If cutting costs and boosting productivity are the biggest concerns for CIOs right now, then where does that leave innovation? Right smack in the middle, argues Scott Anthony, president of consulting firm Innosight. In his new book, The Silver Lining, he describes how businesses can keep innovation alive and well, despite the current pressures. In this excerpt, Anthony describes examples of disruptive innovation and addresses why some companies struggle with it.

Cost-cutting can be very dangerous. Haphazard cost-cutting can lead companies to unintentionally damage their ability to serve today’s customers and destroy their ability to create tomorrow’s growth businesses. Constant cost-cutting can damage morale and make it difficult for people to focus on the business at hand.

During tough times, it’s not unusual for companies to issue broad mandates that all divi-sions cut a certain percentage of their budgets. But these mandates offer precious little guidance about how exactly divisions should achieve those cost savings. Should a company start using cheaper material? Strip out bells and whistles? Lower salesforce incentives? Reduce administrative head count? Take a little from everything?

Understanding the drivers of disruptive innovation provides a way to think differently about feature reduction and cost-cutting. Harvard Business School professor Clayton Christensen’s original research on disruptive innovation found that the best-run companies would fail in the face of a disruptive attack. The reason wasn’t managerial incompetence or poor execution. Rather, companies would fail when a competitor introduced a product that was worse than the product offered by leading incumbents, at least along dimensions of performance that historically mattered to mainstream customers.

The disruptive offering wasn’t bad. It crossed the threshold that made it good enough along traditional dimensions and traded off pure performance to achieve greater simplicity, convenience or low price. The disruptor didn’t target the most-demanding customers in a market. Rather, it found a home among customers who couldn’t use or didn’t want to pay for all the performance of existing solutions, or people constrained from consuming existing solutions. As a disruptor improved its offering, it would cross performance thresholds that would allow it to compete in more demanding market tiers, where its superior simplicity and affordability served as sources of competitive advantage.

A classic example of disruptive innovation is the personal computer. In the early days, the personal computer could not do much. But it was simpler and cheaper than exist-ing minicomputers. Early consumers used personal computers to play games, balance their checkbooks and do simple word proc-essing. As personal com-puters improved, they crossed performance thresholds that made them viable for corporate tasks. Minicomputer titans such as Digital Equipment Corp., Prime Computer, Wang and Nixdorf Computer crumbled as personal computer manufacturers such as Compaq, Hewlett-Packard, Apple and Dell soared.

Why are incumbent firms susceptible to disruption? One reason is that in pursuit of profits in the high end of their respective industries, these companies end up providing too much performance for many groups of consumers. The disruptive literature calls this “overshooting.” Also, companies can lack a fundamental understanding of a customer’s performance thresholds and tolerable trade-offs. Engineers might denigrate a simple solution as being not good enough, but that simple solution could be the key to market success.

Reprinted by permission of Harvard Business Press. Excerpt from The Silver Lining: An Innovation Playbook for Uncertain Times by Scott D. Anthony. Copyright 2009 Innosight LLC. All rights reserved.