Portfolio Management and Disruptive Innovation - Almojuela 2006


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Presentation at the 2006 Pipeline and Portfolio Management Conference 2006.

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  • Portfolio Management and Disruptive Innovation - Almojuela 2006

    1. 1. Integrating Disruptive Innovation Into Your Portfolio Management Process Ben Almojuela Associate Technical Fellow, Product Development Boeing Commercial Airplanes
    2. 2. What is Innovation? <ul><li>Change </li></ul><ul><li>Risk </li></ul><ul><li>Growth </li></ul><ul><li>Initiative </li></ul><ul><li>Payoff </li></ul><ul><li>Competition </li></ul><ul><li>Technology </li></ul><ul><li>Entrepreneurship </li></ul><ul><li>Art </li></ul><ul><li>Creativity </li></ul><ul><li>Speed, Timing </li></ul><ul><li>Invention </li></ul>
    3. 3. No Growth Without Innovation 1 2 3 4 -1 -2 -3 5 Revenues Today Innovation No Innovation Reference: Deloitte & Touche, 2004
    4. 4. Types of Innovation Reference: Moore, 2004 Markets appear as if from nowhere, creating massive new sources of wealth; tends to have roots in technological discontinuities Disruptive Innovation Capitalizes on disruption to restructure industry relationships Reframes an established value proposition to the customer or a company’s established role in the value chain Improves customer-touching processes, such as marketing communications or customer transactions Makes surface modifications that improve customers’ experience of established products or processes Makes processes for established offerings in established markets more effective or efficient Takes established offerings in established markets to the next level; focus can be on performance increase, cost reduction, usability improvement, etc. Takes existing technologies into new markets to serve new purposes Structural Innovation Business Model Innovation Marketing Innovation Experiential Innovation Process Innovation Product Innovation Application Innovation
    5. 5. What is Disruptive Innovation? <ul><li>A disruptive innovation brings a different value proposition to a market </li></ul><ul><li>A sustaining innovation improves the performance of established products </li></ul><ul><li>A new, radical, or “cool” innovation is not necessarily a disruptive innovation </li></ul>Reference: Christensen, 1997
    6. 6. A “Disruptive” Example 5.25-inch Rigid Disk Drives - 1980s Hard Disk Capacity (MB) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Year 10 100 3.5-inch drive technology Reference: Christensen, 1997 5.25-inch drive technology Desktop PC Demand Laptop PC Demand Seagate Miniscribe Computer Memories Int. Memories Seagate Rev Rodime Conner Peripherals
    7. 7. Impact of Sustaining and Disruptive Technological Change Time Product Performance Performance demanded at the high end of the market Performance demanded at the low end of the market Progress due to sustaining technologies Progress due to sustaining technologies Disruptive technological innovation Product Performance Demanded by Market Reference: Christensen, 1997
    8. 8. <ul><li>New market disruption </li></ul><ul><li>Creates a new value network </li></ul><ul><li>Competes with &quot;non-consumption&quot; </li></ul><ul><li>New population of customers </li></ul><ul><li>Ultimately becomes good enough to pull customers out of the original value market </li></ul><ul><li>Example: Sony's introduction of the battery-powered transistor pocket radio </li></ul><ul><li>Low-end disruption </li></ul><ul><li>Attacks least-profitable and most over-served customers </li></ul><ul><li>Low-cost business model picks off the least attractive of the established firm's customers </li></ul><ul><li>Example: Wal-Mart entry </li></ul>Two Types of Disruption Reference: Christensen, 1997
    9. 9. The Challenge of Growth: Sustaining and Disruptive Innovation 1 2 3 4 -1 -2 -3 5 Revenues Today No Innovation Operating Plan Strategic Plan Reference: Deloitte & Touche, 2004 Sustaining Innovation Disruptive Innovation
    10. 10. Portfolio Management Essentials <ul><li>What is Portfolio Management? </li></ul><ul><li>A dynamic decision process dedicated to obtaining the greatest possible value from an organization’s limited resources </li></ul><ul><ul><li>Project selection, evaluation, and prioritization </li></ul></ul><ul><ul><li>Resource allocation </li></ul></ul><ul><ul><li>Strategic Alignment </li></ul></ul><ul><li>Portfolio Management Goals </li></ul><ul><li>Value Maximization </li></ul><ul><ul><li>Allocate resources to maximize the total value of the portfolio in terms of some organizational objective </li></ul></ul><ul><li>Balance </li></ul><ul><ul><li>Desired balance of projects in terms of a number of parameters </li></ul></ul><ul><li>Strategic Alignment </li></ul><ul><ul><li>Consistency with an organization’s business strategy </li></ul></ul><ul><li>Effective Portfolio Management Depends on Solid Metrics </li></ul>
    11. 11. Portfolio Management Limitations for Disruptive Innovation <ul><li>When evaluated using processes designed for sustaining innovations, disruptive innovations aren’t compelling, because sustaining metrics can’t measure the value of the different market </li></ul><ul><li>Disruptive innovations typically under-perform initially, making them unattractive </li></ul><ul><li>Levels of uncertainty (“risk”) are initially so high that most typical portfolio management tools do not provide meaningful data </li></ul>
    12. 12. <ul><li>Effectively exploiting disruptive innovation is a major key to expansion and growth of our markets </li></ul><ul><li>We need to be able to detect when we are being disrupted by a competitor and respond effectively </li></ul><ul><li>Without a process, resource allocation for disruptive innovation rapidly devolves into trial-and-error, as the organization pours funds into the top and hopes something good emerges from the bottom. </li></ul><ul><li>A trial-and-error process can easily lead to technology “hobby shops” that consume limited R&D resources and produce very few profitable innovations. </li></ul>Why do we need a process for evaluating Disruptive Innovations?
    13. 13. Initiation of a Disruptive Innovation Project How do you bridge this gap? Reference: Rice, et al, 2001 “ Reality check” with other opportunity recognizers Formal evaluation Formation of project team Opportunity recognition by manager Insight by innovator
    14. 14. Managing R&D Funding Using Portfolio Management R&D Funding for Sustaining Innovations Small, Dedicated R&D Funding for Disruptive Innovations
    15. 15. <ul><li>Dedicate a portion of R&D investment funding for a portfolio of disruptive innovations, even though they may seem to have lousy “performance” </li></ul><ul><li>Focus on identifying the key assumptions that would enable the disruptive innovation to become a significant growth opportunity </li></ul><ul><li>Assemble a development plan that spends the allocated R&D funding on rapid validation of the key assumptions in the “right” order and as efficiently as possible – not on developing the innovation per se . </li></ul><ul><li>Use the assumption validation results to pace innovation development and support go/kill decisions in portfolio management </li></ul>Process for Managing and Funding Disruptive Innovations
    16. 16. Disruptive Innovation Process Perform disruptiveness test Initial Assessment and Estimates Develop Initial Plan and Estimate Impact Initial Filter Begin Technology Development Validated assumptions pace technology development Invest /Don’t Invest With thanks to McGrath & MacMillian, 2000 Assess performance potential Develop accelerated plan to assess assumptions Define potential as disruptive innovation Define critical assumptions If not disruptive, Use Sustaining Process Assess potential as “Opportunity” Assess potential as “Threat” Perform assessment of assumptions Review Begin phased technical development of innovation
    17. 17. Disruptive Idea: Fly Much Faster <ul><li>A commercial airplane that flies just below the speed of sound </li></ul><ul><li>20% faster than today’s jets </li></ul><ul><li>Trans-Atlantic flight time reduced by two hours </li></ul>Zippyshuttle
    18. 18. Reaction to the Zippyshuttle Idea <ul><li>Get lost! </li></ul><ul><li>Our airline customers don’t want this! </li></ul><ul><li>This isn’t what we do! </li></ul><ul><li>It will cannibalize our market! </li></ul><ul><li>Hey, innovation is my job, not yours! </li></ul>Idea
    19. 19. Innovation Evaluation “Worksheet” <ul><li>Sustaining Value Elements Why? </li></ul><ul><li>Improved operating economics – new engines provide improved fuel consumption </li></ul><ul><li>Improved operating economics – lower weight materials </li></ul><ul><li>Improved operating economics – improved aerodynamic efficiency </li></ul><ul><li>Disruptive Value Elements Why? </li></ul><ul><li>Speed – reduces long-mission trip time by 2 hours </li></ul>Innovation: Zippyshuttle <ul><li>Potential Asymmetries Explain </li></ul><ul><li>Patents/Intellectual Property/Trade Secrets provide temporary technology advantage </li></ul><ul><li>Competitor currently focused on capacity, not speed </li></ul>Type of Disruption □ Non-consumption Some passengers would like to □ Low-end reduce trip time but can’t □ Other (Explain) today. <ul><li>Key Assumptions </li></ul><ul><li>Additional speed provides value to potential customers </li></ul><ul><li>Potential for follow-on sustaining improvements exists </li></ul><ul><li>Framing - Opportunity </li></ul><ul><li>Dramatically changes company’s image as a market and technology leader </li></ul><ul><li>May reverse market share erosion </li></ul><ul><li>Framing - Threat </li></ul><ul><li>Smaller companies could design and build small business cruiser and move up-market. </li></ul><ul><li>Competitor has better technology supply stream. </li></ul>X
    20. 20. Disruptive Innovations Feed into Portfolio Management Disruptive Innovation Development a Initial Filter & Basic Research Assess & Estimate Impact Define Assumptions & Develop Plan Plan & Initiate Technology Development Validate Assumptions PHASE 1 Define Product & Program PHASE 2 Execute Program PHASE 3 Produce, Support & Improve Product 8 1 2 3 4 6 7 ! Innovation Continuous Product Improvement 5 <ul><li>Standard Portfolio Management Process: </li></ul><ul><li>Disciplined milestone definition and reviews </li></ul><ul><li>Includes entire product life cycle </li></ul><ul><li>Aligns technology and product development </li></ul><ul><li>Technology is developed to expected level of maturity </li></ul><ul><li>Continuous improvement of products and processes </li></ul>b Disruptive? No Yes c e d Disruptive Innovations <ul><li>Disruptive Innovation Development Process: </li></ul><ul><li>Defines critical assumptions </li></ul><ul><li>Rapid assessment of assumptions </li></ul><ul><li>Validated assumptions pace critical technology development </li></ul>
    21. 21. <ul><li>Bridges gap between early, seemingly undesirable, concepts and potential business implementation </li></ul><ul><li>Makes portfolio management processes more effective </li></ul><ul><li>Improves productivity of R&D resources </li></ul><ul><li>Provides process for identifying and assessing opportunities key to future growth </li></ul><ul><li>Helps detect when “we” may be disrupted </li></ul>Disruptive Innovation Process Key Values to the Enterprise
    22. 22. <ul><li>The Innovator’s Dilemma – When New Technologies Cause Great Firms to Fail , Clayton M. Christensen, Harvard Business School Press, 1997 </li></ul><ul><li>The Innovator’s Solution – Creating and Sustaining Successful Growth , Clayton M. Christensen, Harvard Business School Press, 2003 </li></ul><ul><li>Seeing What's Next – Using the Theories of Innovation to Predict Industry Change , Clayton M. Christensen, Harvard Business School Press, 2004 </li></ul><ul><li>Innovation – The Attacker’s Advantage , Richard N. Foster, Summit Books, 1986 </li></ul><ul><li>Creative Destruction: Why Companies That Are Built to Last Underperform the Market -- and How to Successfully Transform Them , Richard N. Foster and Sarah R. Kaplan, Doubleday, 2001 </li></ul><ul><li>The Entrepreneurial Mindset – Strategies for Continuously Creating Opportunity in an Age of Uncertainty , Rita Hunter McGrath and Ian MacMillan, Harvard Business School Press, 2000 </li></ul><ul><li>Darwin and the Demon: Innovating Within Established Enterprises , Geoffrey A. Moore, Harvard Business Review, July-August 2004 </li></ul><ul><li>Mastering Innovation: Exploiting Ideas for Profitable Growth , Deloitte and Touche, 2004 </li></ul><ul><li>Radical Innovation: Triggering Initiation of Opportunity Recognition and Evaluation , Mark Rice, Donna Kelley, Lois Peters, and Gina Colarelli O’Connor, R&D Management 31, 4, 2001 </li></ul><ul><li>Innovation: Breakthrough Ideas at 3M, DuPont, GE, Pfizer, and Rubbermaid, Rosebeth Moss Kanter, Fred Wiersema, John Kao, Frederik D. Wiersema, John J. Kao , Harper, 1997 </li></ul><ul><li>Effective Innovation, Don Clausing and Victor Fey, ASME Press, 2004 </li></ul>References and Suggested Reading