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 Innovators 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 companys 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. Only 20% of venture capital funded start-ups succeed 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.

Disruptive Innovation and Creating New Market Growth | 3

Ten questions in building new growth businesses

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

ng i n i usta

ns o i t va o n n i

of al c e i c g Pa nolo h Tec gress Pro

at customers th e c n a rm o rf e P sorb can utilize or ab

Disruptive technologies

Entrants nearly always win

Time
Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 5

The Innovators Dilemma

Performance

ns o i t ova rs n n g i pute n i n tai nicom s u i S to m

45% on $250,000

60% on $500,000

Disruptive technology: personal computers

40% 20% on $2,000

Time

Copyright 2003 Clayton M. Christensen.

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; Armour Black & Decker Xerox

Today Toyota Wal-Mart Intel Southwest Air Microsoft Oracle Cisco Sony Bloomberg Best Buy

Tomorrow: Embraer Veritas U. of Phoenix RIM Blackberry Salesforce.com Linux E-Bay Sonosite Amazon.com Tensilica
Copyright 2003 Clayton M. 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

ess lowe r d a d h A t rs wi model e m o s cust busines

tion p u r d dis -served st n e Low over r-co

Time
tion: p u r s et di inst non k r a a -m on New pete ag sumpti con Com

or s er g um min s n u co ons s n -c n No on sio N cca o

Time

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 8

Non-consumers are the ideal initial target

Major Established Electronics Markets:
Performance

Tabletop radios, floor-standing televisions, computers, telecomm.equipment, etc.

Portable TVs
Pocket radios
Hearing Aids
Path taken by established vacuum tube manufacturers Time

Disruptive technology: transistors vs. vacuum tubes

Copyright 2003 Clayton M. 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. Christensen.

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

Organizational structure, performance measurement systems, channel structure

Nascent idea

Job-based segmentation: What are customers trying to get done in their lives?
Segmentation based upon attributes of customers
Copyright 2003 Clayton M. Christensen.

Focus on customer rather than job as the unit of analysis; demands for quantification; economics of communication

Disruptive Innovation and Creating New Market Growth | 11

Facilitate priorities

Never compete against customers manifest priorities. Facilitate them. Digital cameras Electronic learning

Copyright 2003 Clayton M. Christensen.

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.

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, emagazines Stock trading Travelocity E-mail Voice

Define the market in terms of jobs that customers need to get done Competition: Nokia, Wall Street Journal, CNN Airport News, boredom

Competition: Palm, Handspring, Sony, HP, Compaq, Nokia Digital camera Word Excel Handwriting recognition Wireless e-mail Phone

Voice phone News summaries Always on Simple, mindless games

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 13

Integrated firms have the advantage when products arent good enough. Focused firms overtake over-served markets.

Performance

Beat competitors with functionality

es r u t ec t i ch r A nt e d en es p r e rd c tu e e t t i In ch r rA a l du o M

Beat competitors with speed, responsiveness and customization

Time
Copyright 2003 Clayton M. Christensen.

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 - 1990

1990 - Present

Teradyne, Nikon, Canon, Applied Materials, Millipore, etc. Monsanto, Sumitomo Metals, Shipley, etc. Intel, Micron, Quantum, Komag, etc.

Digital Equipment

Product design

Compaq, Dell, Gateway, Packard Bell

Control Data

Assembly

Compaq

Contract assemblers

IBM

Operating system Applications software Sales & distribution Field service

Microsoft Microsoft
Word Perfect, Lotus, Borland, etc.

CompUSA

Dell

Independent contractors
Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 15

Beat competitors with asymmetry of motivation

% of tons
Steel Quality

2530% 55%

Sheet steel
18% 22%

l Structural Stee

a Qu

of y lit

ni i m

llmi
7%

uc d pro

ed

e st e

l
rs & rods a b ; n o ir le g An
Rebar

8%

12%

4%

1975

1980

1985

1990
Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 16

Over-shooting precipitates reciprocal processes of commoditization and de-commoditization.

Retail/ distribution that addresses speed and convenience is attractive

Retailing is undifferentiable

$
Performance

$
Design & assembly of proprietary products is highly profitable.

Functionality

Speed & responsiveness

Time

Design & assembly of modular systems is commoditized.

$
Components are undifferentiable commodities

$
Performancedefining subsystems are very profitable
Copyright 2003 Clayton M. Christensen.

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, lesswealthy people to do things in a more convenient, lower-cost setting, which historically could only be done by specialists in less convenient settings. Disruption has been one of the fundamental causal mechanisms through which our lives have improved. Computers Xerography Angioplasty

Almost always, disruptive innovations such as these have been ignored or opposed by the leading institutions in their industries for perfectly rational reasons.
Copyright 2003 Clayton M. Christensen.

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, built upon the ability to diagnose unambiguously, shifts the method used to diagnose and treat disorders from an unstructured, experimental problem-solving process, towards a rules-based regime.

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. 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. Christensen.

Disruptive Innovation and Creating New Market Growth | 21

The strategy-making processes that are good at planning sustaining innovations, are bad at guiding disruptive ones.
Intended strategy
Im wh prove at w d u ork nde sa r nd stand wh at d ing of oes nt

The Organizations values

Resource allocation process

Strategic Actions: New products, services, processes, acquisitions

Actual Strategy

Emergent strategy

ties i n ortu ses p p s d o ucce e t a s icip s and t n Una oblem pr

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 22

J&Js Professional Division has grown much faster than its Consumer Division over the last decade

J&J Annual Sales

($ millions)

12,000

10,000

Professional Division

8,000

6,000

Consumer Division

4,000

2,000

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: Johnson and Johnson 10-K Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 23

New disruptive growth businesses account for nearly all of this growth

12,000

CAGR
10.3%

Annual Sales
($ millions)

Total

10,000

8,000
Normalized*(1) 3.7% 2.9% 40.9%

6,000

Absolute* New Disruptive Growth Businesses*

4,000

2,000

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

*Adjusted for revenues from Cordis, Ethicon Endo Surgery, LifeScan and Vistakon Source: Johnson and Johnson 10-K Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 24

Disruption amongst healthcare institutions is well underway

Complex
als t i p os

Complexity of diagnosis and treatment

lH a r es i ne t i l e ci G a F nt e i t pa t a re c Ou ice f f In-o a re c e m o In-h

Simple

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 25

Disruptions amongst healthcare professionals

Complex
list a i c Spe
Complexity of diagnosis and treatment

ec p s b & su

ians c i s hy p t ialis
Performance that the marketplace needs or utilizes

l ca a n rs o e p ly / i m Fa rs e n o titi c a r se p r u N are c f l Se

ans i c i ys h p re

Simple
Time

Copyright 2003 Clayton M. Christensen.