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 a ce of ogical

P l
e chno s
T res
Performance

og
Pr
tions
a
innov
aining
t
Sus
o rm a n c e th a t customers
Perf
sorb
can utilize or ab

Disruptive
Entrants nearly always win
technologies

Time

Copyright 2003 Clayton M. Christensen.

 Disruptive Innovation and Creating New Market Growth | 5

The Innovators Dilemma

tio ns 60% on
nova
Performance

in e rs $500,000
in g ut
ustain icomp
S in
to m
45% on
$250,000

40% 20%
Disruptive on $2,000
technology:
personal
computers

Time

Copyright 2003 Clayton M. Christensen.

 Disruptive Innovation and Creating New Market Growth | 6

Most value-creating growth businesses originated in disruption

Yesterday Today Tomorrow:

Japan Toyota Embraer
Kodak Wal-Mart Veritas
ZCMI Intel U. of Phoenix
Ford Southwest Air RIM Blackberry
Merrill Lynch Microsoft Salesforce.com
AT&T Oracle Linux
Sears catalog Cisco E-Bay
Swift; Armour Sony Sonosite
Black & Decker Bloomberg Amazon.com
Xerox Best Buy Tensilica
Copyright 2003 Clayton M. Christensen.
 Disruptive Innovation and Creating New Market Growth | 7

Two strategies for asymmetric competition

Bring a better product

Performance
into an established
market

ption
Different measure
Of Performance

is ru
w-end d r -served ost
L o v e - c
ddress o h a lower
A s wit model
m er
custo business

Time

:
isruption -
d n
-market ainst noon
New pete ag sumpti
or Com con
ers
um ing Time
ons sum
c n
on - -co ns
N on sio
N ca
oc
Copyright 2003 Clayton M. Christensen.
 Disruptive Innovation and Creating New Market Growth | 8

Non-consumers are the ideal initial target

Major Established
Electronics Markets:
Tabletop radios, floor-standing
televisions, computers,
telecomm.equipment, etc.
Performance

Portable TVs

Pocket radios
Path taken by
Hearing Aids 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

Wireline e-mail
Performance

Wireless e-mail
Chat rooms

Standard phrases
Path taken
Toy robots 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
Organizational based upon
structure,
performance
U attributes of
products
measurement
systems, channel
structure
Job-based
Nascent
segmentation:
idea What are
customers trying to
get done in their
lives?
U
Focus on customer rather
than job as the unit of
analysis; demands for Segmentation based
quantification; economics upon attributes of
of communication customers
Copyright 2003 Clayton M. Christensen.
 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 in

Define the market as a Define the market in
terms of jobs that
class of products demographic terms (the
customers need to get
(wireless hand-held) business traveler)
done

Competition: Palm, Competition: wireline Competition: Nokia,

Handspring, Sony, HP, telecom and notebook Wall Street Journal, CNN
computers Airport News, boredom
Compaq, Nokia

Digital camera CRM software

Voice phone
Word E-books, e-
magazines News summaries
Excel
Stock trading Always on
Handwriting
Travelocity Simple, mindless
recognition
games
Wireless e-mail E-mail

Phone Voice

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.

Beat competitors
with functionality
Performance

tures
hitec
t Arc
n
nde
epe res
erd tu
Int itec
Arch
lar Beat competitors
du
Mo 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 1980 - 1990 1990 - Present

Equipment Teradyne, Nikon, Canon, Applied Materials, Millipore, etc.

Materials Monsanto, Sumitomo Metals, Shipley, etc.

Components Intel, Micron, Quantum, Komag, etc.

Product design Compaq, Dell, Gateway, Packard Bell

Digital Equipment
Control Data

Assembly Compaq Contract assemblers

IBM

Operating system Microsoft

Microsoft
Applications software Word Perfect, Lotus, Borland, etc.

Sales & distribution CompUSA Dell

Field service Independent contractors

Copyright 2003 Clayton M. Christensen.

 Disruptive Innovation and Creating New Market Growth | 15

Beat competitors with asymmetry of motivation

% of tons
2530%
Steel Quality

55%
Sheet steel

18% 22%
l
Structural Stee
l
stee 8%
uced iron; bars & rods
prod 12% Angle
l -
mil 4%
ni Rebar
f mi
lityo 7%
ua
Q

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
Retailing is
addresses speed
undifferentiable and convenience
is attractive
$
$ Performance Functionality
Design & Design &
assembly of assembly of
proprietary modular
products is systems is
highly profitable. Speed & responsiveness commoditized.
$ Time

$
Performance-
Components are
defining
undifferentiable
subsystems are
commodities 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, less-

wealthy 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

Tertiary

Ambiguous

Deep
hospital

Scientific understanding,

Skill required to follow the rules

built upon the ability to diagnose
General
Hospital unambiguously, shifts the method used
to diagnose and treat disorders from
Clarity of the rules

an unstructured, experimental
Outpatient problem-solving process, towards
Clinic a rules-based regime.

Office
Simple

Little

Home Simple Clarity of the rules Ambiguous

Little Skill required to follow the rules Deep

Family
Sick child Parent Nurse Specialist
doctor
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 Processes Values

People Hiring & Training The criteria by which

prioritization decisions
Technology Product are made
development
Products
Manufacturing Ethics
Equipment
Planning & Cost structure/
Information income statement
Budgeting
Cash Size of opportunity
Market Research
Brand
Resource
Distribution allocation

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 Im
strategy wh prove
at w d u
ork nde
s an rsta
d w ndin
hat g
doe of
sn
t

Strategic Actions:
The Resource Actual
New products,
Organizations
allocation
process services, Strategy
values processes,
acquisitions

unities
rt
o ppo cesses
cipated d suc
nti s an
Emergent Una blem
strategy pro

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

12,000
J&J
Annual Professional
10,000 Division
Sales
($ millions)
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

CAGR
12,000
Annual
10.3%
Sales 10,000
Total
($ millions)

8,000

Normalized*(1)
3.7%
6,000 2.9% Absolute*
40.9% 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

p itals
Hos
e ral
Complexity Ge
n ilities
of diagnosis t F ac
at ien
and
ut -p are
treatment O c
ffice
o
In -
e
e car
- hom
In
Simple

Copyright 2003 Clayton M. Christensen.

 Disruptive Innovation and Creating New Market Growth | 25

Disruptions amongst healthcare professionals

icians
Complex s
phy
list
cia
b - spe
t & su
ecialis sicians Performance
Sp
re phy that the
n al ca marketplace
Complexity
/ p erso needs or
of diagnosis am ily
F utilizes
and ers
io n
treatment
p ractit
e
Nurs
lf - care
Se

Simple
Time

Copyright 2003 Clayton M. Christensen.