Disruptive innovation describes a process where a product or service begins in simple, inexpensive applications and then improves in quality and performance until it meets the needs of mainstream customers, displacing existing options. Dell Computer grew rapidly by focusing on direct sales and building computers upon receiving customer orders rather than maintaining large inventories, allowing it to outcompete other PC manufacturers. Dell's success demonstrates how streamlining operations and targeting customer needs directly can enable a company to scale quickly through disruptive innovation.

1. Disruptive innovation, a term of art
coined by Clayton Christensen,
describes a process by which a product
or service takes root initially in simple
applications at the bottom of a market
and then relentlessly moves up
market, eventually displacing
established competitors
DISRUPTIVE INNOVATION

2. Disruptor Disruptee
Personal computers Mainframe and mini computers
Mini mills Integrated steel mills
Cellular phones Fixed line telephony
Community colleges Four-year colleges
Discount retailers Full-service department stores
Retail medical clinics Traditional doctor’s offices

3. Innovation = Invention + Commercialization
Opportunity
Register
I
n
v
e
n
ti
o
n
s
I
d
e
a
s
Commercial
Opportunities
Innovation
Core Competences:
Assessment & Investment
Market Entrance &
Competitive Strategy
Adaptive
Execution

4. What kinds of sources exist?
Where do you find innovations?

5. Two Sources of Innovation
(Eric von Hippel)
 Functional (functional relationship through which firms and
individuals derive benefits from innovation, e.g., customer or
manufacturer)
 Where do the innovations come from?
 Do they come from within the firm or from someplace else?
 Where exactly within the firm?
 Circumstantial (under what circumstances will they benefit)
 Under what circumstances can one expect innovation?
 When can one expect innovation?

6. Functional Sources of Innovation
1. Internal to Value Map (bubbles)
2. External Value Map (boxes)
3. Competitors & related industries
4. University, government & private labs
5. Other nations / regions
 ‘Complementarity of several sources may amplify and
accelerate innovation
 The last two sources are strongly influenced by society
and governments

7. Value Description
Views for value help for
variables/input parameters
If you are using input parameters or
variables, which refer to external
views for value help references and
if you want to map input parameters
or variables of external views with
the input parameters or variables of
the analytic view.
Views for value help for
attributes
If you are creating a analytic view,
and for the attributes in the
underlying data sources of this
analytic view, if you have defined a
value help view or a table that
provides values to filter the attribute
at runtime.

8. Functional Sources of Innovation
Mobile Network
Operators (600,
though 10
control 50%
subscribers
3rd party
Applications
Developers
Handset Makers
Programming / Sales
operations
cost: 70 million
pounds annual; 703
employees
Symbian O/S
C
a
p
t
i
v
e
Captive
Licensing Revenues
Cost of providing functions
These costs
tend to be relatively
fixed, recurring
annual costs
These revenues
tend to grow by the square
of the MNOs subscriber base
Captive relationships tend to
be contractual (compare to
Palm O/S)
The entire market
(HW, SW, Telecom Networks)
is driven by "killer" applications

9. Social characteristics that promote innovation and
success at a commercial level?
Prior experience tells us that societies which:
 operate, manage and build instruments of
production
 create, adapt and master new technologies
 impart expertise and knowledge to the young
 choose people for jobs by competence and relative
merit
 promote and demote on basis of performance
 encourage initiative, competition and emulation
 let people to enjoy and employ the fruits of their
labor, enterprise and creativity
(adapted from David Landes (1998) The Wealth and Poverty of Nations, New York: Norton,
chapters 27-29)

10. Government has a role to play
 Where innovation has flourished in the past, the government does the following:
 encourage saving and investment
 enforce rights of contract
 secure rights of personal liberty against tyranny and crime
 provide stable government,
 though not necessarily democratic
 provide responsive government
 provide no rents or favors for government position
 have governments that are moderate, efficient and ungreedy
 Direct government involvement in innovation tends to favor the creation and
maintenance of powerful, conservative, expensive scientific bureaucracies which rob
would-be innovators of scarce talent
 .e.g., Sematech, MITI, Malaysian projects, US Aerospace and NASA, European Space Agency.
 (adapted from Landes’ The Wealth and Poverty of Nations )

11. Circumstantial Sources of
Innovation
 Planned firm activities
 Serendipity (fortunate accidents)
 Change (creative destruction)

12. For Example:
Consider the Electric Lighting Innovation

13. Thomas Alva Edison didn’t invent
the light bulb
 Humphry Davy, an English chemist, invented the first electric
light in 1809
 Joseph Wilson Swan, an English physicist, was the first person
to invent a practical and longer-lasting electric lightbulb in 1878
 But new technology
 Offered new customers
 Substituting for gas and arc lighting
 … and a new competitor

14. Edison’s System
 “all parts of the system must be constructed with reference to
all other parts,, since in one sense, all the s form one machine
part
 1878 - Thomas Alva Edison, referring to an electrical grid in his article on the
phonograph in the North American Review
 Edison and his team of engineers in Menlo Park, N.J., spent
years building the entire electric system, from light sockets
and safety fuses to generating facilities and the wiring
network.
 Edison beat all his predecessors at one crucial task: managing
the whole process of innovation, from light-bulb moment to
final product

15. Edison’s Strategy
 Develop the working DC system
 Protect it with patents
 When George Westinghouse introduced a superior
AC system
 He attacked with a smear campaign
 He eventually switched to AC systems when
customers demanded

16. Microsoft’s O/S Innovation
The most profitable innovation in history
 Linking & Leveraging
Strategy
 Get the business
 Create the standard
 Leverage the business
 Crush the competition
 An Early Competitor

17. Case Study in MS-DOS
 MS purchased Seattle Computer Products' QDOS
 for Quick and Dirty Operating System (written by Tim Paterson)
 Written as a version of CP/M, with 4000 lines of assembler.
 IBM tested Gates’ cleaned up MSDOS 1.0, finding well over 300 bugs, and decided
to rewrite the program
 This is why PC-DOS is copyrighted by both IBM and Microsoft.
 Gates locked up the IBM deal with the help of his father’s law firm
 est. value of services $250,000

18. Case Study in DOS
 You could order one of three operating systems for
your original IBM PC:
 Digital Research's CP/M-86 for $495
 UCSD p-System for several hundred dollars
 this was a souped-up BASIC operating systems like that used by the
Commodore 64
 but portable like Java
 DOS 1.0 for $39.95

19. Case Study in DOS
 Microsoft’s OEM brochure touted future
enhancements to DOS:
 Unix-compatible pipes, process forks, and multitasking, as well
as graphics and cursor positioning, kanji support, multi-user
and hard disk support, and networking
 None of these was ever added
 Innovation = Invention + Commercialization!

20. Innovation Transfer
 Across functional boundaries
 the stovepipes
 Absorptive and Transmission Capacities
 bounded rationality on the receiving side
 Cultural differences
 Culture = shared ‘values’ (what’s important) + shared ‘beliefs’ (what works
or what’s true)
 Nature of the innovation
 Timing

21. Science & Technology
What are they? How are they related?
Science
Technology
Influence / feedback
Influence / feedback
Verbally
Encoded
Information
Verbally
Encoded
Information
Verbally Encoded
Information
*publications
*patents
Physically & Verbally Encoded
Information
*products & services
*documentatiom
*publications
*patents

23. SMaL:
What, who, …?
 What is the Problem?
 SMaL has experienced initial success by targeting a market where competition
was sparse. But now competitors like Casio are arising. What is SMaL’s main
competitive challenge circa 2003
 Who is responsible for solving the problem and making a
decision?
 Sodini of course; but are there other interested players?
 Where is the money?
 What markets that SMaL can conceivably compete in will generate an adequate
ROI?
 Why does ‘disruptive innovation’ matter?

24. The Challenge

25. Innovation on the Demand Side
 It is important to get the differentiation large enough
to make the investment in the technology worthwhile,
yet small enough so it doesn’t take six years to develop
a market
 Charles Sodini, Chairman of SMaL
 Q: How do you develop successful new technology
or innovations?

26. Three potential market
segments
 Digital Still Cameras
 Security-surveillance
 Automotive (cruise control, etc.)
 Currently 10%-15% of US cars have this technology
 How do you “Sell” the product?
 Hardware (CCD, CMOS, X3)?
 Software (applications)?

27. Autobrite®
How you manipulate demand with Software
 Images on the left, the inability of conventional cameras to adapt to varying
lighting conditions creates a significant safety risk.
 Images on the right demonstrate how accurately SMaL's ACM100 with
proprietary Autobrite technology capture what the eye sees.

28. Camera Imaging Technologies
 CCD (Sony, Kodak;
industry standard)
 CMOS (Kodak, Canon,
SMaL; used in phones,
Canon in some EOS)
 X3 (Foveon; used in Sigma
SD10)

29. Focus
 Having a screen between you and the consumer at this
size company is important
 (you don’t want a large company at this stage)
 Manufacturing is a high fixed cost, low margin game
 Product definition is the key technological component
that allows us to capture value
 Sodini

30. SMaL:
Competitive Environment

31. Which strategy is best?
 Which of the following six strategies – in your
judgment– is best for SMaL over the next seven years
given what you know of their technology, operations and
potential markets
 (think five forces)
 How will disruptive technology (basically the threat of
substitutes or new entrants) influence SMaL’s choice.

32. Strategies
(Be Prepared to discuss these at the start of next class)
 S#1: Move on up
 S#2: Focus on Security and Surveillance
 S#3: Focus on Automotive
 S#4: Focus on Phone Cameras
 S#5: Search for new markets that fit SMaL technology’s
strengths (Making a left turn)
 S#X: Mix and match any two or three of the above five

33. Your Analysis Toolkit
 (1) Framing the Challenge
 The Challenge & objectives, the Business Model, the Strategy Drivers
 Establish what your business needs to do to make innovation worthwhile
 If I were to do something in the next 3-5 years
 That my customers would regard as a major (disruptive) innovation
 How would I change their lives?
 (2) Opportunity ‘Register’
 Concept: Always keep an inventory of possible opportunities so that you are
unlikely to run out of ideas for making the next competitive move or
capturing the next prospect for growth
 (3) Reverse your Assumptions to escape from Looking at Problems
in the Traditional Way

34. Forced Market Reconfiguration:
Digital Cameras

35. Forced Market Reconfiguration: Digital Cameras

36. … never forget
 The Purpose of a Business is to Create a Customer
- Peter Drucker
 Even if you create marvelous inventions
 Your customers won’t care
 Unless that is exactly what they need
 Business customers are especially impatient
 With any product that doesn’t help them gain competitive advantage

37. Your Analysis Toolkit
The Attribute Map
 Slicing and Dicing will help you identify and improve the
Attributes of your product
 Attribute Maps are used in Consumption Chain Analysis,
Resegmenting, and Redifferentiating
Basic Discriminator Energizer
Positive Nonnegotiable Differentiator Exciter
Negative Tolerable Dissatisfier Enrager
Neutral So What? Parallel

38. Awareness
of need
Storage and
trasport
Installation
and Assembly
Receipt
Financing
Payment
Delivery
Order and
purchase
Selection
Search
Finaldisposal
Repairs and
Returns
Service
Use
Your Analysis Toolkit
 Redifferentiate
 Goal: Lay your biases on the table
 There is no market that is so mature
that you cannot further differentiate
your offerings
 (a) Quizzing
 Looks at the customers “stream of
consciousness”
 Through a series of questions
 Think Bubbles with help you
Quiz
 (b) Consumption Chain
Analysis

39. Fritz Zwicky’s morphological box
Combining the parameters of a challenge into new
ideas
Generating parameters ; listing variations for each
parameter.

40. Chapter 6
Building Breakthrough Competences
Dell Computer (It’s not about the computing)

41. What to do with your
Opportunity Register
 Assuming you’ve been religiously adding to your
Opportunity Register
 You should by this time have a lot of different ideas for new and
marketable products
 Then the question becomes:
 Which projects should you take on; emphasize;
continue?
 The answer depends on your competences

42. Two Realities
 Competitors simply cannot allow you to go unchallenged
 and must try to erode your position
 Understanding where to create a competitive position that
cannot easily overcome is thus essential
 You are not only competing with other organizations in
customer markets
 You are also competing with them in the capital markets for
critical funds that you need to build future competitive
position

43. Competences
 You best
 (perhaps your only)
 opportunities to
compete are
 Where Product Market
Needs
 Cross with Competences
Your
Competences
Product Market
Opportunities
Competitor A's
Competences
Competitor B's
Competences
Competitor C's
Competences

44. You Convince Competitors and
Financiers By …
 Proving that your ideas can perform on Key Metrics (e.g., Profit)
 Show me the money!
 This raises the question:
 “What are the important Metrics?”
 The answer is complex … and is not necessarily “Profit”
 Accounting metrics like Profit
 Measure the Past
 Competitors and Financiers are interested in your future!
 Future Profits, Revenues, etc. are Unknown
 Thus Other Measures both needed and More Important than Profit!

45. Delivering on 7-10 critical ‘Key
Ratios’
 This is what Investors and Venture Capitalists will look
for
 The particular accounting statement measures
 That indicate whether your strategy is succeeding or not
 The exact set of measures depends on
 your business model and
 your strategy

46. Some Key Ratios
 Valuation
 Price to Sales
 Price to Book Value
 Enterprise Value to Sales
 EV / EVITDA
 PEG Factor (price/earnings to growth)
 Price to Research
 Reinvested Return on Equity
 IS
 Sales, Earnings and Equity per Share
 Staff Costs to Sales
 Directors Remuneration to Net Income
 Sales and Profit per Employee
 Margins
 Cash Flow
 Op Cash Flow / Op Profit
 Price to Free Cash Flow
 Discounted Cash Flow
 BS
 Current Ratio & Acid Test
 Debtors Days and Creditor Days
 Stock Days and Stockturn
 Equity
 Gearing (OE to borrowed funds)
 Return on Capital Employed
 Z-score (output from a credit-strength test that gauges the likelihood of bankruptcy
)
Magic Numbers: The 33 Key Ratios That Every
Investor Should Know by Peter Temple Each of the
ratios contained in this part looks at the ways in which
share prices can be combined with measurements from
the various...

47. A Case Study in Technology Acceleration and
Organizational Scaling

48. Dell’s War on Inventory
 In less than 20 years, Michael Dell moved from
cluttered dorm-room operations
 to a $25 billion a year company,
 outperforming giants such as IBM, Hewlett-Packard
and Compaq in the process.

49. Hyper-efficient supply chain
 Dell is relentless in negotiating the best prices from
suppliers, and
 driving those savings through the supply-chain.
 To do that, Dell replaces inventory with information.

50. Materials costs account for
about 74% of Dell’s revenues
 about $21 billion in 2000
 Lowering materials costs by 0.1% can have a bigger impact
than improving manufacturing productivity by 10%.
 Where other competitors carry one to three months of
inventory,
 Dell carries 5 days.
 Since materials costs in the computer industry fall by
around 1% per weeks,
 carrying 5 days versus one month of inventory is around 6%
of materials cost.

51. Safety stocks are very
expensive
 But they are very difficult to reduce.
 Reduction requires complete and accurate information and
forecasts about production and procurement.
 Dell has standardized worldwide on i2 Technologies’ software,
 with hourly updates of all information from customers to suppliers.
 five hours’ worth of inventory on hand, including work in progress.
 This increases cycle time at Dell’s factories and reduces warehouse
space.
 The warehouse space is replaced with more manufacturing lines in a
virtuous cycle
 Dell has traded property for information.

52. Customers
 Dell’s online customer procurement Website puts Dell in
contact with more than 10,000 customers daily
 – giving them more than 10,000 opportunities to forecast demand
and balance supply.
 For example, Dell can alter supply constraints through promotions
and substitutions.
 If inventory is low on Sony 17-inch monitors, Dell can offer a 19-inch
model at the 17-inch price. This moves a lot of demand in real-time.
 Competitors selling through retail channels cannot do
this!

53. The bottom-line
 Dell writes off less than 0.1% of total material costs
in excess and obsolete inventory
 Their competitors write off 2% to 3%.

54. Core Competences
 Identify the business of the firm
 Identify the key activities on the value chain, and
differentiate them from supporting activities
 Identify the critical success measures generated for
each activity (supporting and key).

56. consequences of industrial change on the
capabilities demanded of a competitive firm
 ‘Core-ness’ and imitability of the firm’s capabilities
determine the profitability of innovations dependent
on those capabilities.
Long-term Profits
No Profits
Short-term Profits
No Profits High
Low
Noncore Core
Coreness
Imitability

57. Why Incumbents Perform
 The Abernathy-Clark model provides one explanation of why incumbents may outperform
new entrants in the face of ‘radical’ innovations.
 The model suggests that there are actually two kinds of knowledge that underpin a
innovation: technological and market.
 An innovation is incremental (regular) if it conserves the manufacturers/s existing
technological and market capabilities;
 niche if it conserves technological capabilities but obsoletes market capabilities;
 radical (revolutionary) if it obsoletes technological capabilities, but enhances market
capabilities; and
 architectural if both technological and market capabilities become obsolete. The point to
note is that market knowledge is just as important as technological knowledge.
Architectural
Niche
Radical
Incremental Preserved
Destroyed
Preserved Destroyed
Technical Capabilities
Market Capabilities

58. Difficulties Competing
 Henderson and Clark were curious why some incumbents had such difficulty with apparently incremental
innovations which involved seemingly small changes that could easily be handled by their capabilities.
 For example, Xerox, the pioneer of the copier industry (albeit through their acquisition of Chester
Carlson’s technology) stumbled for years before developing a small plain-paper copier to challenge
Japanese products.
 They suggested that innovations are invariably built up of components, and thus building them requires
two kinds of technical knowledge
 technology underlying individual components, and
 architectural knowledge about how to link components together.
 If the innovation enhances both component and architectural knowledge, it is incremental;
 if it destroys both, it is radical;
 if only architectural is destroyed, then the innovation is architectural;
 where only component knowledge is destroyed (for one or more components) the innovation is modular.
Radical
Modular
Architectural
Incremental Preserved
Destroyed
Preserved Destroyed
Architectural Knowledge
Component Knowldge

59. Trajectories
 Industries evolve along four distinct trajectories
 radical, progressive, creative, and intermediating.
 Where a firm's strategy (its plan for achieving a return on investments in
capabilities) failed to align with the industry's change trajectory, profitability
suffered commensurately.
 Failure resulted from obsolescence of the firm’s products or services arising
from two directions:
 (1) a threat to the industry's core competences; and
 (2) a threat to the industry's core assets—the resources, knowledge, and brand
capital that have historically made differentiated the firm.
Intermediating
Progressive
Radical
Creative
Preserved
Obsolete
Preserved Obsolete
Competences
Assets

60. Trajectories in Practice
Creative, 6%
Radical, 19%
Progressive,
43% Intermediating,
32%

61. Cisco
 Cisco Systems has a reputation for expanding its
capabilities through acquisitions.
 Shortly after going public in 1990
 went on a buying spree, acquiring 73 firms from 1993 to
2000.
 By late March 2000, at the height of the dot-com boom,
 Cisco was the most valuable company in the world, with a market
capitalization of more than $US 500 billion.

62. Early years
 This had not always been the case.
 During its first decade after it was founded in 1984 the company acquired no
businesses at all,
 sticking to selling routers and only routers.
 Cisco went public in 1990.
 three years later, a faster and cheaper piece of hardware – the switch – threatened its
business.
 Cisco engineers scrambled to produce their own switch, but realized that they
could not acquire the capabilities to produce one anytime soon.
 In 1993 of Crescendo Communications for $95 million which got them into
switches – fast.
 Cisco's engineers grumbled that they could have produced their own switch in time.
 Most of Crescendo's executives stayed with the company, and switches became
a core Cisco business.
 The switching unit today generates nearly $10 billion in annual revenues.

63. Acquisitions
 Since then, using acquisitions
 where they are unable to develop internal capabilities quickly
enough to be competitive,
 Acquisitions and partnering with other companies have
enabled Cisco to retain its market dominance.
 Cisco has made inroads into many network equipment
markets outside of routing, including Ethernet switching,
remote access, branch office routers, ATM networking,
security, IP telephony and others.

64. Acquisitions
 What began as a one-off response in an emergency soon evolved into a
long-term strategy, an essential part of the Cisco culture.
 While most big tech companies rely heavily on R&D to create products
and business lines,
 Cisco, after Crescendo, decided to strategically use acquisition to
expand its capabilities:
 In 1995, Cisco acquired its way into firewalls and cache engines.
 In 1998, Internet telephony.
 In 2003, with the acquisition of Linksys, a home-networking company,
 In 2006 by acquiring Scientific Atlanta, a set-top-box manufacturer.

65. People
 The vast majority of Cisco’s acquisitions have been targeted
technology buys:
 small start-ups with 50 or less engineers whose products link back to
Cisco’s core competencies, routers and
 Cisco has come to realize that the acquisition of technology really isn't
just about technology.
 "The people are the most strategic asset.“
 Ned Hooper, vice president of business development, whose former company
LightSpeed was acquired by Cisco in 1998.
 If, after the acquisition, Cisco loses the technologists and product
managers who created, say, the Linksys router,
 then it has lost the second and third generations of the product that
existed only in those employees' heads.
 That, is where the billion-dollar markets lie. And that is where Cisco's
acquisitions are aimed. "We need the expertise,"