Disruptive Innovation and Creating New Market Growth | 1

Capturing the Upside While Avoiding the Downside
Clayton M. Christensen Harvard Business School

© Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 2

The Innovator’s Solution
• Historically, less than 10% of companies have been able to sustain for more than a few years the growth that creates above-average shareholder returns. • Once a company’s growth has stalled, the probability that it can successfully re-accelerate growth is only 6%. • Historically, it has seemed impossible to predict which innovations will successfully create new waves of growth, and which will fail. ü Only 20% of venture capital – funded start-ups succeed ü Only 25% of new products launched by established companies succeed.

This need not be the case. Managers can use sound theories to guide the key decisions required to build successful growth businesses.
© Copyright 2003 Clayton M. Christensen.

Which things should our company do. Who should be on our management team? 8. Whose investment capital will help. and whose might hurt? © Copyright 2003 Clayton M. Which customers should we target? 3. How can we know when to change course? 10. What is the best organizational structure for this business? 9. Christensen. How can we beat the competition? 2. How can we avoid commoditization? 7. How should we distribute to and communicate with our customers? 5. and which should our can partners and suppliers do? 6. .Disruptive Innovation and Creating New Market Growth | 3 Ten questions in building new growth businesses 1. What products will our customers want to buy? 4.

Christensen. .Disruptive Innovation and Creating New Market Growth | 4 Disruptive technologies are a driver of leadership failure and the source of new growth opportunities Incumbents nearly always win Performance ns o i t a nov n i ing n i a t Sus e of ogical c a l P hno s c e T res g o Pr customers t a th e c n a rm o Perf sorb can utilize or ab Disruptive technologies Entrants nearly always win Time © Copyright 2003 Clayton M.

Christensen.000 Disruptive technology: personal computers 40% 20% on $2.000 Time © Copyright 2003 Clayton M.000 60% on $500.Disruptive Innovation and Creating New Market Growth | 5 The Innovator’s Dilemma Performance ns o i t va o n n i rs e g t n u i tain icomp s u in S to m 45% on $250. .

com • Linux • E-Bay • Sonosite • Amazon. of Phoenix • RIM Blackberry • Salesforce.Disruptive Innovation and Creating New Market Growth | 6 Most value-creating growth businesses originated in disruption Yesterday • Japan • Kodak • ZCMI • Ford • Merrill Lynch • AT&T • Sears catalog • Swift.com • Tensilica © Copyright 2003 Clayton M. . Christensen. Armour • Black & Decker • Xerox Today • Toyota • Wal-Mart • Intel • Southwest Air • Microsoft • Oracle • Cisco • Sony • Bloomberg • Best Buy Tomorrow: • Embraer • Veritas • U.

Christensen.Disruptive Innovation and Creating New Market Growth | 7 Two strategies for asymmetric competition Performance Bring a better product into an established market Different measure Of Performance v ess o h a lower r d d A s wit model r e m custo business L ption u r s i nd d r -served ost e w e o c Time : ption u r s i n d rket ainst noon a m New pete ag sumpti con Com or s r e m ing u ns sum o c n n . .-co ns o N on sio N ca oc Time © Copyright 2003 Clayton M.

computers. etc.Disruptive Innovation and Creating New Market Growth | 8 Non-consumers are the ideal initial target Major Established Electronics Markets: Performance Tabletop radios. vacuum tubes © Copyright 2003 Clayton M. floor-standing televisions. telecomm.equipment. Christensen. Portable TVs Pocket radios Hearing Aids Path taken by established vacuum tube manufacturers Time Disruptive technology: transistors vs. .

Christensen. .Disruptive Innovation and Creating New Market Growth | 9 Non-consumers are the ideal initial target Word Processing Performance Wireline e-mail Wireless e-mail Chat rooms Standard phrases Toy robots Path taken by IBM Time Disruptive Technology: Voice Recognition Technology © Copyright 2003 Clayton M.

U .Disruptive Innovation and Creating New Market Growth | 10 Powerful forces cause companies to target market segments that are irrelevant to the reasons why customers buy products Segmentation based upon attributes of products Nascent idea Focus on customer rather than job as the unit of analysis. performance measurement systems. economics of communication U Organizational structure. demands for quantification. channel structure Job-based segmentation: What are customers trying to get done in their lives? Segmentation based upon attributes of customers © Copyright 2003 Clayton M. Christensen.

Digital cameras Electronic learning © Copyright 2003 Clayton M. Facilitate them.Disruptive Innovation and Creating New Market Growth | 11 Facilitate priorities Never compete against customers’ manifest priorities. Christensen. .

Handspring. . Nokia • Digital camera • Word • Excel • Handwriting recognition • Wireless e-mail • Phone • Voice phone • News summaries • Always on • Simple. HP. mindless games © Copyright 2003 Clayton M. Compaq. Wall Street Journal. Define the market as a class of products (wireless hand-held) Define the market in demographic terms (the business traveler) Competition: wireline telecom and notebook computers • CRM software • E-books. CNN Airport News.Disruptive Innovation and Creating New Market Growth | 12 Structuring the market in terms defined by data that are easily collected obfuscates the right targets for innovation. boredom Competition: Palm. Christensen. emagazines • Stock trading • Travelocity • E-mail • Voice Define the market in terms of jobs that customers need to get done Competition: Nokia. Sony.

Christensen. Focused firms overtake over-served markets.Disruptive Innovation and Creating New Market Growth | 13 Integrated firms have the advantage when products aren’t good enough. Performance Beat competitors with functionality res u t itec h Arc t n de n pe e res d u r t e ec t Int i rch A lar u d Mo Beat competitors with speed. responsiveness and customization Time © Copyright 2003 Clayton M. .

Disruptive Innovation and Creating New Market Growth | 14 Changes in integrality/modularity have profoundly changed the structure of the computer industry 1960 .1980 Equipment Materials Components 1980 . Christensen. Quantum. etc. Canon.Present Teradyne. Millipore. Monsanto. Micron. Sumitomo Metals. . Lotus.1990 1990 . Gateway. Dell. Nikon. Packard Bell Control Data Assembly Compaq Contract assemblers IBM Operating system Applications software Sales & distribution Field service Microsoft Microsoft Word Perfect. Intel. Borland. Applied Materials. Shipley. etc. etc. Digital Equipment Product design Compaq. etc. CompUSA Dell Independent contractors © Copyright 2003 Clayton M. Komag.

Christensen. . n o ir le Ang Rebar 4% 1985 1990 © Copyright 2003 Clayton M.Disruptive Innovation and Creating New Market Growth | 15 Beat competitors with asymmetry of motivation % of tons Steel Quality 25–30% 55% Sheet steel 18% 22% l Structural Stee l tee s ced u od r 12% p l il m i n mi f yo t i 7% l a u Q 1975 1980 8% s & rods r a b .

Disruptive Innovation and Creating New Market Growth | 16 Over-shooting precipitates reciprocal processes of commoditization and de-commoditization. . Christensen. Retail/ distribution that addresses speed and convenience is attractive Retailing is undifferentiable $ Performance $ Design & assembly of proprietary products is highly profitable. $ Components are undifferentiable commodities $ Performancedefining subsystems are very profitable © Copyright 2003 Clayton M. Functionality Speed & responsiveness Time Design & assembly of modular systems is commoditized.

. Disruption has been one of the fundamental causal mechanisms through which our lives have improved. disruptive innovations such as these have been ignored or opposed by the leading institutions in their industries for perfectly rational reasons. Christensen. lesswealthy people to do things in a more convenient. © Copyright 2003 Clayton M. which historically could only be done by specialists in less convenient settings. • Computers • Xerography • Angioplasty Almost always. lower-cost setting.Disruptive Innovation and Creating New Market Growth | 17 Disruption enables less-skilled people to do more sophisticated things Disruptive innovations enable a larger population of less-skilled.

.Disruptive Innovation and Creating New Market Growth | 18 Disruption is facilitated by sophisticated technology that makes things foolproof Complex Experimentation & problem-solving Pattern Recognition Rules-Based Simple © Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 19 Ambiguous Deep Tertiary hospital General Hospital Clarity of the rules Outpatient Clinic Office Simple Little Skill required to follow the rules Scientific understanding. Home Simple Little Clarity of the rules Skill required to follow the rules Family doctor Ambiguous Deep Sick child Parent Nurse Specialist © Copyright 2003 Clayton M. towards a rules-based regime. shifts the method used to diagnose and treat disorders from an unstructured. Christensen. built upon the ability to diagnose unambiguously. . experimental problem-solving process.

Christensen.Disruptive Innovation and Creating New Market Growth | 20 How can I know what my organization is capable and incapable of accomplishing? Resources • People Processes • Hiring & Training • Product development • Manufacturing • Planning & Budgeting • Market Research • Resource allocation Values The criteria by which prioritization decisions are made • Ethics • Cost structure/ income statement • Size of opportunity • Technology • Products • Equipment • Information • Cash • Brand • Distribution © Copyright 2003 Clayton M. .

. processes. services. Christensen. are bad at guiding disruptive ones.Disruptive Innovation and Creating New Market Growth | 21 The strategy-making processes that are good at planning sustaining innovations. acquisitions Actual Strategy Emergent strategy ities n u t r ppo cesses o ated d suc p i c nti s an Una blem pro © Copyright 2003 Clayton M. Intended strategy Im wh prove at w d u ork nde s an rsta d w ndin hat g doe of sn’ t The Organization’s values Resource allocation process Strategic Actions: New products.

000 Professional Division 10.Disruptive Innovation and Creating New Market Growth | 22 J&J’s Professional Division has grown much faster than its Consumer Division over the last decade J&J Annual Sales ($ millions) 12.000 6.000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: Johnson and Johnson 10-K © Copyright 2003 Clayton M.000 8.000 2. Christensen.000 Consumer Division 4. .

Ethicon Endo Surgery. Christensen.7% 2.000 Normalized*(1) 3.000 2.Disruptive Innovation and Creating New Market Growth | 23 New disruptive growth businesses account for nearly all of this growth 12.000 Absolute* New Disruptive Growth Businesses* 4.000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 *Adjusted for revenues from Cordis. LifeScan and Vistakon Source: Johnson and Johnson 10-K © Copyright 2003 Clayton M.9% 6.000 CAGR 10.9% 40.3% Annual Sales ($ millions) Total 10.000 8. .

Christensen. .Disruptive Innovation and Creating New Market Growth | 24 Disruption amongst healthcare institutions is well underway Complex tals i p os H al r e n ties i l i Ge ac F t ien t a t -p u are O c ce i f f o In e car e om h In Complexity of diagnosis and treatment Simple © Copyright 2003 Clayton M.

Christensen.Disruptive Innovation and Creating New Market Growth | 25 Disruptions amongst healthcare professionals Complex Complexity of diagnosis and treatment list a i c spe b su & t ians ialis c c i e s Sp phy e r l ca a n erso p / ily m a F ers n o i actit r p e Nurs are c f l Se ns a i c i s phy Performance that the marketplace needs or utilizes Simple Time © Copyright 2003 Clayton M. .

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