Disruptive Innovation

Innovator’s SolutionInnovator’s Solution

Clayton ChristensenClayton Christensen

Imperative DilemmaImperative Dilemma

► Investors’ require to growInvestors’ require to grow►But innovation that can satisfy But innovation that can satisfy

investors’ demand for growth require investors’ demand for growth require taking risks unacceptable to investorstaking risks unacceptable to investors

►We need to know We need to know how to growhow to grow

Disruptive Innovation ModelDisruptive Innovation Model

►Disruptive Innovation ModelDisruptive Innovation Model►3-D Disruptive Innovation Model3-D Disruptive Innovation Model►Shaping ideas to become disruptiveShaping ideas to become disruptive


A

B


► Customer’s performance acceptance levelCustomer’s performance acceptance level► Steeper company’s ability to make Steeper company’s ability to make

technology progresstechnology progress Thus, after Point A, overshootThus, after Point A, overshoot

► Distinction between sustaining and Distinction between sustaining and disruptive innovation – moving to lower disruptive innovation – moving to lower parallel lineparallel line B – outstrip pointB – outstrip point Low-end disruptionLow-end disruption

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3-D Disruptive Innovation 3-D Disruptive Innovation ModelModel

3-D Disruptive Innovation 3-D Disruptive Innovation ModelModel

►The third dimension: new value The third dimension: new value network for previous non-consumers – network for previous non-consumers – similar to BOSsimilar to BOS New-market disruptionNew-market disruption

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Shaping ideas to become Shaping ideas to become disruptivedisruptive

Three litmus testsThree litmus tests►Explore whether the idea can becExplore whether the idea can bec

ome a new market disruptionome a new market disruption►Explores the potential for a low-eExplores the potential for a low-e

nd disruptionnd disruption►Is the innovation disruptive to all Is the innovation disruptive to all

of the significant incumbent firmsof the significant incumbent firms in the industry? in the industry?

Test 1Test 1

Is there a large population of people Is there a large population of people who historically have not had the who historically have not had the money, equipment, or skill to do this money, equipment, or skill to do this thing for themselves, and as a result thing for themselves, and as a result have gone without it altogether or have gone without it altogether or have needed to pay someone with have needed to pay someone with more expertise to do it for them?more expertise to do it for them?ReturnReturn

Test 2Test 2

Are there customers at the low end of Are there customers at the low end of the market who would be happy to the market who would be happy to purchase a product with less (but good purchase a product with less (but good enough) performance if they could get enough) performance if they could get it at a lower price? Can we create a it at a lower price? Can we create a business model that enables us to earn business model that enables us to earn attractive profits at the discount prices attractive profits at the discount prices required to win the business of these required to win the business of these over-served customers at the low end?over-served customers at the low end?ReturnReturn

Test 3Test 3

Is the innovation disruptive to Is the innovation disruptive to all of the all of the significant incumbent significant incumbent firms in the firms in the industry? If it appears to be sustaining industry? If it appears to be sustaining to one or more significant players in the to one or more significant players in the industry, then the odds will be stacked industry, then the odds will be stacked in that firm’s favor, and the entrant is in that firm’s favor, and the entrant is unlikely to win.unlikely to win.

Competing Against Non-Competing Against Non-consumptionconsumption

►Why Competing Against Non-Why Competing Against Non-consumption So Hard?consumption So Hard?

►What Makes Competing Against Non-What Makes Competing Against Non-consumption So Hard?consumption So Hard?

►How to Avoid Hard Non-Consumption How to Avoid Hard Non-Consumption CompetitionCompetition

Why Competing Against Non-Why Competing Against Non-consumption So Hard?consumption So Hard?

►The logic of competing against non-consumption as the means for creating new-growth markets seems obvious.

►Despite this, established companies repeatedly do just the opposite.

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What Makes Competing Against What Makes Competing Against Non-consumption So Hard?Non-consumption So Hard?

►Not see disruption coming in. Even if,Not see disruption coming in. Even if,►Threat rigidity - Threat elicits more Threat rigidity - Threat elicits more

intense and energetic response than intense and energetic response than opportunity, and then focus on opportunity, and then focus on countering the threat to survive.countering the threat to survive.

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How to Avoid Hard Non-How to Avoid Hard Non-Consumption CompetitionConsumption Competition

►First, get top-level commitment by First, get top-level commitment by framing an innovation as a threat framing an innovation as a threat during the resource allocation process. during the resource allocation process.

ex. Newspapers embraced online ex. Newspapers embraced online editions to give existing customers editions to give existing customers additional choiceadditional choice


►Later, shift responsibility for the Later, shift responsibility for the project to an autonomous organization project to an autonomous organization that can frame it as an opportunity.that can frame it as an opportunity.

ex. Place the responsibility to ex. Place the responsibility to commercialize the disruption in an commercialize the disruption in an independent unit for which the independent unit for which the innovation represents pure innovation represents pure opportunity – newpaper’s online groupopportunity – newpaper’s online group


• This is incumbent’s problem, not for This is incumbent’s problem, not for new entrant.new entrant.

• This take care of both commitment This take care of both commitment and flexibility.and flexibility.

Getting the Scope of Business Getting the Scope of Business RightRight

Integration or Outsourcing?Integration or Outsourcing? Circumstance and production designCircumstance and production design Production architecture and Production architecture and

integrationintegration Innovation StrategyInnovation Strategy PC industry as innovation strategy PC industry as innovation strategy

exampleexample

Integration or Outsourcing?Integration or Outsourcing? Which activities should a new-growth venture

do internally in order to be as successful as possible as fast as possible, and which should it outsource to a supplier or a partner?

Will success be best built around a proprietary product architecture, or should the venture embrace modular, open industry standards?

What causes the evolution from closed and proprietary product architectures to open ones?

Might companies need to adopt proprietary solutions again, once open standards have emerged?

Core Competence?Core Competence?

If something fits your core competence, you should do it inside?

NO!NO! Ex., IBM outsourcing microprocessors Ex., IBM outsourcing microprocessors

and operating systems was a and operating systems was a mistake.mistake.

Answer relied on: Circumstance-Answer relied on: Circumstance-Based versus Production DesignBased versus Production Design

Circumstance BasedCircumstance Based

Integration or outsourcing decision Integration or outsourcing decision based on products good enough or based on products good enough or not good enoughnot good enough

Production DesignProduction Design

InterdependenceInterdependence One part cannot be created without the One part cannot be created without the

other.other. Optimize performance in functionality Optimize performance in functionality

and reliabilityand reliability ProprietaryProprietary

ModularityModularity Optimize flexibilityOptimize flexibility Sacrifice performance due to rigid designSacrifice performance due to rigid design

Production Architecture and Production Architecture and IntegrationIntegration

A

B

Innovation StrategyInnovation Strategy

Before Point A: Before Point A: Interdependence architectureInterdependence architecture Goal: improve performance Goal: improve performance

After Point A: After Point A: Overshooting, Commoditization pointOvershooting, Commoditization point Goal: speed, convenience, Goal: speed, convenience,

customization, etc.customization, etc.

Innovation StrategyInnovation Strategy

Between A & B:Between A & B: Either approach OKEither approach OK With interdependence: performance over-satisfiedWith interdependence: performance over-satisfied With modularity: performance not satisfied but With modularity: performance not satisfied but

other factors areother factors are After B:After B:

Should take Modularity approachShould take Modularity approach Performance and other factors all satisfiedPerformance and other factors all satisfied

Once mature, back to interdependence Once mature, back to interdependence approachapproach

Innovation Strategy ExampleInnovation Strategy Example

IBM interdependence design – IBM interdependence design – dominate mainframedominate mainframe

After 1964, System 360 to respond to After 1964, System 360 to respond to non-performance demandnon-performance demand modularity allowed custom-configurationmodularity allowed custom-configuration Birth of mini-computer – disruption from Birth of mini-computer – disruption from

mainframe!mainframe! Then, DEC dominated with integration Then, DEC dominated with integration

design – better performancedesign – better performance

The Transition from Vertical Integration to The Transition from Vertical Integration to Horizontal Stratification inHorizontal Stratification in

the Microprocessor-Based Computer Industrythe Microprocessor-Based Computer Industry

How to Avoid How to Avoid CommoditizationCommoditization

• Process of commoditizationProcess of commoditization

• Process of de-commoditizationProcess of de-commoditization

Process of Commoditization Process of Commoditization 11

As a new market coalesces, a company develops a proprietary product that, while not good enough, comes closer to satisfying customers’ needs than any of its competitors. It does this through a proprietary architecture, and earns attractive profit margins.

Process of Commoditization Process of Commoditization 22

As the company strives to keep ahead of its direct competitors, it eventually overshoots the functionality and reliability that customers in lower tiers of the market can utilize.

Process of Commoditization 3, Process of Commoditization 3, 4 & 54 & 5

This precipitates a change in the basis of competition in those tiers, which . . .

. . . precipitates an evolution toward modular architectures, which . . .

. . . facilitates the dis-integration of the industry, which in turn . . .

Process of Commoditization Process of Commoditization 66. . . makes it very difficult to differentiate the performance or costs of the product versus those of competitors, who have access to the same components and assemble according to the same standards. This condition begins at the bottom of the market, where functional overshoot occurs first, and then moves up inexorably to affect the higher tiers.

Process of De-Commoditization Process of De-Commoditization 11

The low-cost strategy of modular product assemblers is only viable as long as they are competing against higher-cost opponents. This means that as soon as they drive the high-cost suppliers of proprietary products out of a tier of the market, they must move up-market to take them on again in order to continue to earn attractive profits.


Because the mechanisms that constrain or determine how rapidly they can move up-market are the performance-defining subsystems, these elements become not good enough and are flipped to the left side of the disruption diagram.


Competition among subsystem suppliers causes their engineers to devise designs that are increasingly proprietary and interdependent. They must do this as they strive to enable their customers to deliver better performance in their end-use products than the customers could if they used competitors’ subsystems.


The leading providers of these subsystems therefore find themselves selling differentiated, proprietary products with attractive profitability.


This creation of a profitable, proprietary product is the beginning, of course, of the next cycle of commoditization and de-commoditization.

Death Spiral of Core Death Spiral of Core CompetenceCompetence

• When facing commoditization, When facing commoditization, companies may still insist their core companies may still insist their core competence. They then miss the competence. They then miss the opportunity to go up-market.opportunity to go up-market.

• Likewise, if they insist on Likewise, if they insist on performance optimization, they miss performance optimization, they miss disruption.disruption.

Death Spiral of ROA Death Spiral of ROA MaximizingMaximizing

Due to the low premium in modular Due to the low premium in modular competition base,competition base,

• Increasing the numerator of ROA is Increasing the numerator of ROA is nearly impossible, andnearly impossible, and

• Decreasing the denominator will Decreasing the denominator will facilitate dis-integration.facilitate dis-integration.– It can shrink the asset where they might It can shrink the asset where they might

need to move up to interdependence need to move up to interdependence strategy, orstrategy, or

– It can result in better profitability for later It can result in better profitability for later on integration.on integration.

Capability of Disruptive Capability of Disruptive GrowthGrowth

►Reasons innovation failsReasons innovation fails►Right organization structure for Right organization structure for

sustaining and disruptive growthsustaining and disruptive growth

Why Innovation failsWhy Innovation fails

►Not because of some fatal technological flaw or because the market isn’t ready

►They fail because responsibility to build these businesses is given to managers or organizations whose capabilities aren’t up to the task.

►An organization’s capabilities become its disabilities when disruption is afoot.

Factors affecting structure Factors affecting structure choicechoice

► Organization’s processes vs. development Organization’s processes vs. development teamteam Heavyweight teamHeavyweight team Lightweight teamLightweight team Functional organizationFunctional organization

► Organization’s value vs. responsible Organization’s value vs. responsible commercial structurecommercial structure Autonomous organizationAutonomous organization Mainstream organizationMainstream organization

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Heavyweight TeamHeavyweight Team

A group of people who are pulled out of their functional organizations and placed in a team structure that allows them to interact over different issues at a different pace and with different organizational groups than they habitually could across the boundaries of functional organizations – to change processes.Return

Organization’s ValueOrganization’s Value

standards by which employees make prioritization decisionsReturn

Autonomous OrganizationAutonomous Organization

►New growth opportunity in non-New growth opportunity in non-consumption market – disruptive consumption market – disruptive opportunityopportunity

►Autonomous organization shares Autonomous organization shares different valuedifferent value

►Opportunity, not threatOpportunity, not threat

A Framework for A Framework for Finding the Right Organizational Structure and Finding the Right Organizational Structure and

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