Innovator’s Solution Clayton Christensen

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

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

Disruptive Innovation Model Disruptive Innovation Model 3-D Disruptive Innovation Model Shaping ideas to become disruptive

Disruptive Innovation Model

3-D Disruptive Innovation Model

Shaping ideas to become disruptive

Disruptive Innovation Model A B

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

Customer’s performance acceptance level

Steeper company’s ability to make technology progress

Thus, after Point A, overshoot

Distinction between sustaining and disruptive innovation – moving to lower parallel line

B – outstrip point

Low-end disruption

Return

3-D Disruptive Innovation Model

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

The third dimension: new value network for previous non-consumers – similar to BOS

New-market disruption

Return

Shaping ideas to become disruptive Three litmus tests Explore whether the idea can become a new market disruption Explores the potential for a low-end disruption Is the innovation disruptive to all of the significant incumbent firms in the industry?

Explore whether the idea can become a new market disruption

Explores the potential for a low-end disruption

Is the innovation disruptive to all of the significant incumbent firms in the industry?

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

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

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

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

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.

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.

Competing Against Non-consumption Why Competing Against Non-consumption So Hard? What Makes Competing Against Non-consumption So Hard? How to Avoid Hard Non-Consumption Competition

Why Competing Against Non-consumption So Hard?

What Makes Competing Against Non-consumption So Hard?

How to Avoid Hard Non-Consumption Competition

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

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

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

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

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

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

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

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

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

This is incumbent’s problem, not for new entrant.

This take care of both commitment and flexibility.

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

Integration or Outsourcing?

Circumstance and production design

Production architecture and integration

Innovation Strategy

PC industry as innovation strategy example

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?

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?

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

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

Circumstance Based Integration or outsourcing decision based on products good enough or not good enough

Integration or outsourcing decision based on products good enough or not good enough

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

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

Production Architecture and Integration A B

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

Before Point A:

Interdependence architecture

Goal: improve performance

After Point A:

Overshooting, Commoditization point

Goal: speed, convenience, customization, etc.

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

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

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

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

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

How to Avoid Commoditization Process of commoditization Process of de-commoditization

Process of commoditization

Process of de-commoditization

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.

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.

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.

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.

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 . . .

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 . . .

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.

. . . 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.

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.

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.

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.

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.

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.

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.

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

The leading providers of these subsystems therefore find themselves selling differentiated, proprietary products with attractive profitability.

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.

This creation of a profitable, proprietary product is the beginning, of course, of the next cycle of commoditization and de-commoditization.

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.

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.

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.

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.

Capability of Disruptive Growth Reasons innovation fails Right organization structure for sustaining and disruptive growth

Reasons innovation fails

Right organization structure for sustaining and disruptive growth

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.

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.

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

Organization’s processes vs. development team

Heavyweight team

Lightweight team

Functional organization

Organization’s value vs. responsible commercial structure

Autonomous organization

Mainstream organization

Next

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

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

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

standards by which employees make prioritization decisions

Return

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

New growth opportunity in non-consumption market – disruptive opportunity

Autonomous organization shares different value

Opportunity, not threat

A Framework for Finding the Right Organizational Structure and Home