Disruptive innovation: Opportunity and BarriersEnabling disruption within existing businessesJuly, 2012
Who we are…                           The Forum for Growth and Innovation  The Forum for Growth and Innovation is a resear...
Part 1: An Overview of Disruptive Innovation                              the forum for growth and innovation   2
Executive summaryInnovation is well recognized as the key ingredient to driving investor returns  • A 2005 Deloitte and BC...
The Question How, in a world where large organizations are led by the    best trained managers, are equipped with the most...
What is a disruptive innovation?                 The three characteristics of a disruptive innovation Disruptive innovatio...
The cycle of disruption, illustrated      Product Performance                            Incumbents nearly always win     ...
Disruptive waves tend to transform industries           Disruptive innovation                                             ...
Disruption is not equivalent to new technology                Categorization of tech innovation                           ...
Inherent to every disruption is an “extendable core”Disruption is not merely price competition  • Disruptive innovation‟s ...
Why are disruptive innovation’s interesting? Maximize personal                                                            ...
Despite opportunity, disruptions don’tappear appealing to incumbentsCannibalization  • The fear of revenue cannibalization...
Nor do they appear appealing to existing buyers               Low-end disruptions apply new business models or technologie...
But disruption is predictable…          For Incumbent Firms                                                     Disruptive...
If you do everything right, everything goes wrong  “The principles of good management – like the principles we teach      ...
Part 2: Overcoming the organizational challenge                             the forum for growth and innovation   15
Developing disruptive businesses isunnatural, but possibleKey to developing an organization capable of disruptive innovati...
As firms mature, they naturally shift focus fromdiscovery to operational excellence                                       ...
The business model framework                                                                     RESOURCES:     THE VALUE ...
With unknown value proposition, businessmodel must be in flux                                                             ...
As firms shift to operational excellence,resources, processes, and priorities solidifyReduction in operational risk comes ...
Unfortunately, discovery is vital to renewal & growth                                   A simplified corporate lifecycle  ...
Resources, processes, and priorities interferewith the ability to capture disruptive opportunity   Example               P...
Examples of everyday RPP in the way of disruptive growth               Existing manufacturing facilities                  ...
Developing an organization capable of disruptivegrowth requires a solution to this paradox                                ...
It’s an uphill battle, but strategic renewal is possible                                 Recognizing the commoditization o...
Part 3: Key questions to guide discussion                             the forum for growth and innovation   26
Key QuestionsDisruptive to who?  • How do we define white space?  • How do we define boundaries?How do we create R.P.P. in...
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Disruption and Your Business

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A quick deck I threw together on Disruption for a Fortune 500. Creating a shared language around disruption.

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Disruption and Your Business

  1. 1. Disruptive innovation: Opportunity and BarriersEnabling disruption within existing businessesJuly, 2012
  2. 2. Who we are… The Forum for Growth and Innovation The Forum for Growth and Innovation is a research initiative funded by the Harvard Business School and guided by Professor Clayton Christensen, the Kim B. Clark Professor of Business Administration and one of the world‟s top experts on growth and innovation. The goal of the Forum is to discover, develop and disseminate robust, accessible theory in the areas of innovation and general management. In pursuit of this goal, the Forum both hosts conferences to bring together academic experts and leading practitioners to develop current ideas and engages in extensive publishing activities. Each year, the Forum invites a few highly qualified MBA graduates to engage in a yearlong fellowship program. The Fellows collaborate with Professor Christensen on theory development intended for publication in The Harvard Business Review and in other leading business journals. the forum for growth and innovation 1
  3. 3. Part 1: An Overview of Disruptive Innovation the forum for growth and innovation 2
  4. 4. Executive summaryInnovation is well recognized as the key ingredient to driving investor returns • A 2005 Deloitte and BCG study suggested that 73% of TSR was derived from revenue growth and expected revenue growth • Despite its importance, innovation remains a poorly understood phenomenon within managementIn fact, innovation can be best understood when it is re-categorized • Certain innovations rely on technological change, others business model change • Certain innovations are systematically rejected by corporations, others are embracedToday’s discussion will focus on enabling those innovations traditionally rejected by established corporation • These „disruptive‟ innovations share similar qualities and can drive transformational growth • Understanding why these innovations are rejected by most organizations is the key to developing an organizational structure to enable these sorts of innovation the forum for growth and innovation 3
  5. 5. The Question How, in a world where large organizations are led by the best trained managers, are equipped with the most technologically advanced resources, and maintainrelationships with industry’s most valuable customers, do startups emerge time and time again? the forum for growth and innovation 4
  6. 6. What is a disruptive innovation? The three characteristics of a disruptive innovation Disruptive innovation’s three components:1) Introduces a product or service into an industry, competing in a fundamentally1 different manner than previous competitors • Disruptive innovations reject the standard metrics of industry performance, often performing far worse than incumbent products when entering markets2) Maintains a business model or technological advantage that scales over time2 • In addition to competing differently, disruptive innovations maintain scalable business model advantages that allow them to compete in ways that could not be mimicked by incumbent competitors3) Cannot be integrated with the existing profit model of incumbent firms3 • In the manner in which they are commercialized, disruptive innovations cannot be integrated into the profit models of existing firms the forum for growth and innovation 5
  7. 7. The cycle of disruption, illustrated Product Performance Incumbents nearly always win Disruptors nearly always win Time the forum for growth and innovation 6
  8. 8. Disruptive waves tend to transform industries Disruptive innovation Description Before After Personal computing • In the late 1970‟s, companies arose to ~$120-160K1 ~$1.3K2 manufacture computers using existing, modular, technical components, thereby decreasing cost of production Retail health clinics • Over the past 2 decades, retail health clinics $5603 $1103 have emerged to offer basic healthcare services w/out expensive overhead of primary care offices Mobile digital learning • Educational platforms being developed to 100M w/out N/A provide access to the more than 100M children access to that do not attend school across the globe education Disruption brings services to more customers by dramatically reducing costs and increasing accessibility 1) DEC VAX 11/780 Computer Specifications. ed-thelen.org/comp-hist/vax-11-750. Accessed 6/15/2012 2) The Encyclopedia of Consoles, Handhelds, & Home Computers, pg. 19 the forum for growth and innovation 73) Comparing Costs and Quality of Care at Retail Clinics… Annals of Internal Medicine, Sept 2009, pg. 324
  9. 9. Disruption is not equivalent to new technology Categorization of tech innovation Categorization of competitive innovation Incremental improvements to existing Innovations that integrate with the profit technologies models of incumbent firmsContinuous Sustaining Integrate seamlessly with legacy formats Can be derived from either continuous or discontinuous innovation Example: Example: • A traditional engine that generates 20% • A solar engine integrated into a Ford more horsepower than its predecessor coupe and priced at a premium Technological innovation that bypass the Innovations that do not integrate with profit existing paradigm; often cited as a step- models of incumbent firmsDiscontinuous change Disruptive Often lower quality to existing products, but Can or cannot integrate with legacy formats cheaper and more accessible Example: Example: • An solar engine that generates 20% more • An solar engine used to power a horsepower than its gasoline predecessor cheap, around-town bicycle for city commuters the forum for growth and innovation 8
  10. 10. Inherent to every disruption is an “extendable core”Disruption is not merely price competition • Disruptive innovation‟s predictability is derived from an advantage that scales over time • Disruptive businesses advantage will allow them to make tradeoffs unavailable to incumbent firms – For example, the use of standard components in the personal computer allowed manufacturers to maintain price advantages over mini-computers even as they approached parity on processing powerAn illustration – A lower-priced hotel chain A facilitated network • To compete with the Four • To compete with the four Seasons, the Best Western seasons, AirBnB would only would have to adopt the need to sign up more affluent competitors cost structure users Luxury vacation rentals Low-priced vacation rentals Disruptive vacation rentals the forum for growth and innovation 9
  11. 11. Why are disruptive innovation’s interesting? Maximize personal Maximize return to utility existing assets • Inherently a • Leverage balancing act – customers budget constrained • Leverage existing • Incentivized to resources spend less on • Leverage talent solutions to free • Secure marginal capital Customer Value Business Interest price increases Unconcerned with how Maximize investments a problem is solved in additional assets • Parity between Normally these • Devote investment products and interests are aligned, in dollars to areas services that solve instances of that will generate identical problems disruption, they are not largest returns to necessarily aligned shareholders the forum for growth and innovation 10
  12. 12. Despite opportunity, disruptions don’tappear appealing to incumbentsCannibalization • The fear of revenue cannibalization often deters managers from pursuing disruptive opportunities • Xerox PARC saw the opportunity for smaller, cheaper, copiers, but avoided development to avoid revenue cannibalization – Ultimately Ricoh and Cannon entered to capture share from XeroxReduced Marginal Profitability • Many disruptive products capture lower profitability due to their reduced performance levels • In developing the Alto, Xerox management saw a failure in a product that would not garner the 60% margins of computing competitors such as DEC and Data GeneralInitially, Small in Market Scope • Disruptive innovations tend to follow the standard adoption curve – investors must be patient for revenue and profit growth A key question: Disruptive to who? the forum for growth and innovation 11
  13. 13. Nor do they appear appealing to existing buyers Low-end disruptions apply new business models or technologies to aid in the delivery of products in existing markets disruption Low-end • E.g., Mini-mill steel producers sold commodity steel, for use in existing markets, with a novel process to allow their entry into the low-end of the market • Demanding customers with high willingness to pay for products are not interested in low-end disruptions New market disruption introduces products and services that make products and services available to those without existing access New-market disruption • E.g., Smart phones, introduced to provide computing power on the go, initially appealed to those looking for connectivity where existing solutions didn‟t exist • These products and services tend to underperform existing industry offerings in such a way that they are not viewed as competitive threats at all “If I had asked people what they wanted, they would have said a faster horse” the forum for growth and innovation 12
  14. 14. But disruption is predictable… For Incumbent Firms Disruptive Firms Retreat will look more appealing than Entrants will consider lower margin direct competition customers appealing • When opportunity exists to spread fixed • Lowest-end of existing markets will look costs across higher margin customers, appealing and profitable to start-ups retreat will look more profitable on the with no existing revenue and flexible margin business models & Over time, improvements in disruptive Once growth becomes limited, profit technologies will force competition or incentive will lead entrants to invest in acquisition product improvement • De-risked businesses will be expensive • If technology can be improved to satisfy on acquisition additional players, it will be • Rose Park Advisors studies suggest disruptive businesses Scalable advantages will allow disruptive consistently command P/E entrants to steal share by offering by multiples between 20-30 offering the forum for growth and innovation 13
  15. 15. If you do everything right, everything goes wrong “The principles of good management – like the principles we teach here at Harvard Business School – are exactly what lead to success being so hard to sustain” the forum for growth and innovation 14
  16. 16. Part 2: Overcoming the organizational challenge the forum for growth and innovation 15
  17. 17. Developing disruptive businesses isunnatural, but possibleKey to developing an organization capable of disruptive innovation is acknowledging theinherent limitations of legacy businesses • Good business practices will restrict disruptive opportunityLeveraging disruption to achieve transformative growth requires… • Long time horizons • Willingness to fail • Desire to serve new customers • Recognition that the best ways of completing a task today will not be the best ways of completing that task in the future “The customer rarely buys what the company thinks it’s selling” – Peter Drucker the forum for growth and innovation 16
  18. 18. As firms mature, they naturally shift focus fromdiscovery to operational excellence A simplified product lifecycle Revenue Goal of developing amassing resources and delivering Goal of creating processes value to customers and corporate culture that allow the firm to maximize profit over time Goal of developing an appealing value proposition Group Maturity Discovery Growth Operations focus the forum for growth and innovation 17
  19. 19. The business model framework RESOURCES: THE VALUE PROPOSITION: People, technology, products, fa A product that helps customers cilities, equipment, brands, and do more effectively, conveniently cash that are required to deliver & affordably fulfill a need this value proposition to the targeted customers PROCESSES: PROFIT FORMULA: Ways of working together to Assets & fixed cost address recurrent tasks in a structure, and the margins & consistent way: velocity required to cover them training, development, manufact uring, budgeting, planning, etc. the forum for growth and innovation 18
  20. 20. With unknown value proposition, businessmodel must be in flux …must occur prior toCycle of entrepreneurial iteration… process codification Process Codification Build Goal Growth Learn Measure Value Discovery Entrepreneurial endeavor requires a Once understanding of value proposition is process of learning to identify value solidified, resources can be scaled and processes proposition and de-risk scalable product and priorities developed effectively the forum for growth and innovation 19
  21. 21. As firms shift to operational excellence,resources, processes, and priorities solidifyReduction in operational risk comes from codifying processes • Decrease individual control in product creation, leading to product predictability • Standardization of reporting and accounting systems allows control despite growth • Adoption of uniform production techniques leads to economies of scaleThis shift is perfectly sensible at the level of the business unit • Maximize profit given an existing product base • Leverage existing resources most efficiently • Listen and respond to valuable customersHowever, failures to innovate arise when firms allocate resources in the same way at thecorporate level as they would otherwise allocate resources at the business unit level • Instead, there must be a switch to enable simultaneous disruptive discovery and sustaining operations the forum for growth and innovation 20
  22. 22. Unfortunately, discovery is vital to renewal & growth A simplified corporate lifecycle Revenue Requires ever-increasing product development to achieve continued growth Conflicting focus demands distinct organizational structure Group 1 Discovery Growth Operations Maturity Group 2 Discovery Growth Operations the forum for growth and innovation 21
  23. 23. Resources, processes, and priorities interferewith the ability to capture disruptive opportunity Example Problem with… Description Blockbuster Resources • Blockbuster‟s existing resource base – primarily stores – made the cannibalization available through online distribution unacceptable Xerox PARC Priorities • Xerox‟s role out of its front office products was ultimately abandoned, in accordance with the prioroties of the executive team • After inventing the personal computer, the mouse, the graphic user interface, the laser printer, and ethernet ports Sonosite Processes • Sonosite almost failed under legacy leadership • The sales processes favored high commission products, the antithesis of the cheap handheld sonogram Any misalignment can cause disruptive businesses to fail the forum for growth and innovation 22
  24. 24. Examples of everyday RPP in the way of disruptive growth Existing manufacturing facilities • Existing facilities often change consideration on the marginal value of investment in disruptive Resources opportunities – decisions tend to inaccurately forecast the pace of technological change Existing talent • People familiar with process or technology will systematically overvalue its need in a system Customer surveys and other feedback mechanisms • People always want more for equivalent prices – surveys, interviews, call lines, etc. will always Processes point out opportunities for improvement within service delivery Scripted sales and marketing interactions • Often these processes encourage up-selling and draw focus from disruptive products Poorly structured corporate values systems • Value systems often direct managers and line employees to define corporate identity based on Priorities industry or expertise instead of the forum for growth and innovation 23
  25. 25. Developing an organization capable of disruptivegrowth requires a solution to this paradox The Goal: Take advantage of existing strengths without falling victim to their weaknesses Best practices in satisfying this goalCreate RPP agnostic disruptive business units Utilize independent sales forces • Business units must have the freedom to • Once disruptive products have been developed, it is experiment, fail, pursue new customers, and vital to create independent sales forces with compete with existing units interests aligned with disruptiveAssume high growth of disruptive entrants within Base product design off of more than customerfinancial models requests • Conservative assumptions often impair predictions • Look to both non-consumption and lowest value surrounding cannibalization and value of legacy customers as sources of information assets • Distill job-to-be-done wherever possibleCreate a market for resources Implement Activity-Based-Costing • Legacy business units and internal “start-ups” must • Ensure that all relevant costs are embedded in have different evaluation metrics within the market financial analysis and that depreciation schedules to reflect their differing payoff natures are accurate the forum for growth and innovation 24
  26. 26. It’s an uphill battle, but strategic renewal is possible Recognizing the commoditization of silicon products, Dow Corning engaged in business model innovation • Simplifying product line and automating sales of standard products While exploring sustaining innovations to their floor cleaners, Proctor & Gamble realized that soap was the wrong product • Improved upon the „wet paper towel‟ to disrupt floor cleaners After a decade of subsidizing book sales to build a distribution network and achieve cost leadership, Amazon turned to digital • Lower margin dollars, higher volume and market share In 2010, Apple released the iPad in a direct attempt to cannibalize market share from the laptop category • “If someone is going to cannibalize the market, it should be us” With leadership support and patience, disruptive innovation can lead to amazing growth businesses the forum for growth and innovation 25
  27. 27. Part 3: Key questions to guide discussion the forum for growth and innovation 26
  28. 28. Key QuestionsDisruptive to who? • How do we define white space? • How do we define boundaries?How do we create R.P.P. independence? • Who needs to be bought in? • Leadership? Public investors? Board? • Where do the disruptive organizations sit? • What resources should they draw upon, what should they avoid?How can we effectively allocate resources? • What are the appropriate • What human capital needs must we satisfy? • Do we have to go outside of the organization? the forum for growth and innovation 27

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