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Disruptive Innovation: Creating and Capturing New

Growth

Rory McDonald

Harvard Business School

Lessons from Business History

Across diverse industries, leading companies failed to stay atop their markets

Common explanations

Managerial incompetence

Technological complexity

(Source: Christensen & Raynor, 2003)

7%

12%

18% S

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lity

1980 1975 1985 1990

25–30%

1995

Disruptive Innovation (1)

Pace of technological progress outstrips markets’ demand for higher-performing technologies

Firms can over-serve the market by producing more advanced, feature-

rich products than customers need—leaving a gap at lower tiers of the

market

Disruptive Innovation (2)

Sustaining innovations: improve products and services along dimensions of performance that mainstream customers care about

Disruptive innovations: are initially inferior on the historic performance

dimensions, but offer a novel mix of attributes that appeal to fringe

customers

Disruptive Innovation (3)

Existing customers and established profit models constrain firms’ investments in new innovations

Incumbents are typically not motivated to pursue disruptive innovations

that promise lower margins and target smaller markets

Pe

rfo

rman

ce

Time

Disruptive

innovations

Incumbents nearly always win

Entrants nearly always win

Disruptive Innovation Model

(Source: Christensen, Raynor, McDonald 2015)

Example: Video Rental Industry (late 1990’s)

Market leader: Blockbuster

Movie rentals were impulse decisions (“movie night”)

70% of U.S. population lives within 10 minute drive

Experiencing dramatic growth, record profits (2002)

Example: Video Rental Industry (late 1990’s)

Launched home delivery of DVDs through the mail

Website: search engine, queue of movies

3-5 days to get your movie

Not valued by mainstream customers, but appealed to some fringe

customer groups

Example: Video Rental Industry (late 1990’s)

By honing operations over time, they improved rapidly. 90% of subscribers reached within 1 day

Offered convenience, value, and selection

Comparison of Business Models

Blockbuster

5,000 stores

New releases (70%)

Local inventory

Late fees (10-15%)

Netflix

No stores

New releases (30%)

National inventory

No late fees

Blockbuster’s fate

Types of Disruptions

Low-end disruptions come in at the bottom of the market and take hold within an existing value network before moving up-market and attacking

incumbents

Incumbents retreat

Types of Disruptions

New market disruptions take hold in a completely new value network and they compete against non-consumption

Incumbents ignore

Example:

Godrej: Business group faced a shrinking share of refrigerator market due to

foreign appliance makers

Decision:

1. Aggressively compete in conventional market

2. Innovation aimed at unserved customer segment

Built a low-cost refrigerator for bottom-of-the-market

“Instead of competing with global powerhouses for the 15% of the market that

purchased refrigerators, Godrej decided to go for the 85% that did not.”

Example:

Looked at drivers of non-consumption—problem consumers couldn’t address

Rural Indian households couldn’t store food, so they had to buy daily (time

consuming, expensive)

Intermittent electricity rules out normal refrigerator

Godrej developed a “good enough” solution: chotuKool portable fridge,

which had a low price, operated on battery power, and used post offices as a

sales channel / new distribution chain.

Example:

Won five global innovation awards

At $69, chotuKool was 1/3 the price of Godrej's least expensive refrigerator

Result of a unique innovation strategy guided by new market disruption

Video Game Industry

(Source: Anthony, 2008)

Health Care

Accounting Services

Word Processing

Looking into the future

Looking into the future

Software-based financial advisor

New market disruption serving those who can’t afford the high minimums of

traditional financial advisors

Appeals to fringe customers

Looking into the future

Sharing service that allows people to rent out lodging

Started out offering short-term living quarters for people who couldn’t afford a

hotel (or couldn’t book one)

Now has 2M listings in 192 countries

Looking into the future

“Elite business schools still look like a fair deal. Few expect the luster of an MBA

from Harvard, Wharton, or Stanford to fade…Schools with names that send a less

sexy signal, though, may be in trouble.”

“Is time running out for business schools that aren’t quite elite?” -The Economist (2011)

Other challenges of innovation

“Listen to your customers”

“Understand your customers”

An alternative approach: Jobs-to-be-done

In many industries, the products and services are built around customer attributes and characteristics

For business customers, it is corporate demographics (i.e. industry verticals,

customer size etc.)

But what causes us to buy a product is that we have jobs that arise in our lives that we need to get done

When customers have a job-to-be-done, they hire a product to do it for

them

An alternative approach: Jobs-to-be-done

(Source: Christensen, 2011)

Problem: Increase sales of milkshakes

Company had sophisticated demographic profiles of the customers that bought each product

Quintessential milkshake customer

A job arises in people’s lives on occasion that causes them to hire a milkshake from McDonald’s

What’s the job?

What time did he buy the milkshake?

What was he wearing?

Did he buy other food with it or just the milkshake?

Was he alone or with other people?

Did he eat it in the restaurant or get in the car and leave?

“Think about the last time you were in the same situation and needed to get the same job done, but you didn’t come here to hire a milkshake.

What did you hire instead?”

“Think about the last time you were in the same situation and needed to get the same job done, but you didn’t come here to hire a milkshake.

What did you hire instead?”

(Source: Christensen, 2011)

Job

Need something to do

during a long, boring

commute

Milkshake

Viscous

Staves off hunger

Convenient

Implications

1. Competition

2. Product improvement and differentiation

Implications

1. Competitors are not Burger King milkshakes

2. Must improve product on dimensions of performance that are relevant to the job-to-be-done

Implications

3. One reason why promising technologies often fail

Don’t help customers do a job they need to get done

Implications

Before digital photography

People had the best intentions to arrange photos in albums, but most were

viewed once and put a shoebox

But most people would ask for double prints so they could mail the best photos

to a family member

Implications

When digital cameras were adopted

Consumers changed their behavior but not the fundamental job they wanted

from the photos

Still share with friends/family, but now through email

Despite all the systems for online photo albums

Dominant consumer behavior is to share via email/phone

Albums didn’t do very well – tried to perform a job that most consumers weren’t

trying to do

Trying new things is hard

An anthropologist once visited a remote tribe. She observed that each morning,

before sunrise, members of the tribe sacrificed a goat in order to make the sun rise.

Since the tribe was poor, the anthropologist believed that this was a wasteful

practice. As a result, the anthropologist proposed that they should avoid sacrificing a

goat for one day, to see if the sun would nevertheless rise.

And there are many barriers to innovation

In response, the locals looked at her and said, gravely,

“In these matters one cannot afford to experiment.”