Clayton Christensen presentation - MIT System Design and ...

Disruptive Innovation and Creating New Market Growth | 1

Capturing the Upside While Avoiding the Downside Clayton M. Christensen Harvard Business School

© Copyright 2003 Clayton M. Christensen.


The Innovator’s Solution • Historically, less than 10% of companies have been able to sustain for more than a few years the growth that creates above-average shareholder returns. • Once a company’s growth has stalled, the probability that it can successfully re-accelerate growth is only 6%. • Historically, it has seemed impossible to predict which innovations will successfully create new waves of growth, and which will fail. ü Only 20% of venture capital – funded start-ups succeed ü Only 25% of new products launched by established companies succeed.

This need not be the case. Managers can use sound theories to guide the key decisions required to build successful growth businesses. © Copyright 2003 Clayton M. Christensen.


Ten questions in building new growth businesses 1. How can we beat the competition? 2. Which customers should we target? 3. What products will our customers want to buy? 4. How should we distribute to and communicate with our customers? 5. Which things should our company do, and which should our can partners and suppliers do? 6. How can we avoid commoditization? 7. Who should be on our management team? 8. What is the best organizational structure for this business? 9. How can we know when to change course? 10. Whose investment capital will help, and whose might hurt? © Copyright 2003 Clayton M. Christensen.


Disruptive technologies are a driver of leadership failure and the source of new growth opportunities

Performance

Incumbents nearly always win

ns o i t a nov n i ing n i a t Sus

e of ogical c a l P hno s c e T res g o Pr

customers t a th e c n a rm o Perf sorb can utilize or ab

Disruptive technologies

Entrants nearly always win

Time © Copyright 2003 Clayton M. Christensen.


The Innovator’s Dilemma

Performance

ns o i t va o n n i rs e g t n u i tain icomp s u in S to m

60% on $500,000

45% on $250,000

Disruptive technology: personal computers

40% 20% on $2,000

Time



Most value-creating growth businesses originated in disruption

Yesterday

Today

Tomorrow:

• Japan

• Toyota

• Embraer

• Kodak

• Wal-Mart

• Veritas

• ZCMI

• Intel

• U. of Phoenix

• Ford

• Southwest Air

• RIM Blackberry

• Merrill Lynch

• Microsoft

• Salesforce.com

• AT&T

• Oracle

• Linux

• Sears catalog

• Cisco

• E-Bay

• Swift; Armour

• Sony

• Sonosite

• Black & Decker

• Bloomberg

• Amazon.com

• Xerox

• Best Buy

• Tensilica © Copyright 2003 Clayton M. Christensen.


Different measure Of Performance

Performance

Two strategies for asymmetric competition

or s r e m ing u ns sum o c n n - -co ns o N on sio N ca oc

Bring a better product into an established market

ption u r s i nd d r -served ost e w e o c

v ess o h a lower r d d A s wit model r e m custo business

L

Time : ption u r s i n d rket ainst noon a m New pete ag sumpti con Com

Time



Non-consumers are the ideal initial target Major Established Electronics Markets: Performance

Tabletop radios, floor-standing televisions, computers, telecomm.equipment, etc.

Portable TVs Pocket radios Hearing Aids

Path taken by established vacuum tube manufacturers Time

Disruptive technology: transistors vs. vacuum tubes © Copyright 2003 Clayton M. Christensen.


Non-consumers are the ideal initial target Word Processing

Performance

Wireline e-mail

Wireless e-mail Chat rooms Standard phrases Toy robots

Path taken by IBM

Time

Disruptive Technology: Voice Recognition Technology © Copyright 2003 Clayton M. Christensen.


Powerful forces cause companies to target market segments that are irrelevant to the reasons why customers buy products

U

Organizational structure, performance measurement systems, channel structure

Job-based segmentation:

Nascent idea

Focus on customer rather than job as the unit of analysis; demands for quantification; economics of communication

Segmentation based upon attributes of products

U

What are customers trying to get done in their lives? Segmentation based upon attributes of customers © Copyright 2003 Clayton M. Christensen.


Facilitate priorities

Never compete against customers’ manifest priorities. Facilitate them. Digital cameras Electronic learning



Structuring the market in terms defined by data that are easily collected obfuscates the right targets for innovation.

Define the market as a class of products (wireless hand-held)

Define the market in demographic terms (the business traveler)

Competition: Palm,

Competition: wireline

Handspring, Sony, HP,

telecom and notebook

Compaq, Nokia

computers

• Digital camera

• CRM software

• Word

• E-books, emagazines

• Excel

Define the market in terms of jobs that customers need to get done Competition: Nokia, Wall Street Journal, CNN Airport News, boredom

• Voice phone • News summaries

• Stock trading

• Always on

• Handwriting recognition

• Travelocity

• Wireless e-mail

• E-mail

• Simple, mindless games

• Phone

• Voice



Performance

Integrated firms have the advantage when products aren’t good enough. Focused firms overtake over-served markets.

Beat competitors with functionality

res u t itec h Arc t n de n pe e res d u r t e ec t Int i rch A lar u d Mo

Beat competitors with speed, responsiveness and customization

Time © Copyright 2003 Clayton M. Christensen.


Changes in integrality/modularity have profoundly changed the structure of the computer industry 1960 - 1980

1980 - 1990

Teradyne, Nikon, Canon, Applied Materials, Millipore, etc.

Equipment

Monsanto, Sumitomo Metals, Shipley, etc.

Materials

Intel, Micron, Quantum, Komag, etc.

Applications software Sales & distribution Field service

IBM

Assembly

Control Data

Product design

Digital Equipment

Components

Operating system

1990 - Present

Compaq, Dell, Gateway, Packard Bell

Compaq

Contract assemblers

Microsoft Microsoft Word Perfect, Lotus, Borland, etc.

CompUSA

Dell

Independent contractors © Copyright 2003 Clayton M. Christensen.


Beat competitors with asymmetry of motivation % of tons Steel Quality

25–30% 55%

Sheet steel 22%

18%

l Structural Stee

l tee s ced u od r 12% p l il m i n mi f yo t i 7% l a u Q 1975

1980

8%

s & rods r a b ; n o ir le Ang Rebar

1985

4%

1990 © Copyright 2003 Clayton M. Christensen.


Over-shooting precipitates reciprocal processes of commoditization and de-commoditization. Retail/ distribution that addresses speed and convenience is attractive

Retailing is undifferentiable

$ Design & assembly of proprietary products is highly profitable.

$

Performance

$ Functionality

Speed & responsiveness

Design & assembly of modular systems is commoditized.

Time

$ Components are undifferentiable commodities

Performancedefining subsystems are very profitable © Copyright 2003 Clayton M. Christensen.


Disruption enables less-skilled people to do more sophisticated things Disruptive innovations enable a larger population of less-skilled, lesswealthy people to do things in a more convenient, lower-cost setting, which historically could only be done by specialists in less convenient settings. Disruption has been one of the fundamental causal mechanisms through which our lives have improved. • Computers • Xerography • Angioplasty

Almost always, disruptive innovations such as these have been ignored or opposed by the leading institutions in their industries for perfectly rational reasons. © Copyright 2003 Clayton M. Christensen.


Disruption is facilitated by sophisticated technology that makes things foolproof

Complex

Experimentation & problem-solving

Pattern Recognition

Rules-Based

Simple


Home

Simple

Office

Deep

Scientific understanding, built upon the ability to diagnose unambiguously, shifts the method used to diagnose and treat disorders from an unstructured, experimental problem-solving process, towards a rules-based regime.

Skill required to follow the rules

Outpatient Clinic

Clarity of the rules

General Hospital

Little

Tertiary hospital

Ambiguous


Simple Little

Sick child

Parent

Clarity of the rules

Ambiguous

Skill required to follow the rules

Nurse

Family doctor

Deep

Specialist © Copyright 2003 Clayton M. Christensen.


How can I know what my organization is capable and incapable of accomplishing?

Resources •

People

• Technology • Products • Equipment • Information • Cash • Brand • Distribution

Processes

Values

• Hiring & Training

The criteria by which prioritization decisions are made

• Product development • Manufacturing

• Ethics

• Planning & Budgeting

• Cost structure/ income statement

• Market Research

• Size of opportunity

• Resource allocation



The strategy-making processes that are good at planning sustaining innovations, are bad at guiding disruptive ones. Intended strategy

The Organization’s values

Resource allocation process

Emergent strategy

Im wh prove at w d u ork nde s an rsta d w ndin hat g doe of sn’ t

Strategic Actions: New products, services, processes, acquisitions

Actual Strategy

ities n u t r ppo cesses o ated d suc p i c nti s an Una blem pro



J&J’s Professional Division has grown much faster than its Consumer Division over the last decade

J&J Annual Sales

12,000 Professional Division

10,000

($ millions) 8,000

6,000

Consumer Division

4,000

2,000

0 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Source: Johnson and Johnson 10-K © Copyright 2003 Clayton M. Christensen.


New disruptive growth businesses account for nearly all of this growth

CAGR

12,000

Annual Sales ($ millions)

10.3%

Total

10,000

8,000 Normalized*(1) 3.7% 2.9% 40.9%

6,000

4,000

Absolute* New Disruptive Growth Businesses*

2,000

0 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

*Adjusted for revenues from Cordis, Ethicon Endo Surgery, LifeScan and Vistakon Source: Johnson and Johnson 10-K © Copyright 2003 Clayton M. Christensen.


Disruption amongst healthcare institutions is well underway

Complex

Complexity of diagnosis and treatment

tals i p os H al r e n ties i l i Ge ac F t ien t a t -p u are O c ce i f f o In e car e om h In

Simple



Disruptions amongst healthcare professionals

Complex

Complexity of diagnosis and treatment

ns a i c i s phy

list a i c spe b su & t ians ialis c c i e s Sp phy e r l ca a n erso p / ily m a F ers n o i actit r p e Nurs are c f l Se

Performance that the marketplace needs or utilizes

Simple Time
