Disruptive Innovation

Slide 1: Innovator’s Solution Clayton Christensen

Slide 2: Imperative Dilemma ► Investors’require to grow ► But innovation that can satisfy investors’ demand for growth require taking risks unacceptable to investors ► We need to know how to grow

Slide 3: Disruptive Innovation Model ► DisruptiveInnovation Model ► 3-D Disruptive Innovation Model ► Shaping ideas to become disruptive

Slide 4: Disruptive Innovation Model B A

Slide 5: Disruptive Innovation Model ► Customer’s performance acceptance level ► Steeper company’s ability to make technology progress  Thus, after Point A, overshoot ► Distinctionbetween sustaining and disruptive innovation – moving to lower parallel line  B – outstrip point  Low-end disruption Return

Slide 6: 3-D Disruptive Innovation Model

Slide 7: 3-D Disruptive Innovation Model ► The third dimension: new value network for previous non-consumers – similar to BOS  New-market disruption Return

Slide 8: Shaping ideas to become disruptive Three litmus tests ►Explore whether the idea can become a n ►Explores the potential for a low-end disru ►Is the innovation disruptive to all of the s

Slide 9: Test 1 Is there a large population of people who historically have not had the money, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them? Return

Slide 10: Test 2 Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price? Can we create a business model that enables us to earn attractive profits at the discount prices required to win the business of these over-served customers at the low end? Return

Slide 11: Test 3 Is the innovation disruptive to all of the significant incumbent firms in the industry? If it appears to be sustaining to one or more significant players in the industry, then the odds will be stacked in that firm’s favor, and the entrant is unlikely to win.

Slide 12: Competing Against Non-consumption ► Why Competing Against Non-consumption So H ► What Makes Competing Against Non-consumpt ► How to Avoid Hard Non-Consumption Competit

Slide 13: Why Competing Against Non- consumption So Hard? ► The logic of competing against non- consumption as the means for creating new-growth markets seems obvious. ► Despite this, established companies repeatedly do just the opposite. Return

Slide 14: What Makes Competing Against Non- consumption So Hard? ► Not see disruption coming in. Even if, ► Threat rigidity - Threat elicits more intense and energetic response than opportunity, and then focus on countering the threat to survive. Return

Slide 15: How to Avoid Hard Non- Consumption Competition ► First,get top-level commitment by framing an innovation as a threat during the resource allocation process. ex. Newspapers embraced online editions to give existing customers additional choice

Slide 16: How to Avoid Hard Non- Consumption Competition ► Later,shift responsibility for the project to an autonomous organization that can frame it as an opportunity. ex. Place the responsibility to commercialize the disruption in an independent unit for which the innovation represents pure opportunity – newpaper’s online group

Slide 17: How to Avoid Hard Non- Consumption Competition • This is incumbent’s problem, not for new entrant. • This take care of both commitment and flexibility.

Slide 18: Getting the Scope of Business Right  Integration or Outsourcing?  Circumstance and production design  Production architecture and integration  Innovation Strategy  PC industry as innovation strategy example

Slide 19: Integration or Outsourcing?  Which activities should a new-growth venture do internally in order to be as successful as possible as fast as possible, and which should it outsource to a supplier or a partner?  Will success be best built around a proprietary product architecture, or should the venture embrace modular, open industry standards?  What causes the evolution from closed and proprietary product architectures to open ones?  Might companies need to adopt proprietary solutions again, once open standards have emerged?

Slide 20: Core Competence?  If something fits your core competence, you should do it inside?  NO!  Ex., IBM outsourcing microprocessors and operating systems was a mistake.  Answer relied on: Circumstance-Based versus Production Design

Slide 21: Circumstance Based  Integration or outsourcing decision based on products good enough or not good enough

Slide 22: Production Design  Interdependence  One part cannot be created without the other.  Optimize performance in functionality and reliability  Proprietary  Modularity  Optimize flexibility  Sacrifice performance due to rigid design

Slide 23: Production Architecture and Integration B A

Slide 24: Innovation Strategy  Before Point A:  Interdependence architecture  Goal: improve performance  After Point A:  Overshooting, Commoditization point  Goal: speed, convenience, customization, etc.

Slide 25: Innovation Strategy  Between A & B:  Either approach OK  With interdependence: performance over-satisfied  With modularity: performance not satisfied but other factors are  After B:  Should take Modularity approach  Performance and other factors all satisfied  Once mature, back to interdependence approach

Slide 26: Innovation Strategy Example  IBM interdependence design – dominate mainframe  After 1964, System 360 to respond to non-performance demand  modularity allowed custom-configuration  Birth of mini-computer – disruption from mainframe!  Then, DEC dominated with integration design – better performance

Slide 27: The Transition from Vertical Integration to Horizontal Stratification in the Microprocessor-Based Computer Industry

Slide 28: How to Avoid Commoditization • Process of commoditization • Process of de-commoditization

Slide 29: Process of Commoditization 1 As a new market coalesces, a company develops a proprietary product that, while not good enough, comes closer to satisfying customers’ needs than any of its competitors. It does this through a proprietary architecture, and earns attractive profit margins.

Slide 30: Process of Commoditization 2 As the company strives to keep ahead of its direct competitors, it eventually overshoots the functionality and reliability that customers in lower tiers of the market can utilize.

Slide 31: Process of Commoditization 3, 4 & 5 This precipitates a change in the basis of competition in those tiers, which . . . . . . precipitates an evolution toward modular architectures, which . . . . . . facilitates the dis-integration of the industry, which in turn . . .

Slide 32: Process of Commoditization 6 . . . makes it very difficult to differentiate the performance or costs of the product versus those of competitors, who have access to the same components and assemble according to the same standards. This condition begins at the bottom of the market, where functional overshoot occurs first, and then moves up inexorably to affect the higher tiers.

Slide 33: Process of De-Commoditization 1 The low-cost strategy of modular product assemblers is only viable as long as they are competing against higher-cost opponents. This means that as soon as they drive the high-cost suppliers of proprietary products out of a tier of the market, they must move up-market to take them on again in order to continue to earn attractive profits.

Slide 34: Process of De-Commoditization 2 Because the mechanisms that constrain or determine how rapidly they can move up- market are the performance-defining subsystems, these elements become not good enough and are flipped to the left side of the disruption diagram.

Slide 35: Process of De-Commoditization 3 Competition among subsystem suppliers causes their engineers to devise designs that are increasingly proprietary and interdependent. They must do this as they strive to enable their customers to deliver better performance in their end-use products than the customers could if they used competitors’ subsystems.

Slide 36: Process of De-Commoditization 4 The leading providers of these subsystems therefore find themselves selling differentiated, proprietary products with attractive profitability.

Slide 37: Process of De-Commoditization 5 This creation of a profitable, proprietary product is the beginning, of course, of the next cycle of commoditization and de- commoditization.

Slide 38: Death Spiral of Core Competence • When facing commoditization, companies may still insist their core competence. They then miss the opportunity to go up- market. • Likewise, if they insist on performance optimization, they miss disruption.

Slide 39: Death Spiral of ROA Maximizing Due to the low premium in modular competition base, • Increasing the numerator of ROA is nearly impossible, and • Decreasing the denominator will facilitate dis-integration. – It can shrink the asset where they might need to move up to interdependence strategy, or – It can result in better profitability for later on integration.

Slide 40: Capability of Disruptive Growth ► Reasons innovation fails ► Right organization structure for sustaining and disruptive growth

Slide 41: Why Innovation fails ► Not because of some fatal technological flaw or because the market isn’t ready ► They fail because responsibility to build these businesses is given to managers or organizations whose capabilities aren’t up to the task. ► An organization’s capabilities become its disabilities when disruption is afoot.

Slide 42: Factors affecting structure choice ► Organization’s processes vs. development team  Heavyweight team  Lightweight team  Functional organization ► Organization’s value vs. responsible commercial structure  Autonomous organization  Mainstream organization Next

Slide 43: Heavyweight Team A group of people who are pulled out of their functional organizations and placed in a team structure that allows them to interact over different issues at a different pace and with different organizational groups than they habitually could across the boundaries of functional organizations – to change processes. Return

Slide 44: Organization’s Value standards by which employees make prioritization decisions Return

Slide 45: Autonomous Organization ► New growth opportunity in non- consumption market – disruptive opportunity ► Autonomous organization shares different value ► Opportunity, not threat

Slide 46: A Framework for Finding the Right Organizational Structure and Home