change can usually only be effective by setting up a separate operation, where it can pursue the new opportunity unconstrained by its existing RPV network.  The implications of this for innovation in law are discussed in the next post.