Clayton Christensen - World Innovation Forum

Creating and Sustaining Profitable Growth Clayton M. Christensen Harvard Business School Copyright Clayton M. Christensen 1

Principles we’ve taught that aren’t universally true 1. Listen and respond to the unmet needs of your best customers 2. Focus investments in those opportunities that promise the most attractive profit margins 3. Outsource those activities that are low value-added that that are not your core competencies 4. The value of an innovation can be expressed as a net present value. 5. You should ignore fixed and sunk costs, and make investment decisions based on future, marginal outlays and revenues. 6. Large markets represent the biggest growth opportunities 7. Understanding the customer is key to successful innovation. 8. Great brands are built through advertising. Copyright Clayton M. Christensen 2

Disruptive Technologies: A driver of leadership failure and the source of new growth opportunities f l ce o logica Pa no Incumbents nearly always win h Tec gress Performance s Pro va tion ng inno i tain Sus stomers Perf ormance that cu sorb can utilize or ab Disruptive Entrants nearly always win technologies Time Copyright Clayton M. Christensen 3

Beat competitors with asymmetry of motivation % of tons 25–30% Steel Quality 55% l Sheet steel t ee s ills’ m 18% 22% ed l rat Structural Stee eg nt l o fi st e e 8% lit y ed du c rs & rods ua ngle iron; ba Q pro 12% A mill- 4% m ini Rebar of li ty 7% a Qu 1975 1980 1985 1990 Copyright Clayton M. Christensen 4

Disruptive Innovations create asymmetric competition of Pace ical Incumbents nearly always win log hno ess Tec ogr Performance ns Pr o vatio inin g inn 60% on Susta $500,000 45% on $250,000 Of Performance Different measure Time ons: novati nst 40% 20% e In Disruptiv peting agai n on $2,000 or s g Com onsumptio r m e m in non-c u ns su co n s Time n- n-co sion Entrants nearly always win N o N o cca o Copyright Clayton M. Christensen 5

Disruption in business models has been the dominant historical mechanism for making things more affordable and accessible, and for generating corporate and economic growth Yesterday Today Tomorrow: • Ford • Toyota • Chery • Dept. Stores • Wal-Mart • Internet retail • Digital Eqpt. • Dell • RIM Blackberry • Delta • Southwest, RyanAir • SkyWest, Air taxis • JP Morgan • Fidelity • ETFs • Xerox • Canon • Zink • IBM • Microsoft • Linux • Cullinet • Oracle • Salesforce.com • AT&T • Cingular • Skype • Sony DiskMan • Apple iPod • Cell Phones • Japan • Korea, Taiwan, HK • China, India Copyright Clayton M. Christensen 6

Two strategies for asymmetric competition Bring a better product into Performance an established market tion disrup ed Of Performance Different measure -end over-serv -cost Low ess w er Addr with a lo l ers o de c ustom usiness m b Time n: dis ruptio n- arket ainst no ew-m g o r N ompete a sumption ers ng C con m nsu sumi n-co -con ions Time s N o N o n cca o Copyright Clayton M. Christensen 7

Expensive failure always results when disruption is framed in technological rather than business model terms. Tabletop Radios, Performance Floor-standing TVs Path taken by Of Performance Different measure vacuum tube manufacturers Time Portable TVs Pocket radios Hearing Aids or ers g um umin ns - co cons ons Time on on- casi N N c o © 2007 Innosight LLC 8

Outsourcing often sets in motion disruptive business model liquidation Compaq Flextronics Brand Brand Product design Product design Supply chain Supply chain & logistics & logistics Computer assembly Computer assembly Mother boards Mother boards Simple circuit boards © 2007 Innosight LLC 9

Outsourcing often sets in motion disruptive business model liquidation Customer Supplier IT departments TCS, Infosys, Wipro Auto companies Tier One Suppliers IC companies Fabs: TSMC, UMC Commercial banks State Street, First Data Wall Street Analysts Bloomberg © 2007 Innosight LLC 10

What is a business model, and how is it built? PROCESSES: PROFIT FORMULA: Ways of working together to Assets & fixed cost structure, address recurrent tasks in a and the margins & velocity consistent way: training, required to cover them development, manufacturing, budgeting, planning, etc. RESOURCES: THE VALUE PROPOSITION: People, technology, products, A product that helps facilities, equipment, brands, customers do more effectively, and cash that are required to conveniently & affordably a deliver this value proposition job they’ve been trying to do to the targeted customers Copyright Clayton M. Christensen 11

Evaluating investments on marginal rather than full costs biases incumbent leaders to leverage what they have, instead of building what they need Existing Minimill Marginal Price $320 $320 $320 % of tons Cost 310 255 45 25–30% Steel Quality Net 10 65 275 55% l Sheet steel t ee s ills’ m 18% 22% ed l rat Structural Stee eg i nt e l of st e 8% lit y c ed rods du rs & ua ngle iron; ba Q pro 12% A mill- 4% m ini Rebar of li ty 7% a Qu 1975 1980 1985 1990 Copyright Clayton M. Christensen 12

The common methods of financial analysis systematically bias managers against innovation Foreseen cash flows from + investing in an innovation Present cash flows: DCF and NPV The typically assumed methodologies Magnitude of cash flows base case of doing implicitly make this contrast nothing Time Returns from innovation realistically must be contrasted to the deteriorating stream of cash likely to result from doing nothing - Copyright Clayton M. Christensen 13

Market Understanding that Mirrors how Customers Experience Life “The customer rarely buys what the company thinks it is selling him” - Peter Drucker Copyright Clayton M. Christensen 14

Companies that segment markets by job find: – The market is much larger – Their share is smaller – Their real competitors aren’t in their product category – Growth potential is greater, because non- consumption is usually a major competitor – They can integrate properly – Building a valuable brand is straightforward © 2007 Innosight LLC 15

Three levels in the architecture of a job What is the fundamental job or problem the customer is facing? This includes its political, functional, emotional and social dimensions. – What are the experiences in purchase and use which, if all provided, would sum up to nailing the job perfectly? (The “HIRING CRITERIA” ) - What are the product attributes, technologies, features, etc. that are needed to provide these experiences? Copyright Clayton M. Christensen 16

What is a valuable brand, and how is it built? 1. Design a product that does a job well • FedEx 2. Give it a brand that uniquely links that • Ikea product to that job • OnStar 3. As people hire it to do that job and find • Google that it does it well, they learn to trust the brand for that purpose • eBay 4. They begin hiring it whenever they • Starbucks land on that “job space” – and talk about it. • Blackberry 5. Advertising can then remind other • Swiffer people that they, too, land on this job, • Kleenex and that they should hire this branded product when they do. • Crest • Xerox Copyright Clayton M. Christensen 17

Purpose brands are generally more valuable than corporate endorser brands Milwaukee Sony Sawzall: share > 80% Walkman: share > 70% HoleHawg: share > 80% Playstation: share > 50% Everything else: Share < Everything else: Share < 10% 10% Copyright Clayton M. Christensen 18

Alternative Structures for the Automobile Market My family Care for Mobile office Light truck Tundra LT SUV 4-Runner SUV SUV Mid-SUV Highlander MSUV MSUV Small SUV Rav-4 SSUV SSUV Minivan Sienna MV MV Full-size Avalon FS FS Mid-size Camry MS MS Compact Corolla C C Sub-Compact Echo SC SC Copyright Clayton M. Christensen 19

The right product architecture depends upon the basis of competition IBM Mainframes, Microsoft Windows Performance Compete by improving functionality & reliability s ct ure h ite arc nt nde epe t erd es , in ct ur ry e eta it op ri arch Compete by improving Pr pe n speed, responsiveness r o and customization dula Mo Dell PCs, Linux Time Copyright Clayton M. Christensen 20

Changes in product architecture have profoundly changed the architecture of the computer industry 1960 - 1980 1980 - 1990 1990 - Present Equipment Teradyne, Nikon, Canon, Applied Materials, Millipore, etc. Materials Monsanto, Sumitomo Metals, Shipley, etc. Components Intel, Micron, Quantum, Komag, etc. Apple Computer Product design Compaq, Dell, Gateway, Packard Bell Digital Equipment Control Data Assembly Compaq Contract assemblers IBM Operating system Microsoft Microsoft Applications software Word Perfect, Lotus, Borland, etc. Sales & distribution CompUSA Dell Micro- Field service Center Independent contractors © 2007 Innosight LLC 21

The stage of value-added where attractive profits are made shifts through the process of disruption Commoditizer Commoditizee IBM Applied Magnetics General Motors Dana Corp. Performance P&G Dow Corning es c tur ite ch Ar e nt nd pe de s in ter u re ry, ct ta ite rie ch p Ar Commoditizer Commoditizee Pro lar odu Intel Dell n,m O pe Johnson Controls General Motors Time © 2007 Innosight LLC 22

The law of conservation of attractive profits De-Commoditization: services & products that make use of the product more effective Add features Commoditization thru modularity, over-shooting Copy features De-Commoditization: sub-systems that drive the performance of the modular product © 2007 Innosight LLC 23

Proper team structure is crucial in every project Product Process Team Type Autonomous Business model in which Business model in VP VP VP VP product is used which process is used Product architecture: What Process architecture: Heavyweight Level of change VP VP VP VP are the components, and What are the steps in which ones interface with the process, and what others? is their sequence? Change the specifications How must the steps in Lightweight VP VP VP VP for how components must the process interface fit together in time and space? Improve performance of Improve individual Functional VP VP VP VP each component steps in the process Copyright Clayton M. Christensen 24

Launching A Sequence Of Successful New Growth Businesses Requires The Parallel Operation Of Two Different Processes Sustaining Innovations: Disruptive Innovations: Platform-based planning Discovery-driven planning 1. Make Assumptions 1. Make Projections 2. Build projections based upon 2. What assumptions must prove assumptions true for the projections to happen? 3. Make decisions to invest 3. Implement a plan to learn -- to based upon projections test whether the critical assumptions are reasonable 4. Implement the deliberate strategy 4. Invest when key assumptions prove valid Decision to initiate project is Decision to initiate project is based upon numbers and rules. based on pattern recognition Copyright Clayton M. Christensen 25

Whose Money Will Help The Business, And Whose Money Could Kill It? • When the right strategy is still emerging: – Good money is impatient for profit, but patient for growth. – Bad money is patient for profit, but demands that the business grow big, fast • When a viable strategy has become clear: – Good money can now demand rapid growth Copyright Clayton M. Christensen 26

Making Innovation Predictable: Strategy Is this opportunity sustaining, or disruptive? Have we defined the opportunity around a job to be done, or are we targeting a product or customer category? Are we building a purpose brand? Are we competing against non-consumption with new technology? Are we focusing where our value-added is being de-commoditized? Copyright Clayton M. Christensen 27

Making Innovation Predictable: Structure Have we created a business model that integrates our resources properly to provide a complete solution for the job? VP VP VP VP Do we have the right degree of autonomy and linkage to our other business? Do we have a discovery-driven plan? Platform- Discovery- based driven Does our impatience have the right focus? Does this play the needed role in our aggregate project plan? Copyright Clayton M. Christensen 28

The process of building theory Preliminary t Co dic statements of nfi Pre correlation rm s ces pro Categorization by the ve cti attributes of the phenomena du De In du Anomaly c ti Observe, describe & measure ve pro the phenomena ce s s Copyright Clayton M. Christensen 29

The predictive power of theory improves markedly when careful researchers move beyond statements of correlation to statements of causality. ch se ar r e s ed - ba eld Statement ul fi ict of causality Co nfi ref Pred rm Ca s ces Categorization of the pro circumstances in which we tive might find ourselves uc d De In du Anomaly cti Preliminary Observe, describe & ve t statements of Co dic nf i p Pre rm roc correlation measure the phenomena ess ess roc Normative theory ep Categorization by the tiv attributes of the phenomena uc d De In du Anomaly c tiv ep roc Observe, describe & measure the phenomena ess 5/11/2009 Copyright Clayton M. Christensen 30 Descriptive theory

Making Innovation Predictable: Strategy Is this opportunity sustaining, or disruptive? Have we defined the opportunity around a job to be done, or are we targeting a product or customer category? Are we building a purpose brand? Are we competing against non-consumption with new technology? Are we focusing where our value-added is being de-commoditized? Copyright Clayton M. Christensen 31

The target makes a huge difference Product Customer Job to be category Category done Copyright Clayton M. Christensen 32

Creating and Sustaining Profitable Growth Clayton M. Christensen Harvard Business School Copyright Clayton M. Christensen 33

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Clayton Christensen - World Innovation Forum

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