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