1 The Panda’s Thumb in Health Care Clayton Christensen Harvard Business School
1
The Panda’s Thumb in Health Care Clayton Christensen Harvard Business School
6/21/2013 Copyright Clayton M. Christensen 2
Decentralization is disruptive, and is hard to catch
Perf
orm
ance
Time
40% 20% on $2,000
Time
Incumbents dominate sustaining battles
Entrants typically win at disruption
45% on $250,000
60% on $500,000
Surg
ical
su
ites
High-speed multi-channel
testers
Imaging: MRI, CT, PET Scanners
Specialist physicians
Personal physicians
Nurse practitioners
Pharmacists
Clinics
Offices
Homes
The decentralization that follows centralization is only beginning in healthcare
1. Bring the problem to the solution. 2. Then bring the solution to the problem.
Retail Clinics
Family care
Probabilistic pattern
recognition Rules-based
Intuitive, trial-and-error
problem- solving
Synthetic fibers: Nylon Polyester Acetate Kevlar
Infectious diseases; Cervical
cancer
Bipolar disorder; Seizures asthma
Scientific progress that commoditizes expertise plays a critical role in disruption
Empirical medicine
(Evidence-based medicine)
Precision medicine
(Personalized medicine)
Intuitive medicine
(symptoms < diseases)
Shouldice Hospital: Hernia surgery
Dave Snow, asthma CEO, Medco
National Jewish Medical Center Pulmonary & Respiratory Diseases
Typical hospitals are not
complicated. They are
impossible.
Fee For service
• Consulting firms • R&D organizations • Diagnostic & intuitive activities of hospitals
solution shops
Fee For outcome
• Manufacturing • Education •Construction • Medical procedures
process Businesses
• Telecommunications • Insurance • EBay • D-Life; Crohns.org
Facilitated networks
Fee For memBership
© 2007 Innosight LLC 6
Market Understanding that Mirrors how Customers Experience Life
“The customer rarely buys what the company thinks it is selling him.” - Peter Drucker
I need to get this to there as fast as possible,
with perfect certainty.
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7
Horseman & chariot
Telegraph, railroad
Airplane
FedEx
Four levels in the architecture of a job
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What’s the job-to-be-done? (Each job has functional, emotional & social dimensions)
What experiences in purchase & use must we provide to do the job perfectly?
What and how to integrate?
Purpose Brand
Integrating correctly to get the job done means:
• IKEA • TurboTax;
QuickBooks • Whole Foods • Disney • Zara • NxStage • OnStar • i-Tunes
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• Jobs are very stable over long periods; they are not vulnerable to product life cycles
• Whereas products are easy to copy, integration around a job creates defensible differentiation.
• Customers are happy to pay a profitable price, instead of a zero-sum relationship.
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The advantage of focuing on a job-to-be-done.
New York
Times
AutoTrader.com R
ealtor.com
Met
ro
Bloomberg
Buy or sell stuff.
Buy or sell a car. Find a job
or fill a job
Sell or buy a home
Keep me productive while I wait
Keep me deeply
informed Up-to-date business
news
Help me unwind
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Focusing on a job creates:
• More growth • Enduring
differentiation • Few customers from
customers’ perspective • Stability: No product
life cycle
Inte
grat
e Ex
perie
nces
Jo
b
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When two business models predictably converge into one
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When one business model predictably will diverge into two
Business models for adherence in chronic care
Degree to which behavior change is required Minimal Extensive
Mot
ivat
ion
to
adhe
re to
ther
apy
Strong: quickly feel
consequences
Weak: Complications
are deferred
Type I Diabetes
Addictions Type II Diabetes
Asthma
Congestive heart failure
Obesity Hypertension
Osteoporosis
Cancer HIV
Myopia Crohn’s disease
Chronic back pain
Ulcerative colitis
Infertility
Business models for ongoing care
Degree to which behavior change is required Minimal Extensive
Mot
ivat
ion
to
adhe
re to
ther
apy
Strong: quickly feel
consequences
Weak: Complications
are deferred
Type I diabetes
Addictions Type II diabetes
Asthma
Congestive heart failure
Obesity Hypertension
Osteoporosis
Cancer HIV
Myopia Crohn’s disease
Chronic back pain
Ulcerative colitis
Infertility
Doctor’s office User Networks
Employer- Managed Care
with HSAs
Pharmacy- based care
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Apprenticeship
Tradition
Salesmanship
Decapitation
Religion
Broad consensus
No consensus
Extent to which there is pre-existing consensus about what actions will lead to the needed results
No consensus Broad consensus
Power Tools
Management Tools
Leadership Tools
Culture Tools
Measurement Systems
Training
Standard operating procedures
Strategic planning
Financial incentives
Negotiation
Exte
nt to
whi
ch th
ere
is
Con
sens
us o
n w
hat w
e w
ant
Rituals
Democracy
Folklore Religion
Vision Charisma
Role modeling
Salesmanship
Coercion
Fiat Threats
Role definition
Control Systems
Decapitation
The Tools of Cooperation
PROCESSES:
Ways of working together to address recurrent tasks in a
consistent way: training, development, manufacturing,
budgeting, planning, etc.
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What is a business model, and how is it built?
PROFIT FORMULA:
Assets & fixed cost structure, and the margins & velocity
required to cover them
THE VALUE PROPOSITION:
A product that helps customers do more effectively, conveniently & affordably a job they’ve been trying to do
RESOURCES:
People, technology, products, facilities, equipment, brands, and cash that are required to deliver this value proposition
to the targeted customers
Agenda
6/21/2013 Copyright Clayton M. Christensen 18
Per
form
ance
Time
Pocket radios
Portable TVs
Diff
eren
t mea
sure
O
f Per
form
ance
Time
Hearing Aids
Tabletop Radios, Floor-standing TVs
Path taken for transistors by vacuum tube manufacturers
The customers are enticed into the new system, not vice versa.
The metric of performance changes
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Time
perf
orm
ance
Pell Grants Student Loans
Pell Grants
Student Loans
As tuition has soared – it now averages of $28,500 a year, including fees, at private
schools – student-loan debt has exploded.
"What a Drag" Barron's April 16, 2012
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Original Technology Pure-play deployed against non-consumption
Hybrid when deployed as a sustaining technology
against consumption
A Theory of Hybrids
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A Theory of Hybrids
Perf
orm
ance
Time
Time Peapod: Are there customers that would love a car that won’t go far, and won’t go fast?
Competing on cost, design, reliability, and
performance on the California Freeway
Tesla $100,000
Prius Hybrid
The Church of New Finance
6/21/2013 Copyright Clayton M. Christensen 24
The high priests: business professors; partners in private
equity, venture and hedge funds
I. Return on net
assets (RONA) II.
Economic Value-added (EVA)
III. Gross Margin %
IV. Internal Rate of
Return (IRR)
V. Earnings per share (EPS)
VI. Return on Capital Employed (ROCE)
VII. Marginal Revenue /
marginal cost VIII.
Thou shalt be data-driven and fact-based.
Efficiency Innovations
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The economic engine
Empowering (Disruptive) innovations
Jobs
Capital
Empowering
Creates
Uses
Sustaining
Neutral
Neutral
Eliminates
Creates
Efficiency
Perf
orm
ance
Time
Time
Sustaining innovations
7%
12%
18%
Stee
l Qua
lity
1980 1975 1985 1990
25–30%
Efficient Innovations
Rules in writing vs. rules in use
• Four rules in use in design and manufacturing at Toyota
• Org. Chart in use at Apple • Financial rules in use
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© 2007 Innosight LLC 28
7%
4% 12%
8%
18% 22%
% of tons
Ste
el Q
ualit
y
1980 1975 1985 1990
25–30% 55%
Evaluating investments on marginal rather than full costs biases incumbent leaders to leverage what they have, instead of building what they need
$350 285 65
Minimill $350
15 335
Marginal $350 340 10
Existing Price Cost Net
Present cash flows: The typically assumed
base case of doing nothing
Foreseen cash flows from investing in an innovation
DCF and NPV methodologies implicitly make
this contrast
Time
Mag
nitu
de o
f cas
h flo
ws
The common methods of financial analysis systematically bias managers against innovation
Returns from innovation realistically must be contrasted to the deteriorating stream of cash
likely to result from doing nothing
+
-
Outsourcing often sets in motion disruptive business model liquidation
Mother boards
Computer assembly
Supply chain & logistics
Product design
Brand
Dell AsusTek
Simple circuit boards
Mother boards
Computer assembly
Supply chain & logistics
Product design
Brand
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Wall Street Analysts
Pharmaceutical Cos.
Petroleum Majors
Auto companies
IT departments
Customer Supplier
Bloomberg
CROs.
Halliburton, Schlumberger
Tier One Suppliers
TCS, Infosys, Wipro
Outsourcing often sets in motion disruptive business model liquidation
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The right product architecture depends upon the basis of competition
Perf
orm
ance
Time
Compete by improving functionality &
reliability
Compete by improving speed, responsiveness and customization
Dell PCs, Linux
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Integrating forward to the decoupling point
Heads & Disks
Disk Drives Computers Applications
Software Service
Heads & Disks
Disk Drives Computers Applications
Software Service
Heads & Disks
Disk Drives Computers Applications
Software Service
Heads & Disks
Disk Drives Computers Applications
Software Service
Heads & Disks
Disk Drives Computers Applications
Software Service
Changes in product architecture have profoundly changed the architecture of the computer industry
Equipment
Materials
Components
Product design & assembly Operating system & applications software
Sales & distribution
Field service
1960 - 1980
IBM
Con
trol D
ata
Dig
ital E
quip
men
t
---------- 1990 – Present -------
Intel, Komag, etc.
Dell, HP, Quanta, Acer
Best Buy
Geek Squad
Microsoft
Monsanto, Sumitomo Metals, Komatsu, Shipley, etc.
Teradyne, Nikon, Canon, Applied Materials, Millipore, etc.
App
le C
ompu
ter
6/21/2013 34 Copyright Clayton M. Christensen
© 2007 Innosight LLC 35
Copy features
Add features
The law of conservation of attractive profits
Commoditization thru modularity, over-shooting
De-Commoditization: services & products that make use of the product more effective
De-Commoditization: sub-systems that drive the performance of the modular product
6/21/2013 Copyright Clayton M. Christensen
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So what should the Harvard Business School Do?
Implications of the Law of Conservation of Modularity on where the money will be
Modular: unattractive profitability
Interdependent: attractive
profitability
Modular: unattractive profitability
Interdependent: attractive
profitability
Modular: unattractive profitability
Desktop computer Microprocessor Fab Mfg. Equipment Components
Modular: unattractive profitability
Interdependent: attractive
profitability
Modular: unattractive profitability
Interdependent: attractive
profitability
Interdependent: attractive
profitability
Hand-held devices System-on-chip Fab Mfg. Equipment Eqpt. Subsystems
Reusable “silicon IP;” Design tools
Corolla Camry Avalon
4-Runner
Tundra
Toyota
Tacoma
Sienna
Cobalt Malibu Impala
Trailblazer
Colorado Avalanche
Uplander
Chevrolet
6/21/2013 Copyright Clayton M. Christensen 38
Focus on product categories leads to feature proliferation and undifferentiable products
Corolla
Camry
Avalon
4-Runner
Tundra
Toyota
Tacoma
Focus on a job defines the correct mode of proprietary integration
6/21/2013 Copyright Clayton M. Christensen 39
Avalon
Full-
size
Sub-
com
pact
Com
pact
Mid
-siz
e
Min
ivan
SUV
Ligh
t tru
ck
Full-
size
truc
k
Big-screen Blackberry; hands-free phone; automatic expense-reporting system;
CRM software; laptop docking station, swing-out keyboard; fold-out desk; 3G
access; Peltier box; storage systems
Purpose Brand: “My car is my office”
Different kind of dealers
The Resource Allocation Process: Decisions about what gets resources: what
to do & what not to do
Intended Strategy: Analytical project
followed by implementation
Emergent Initiatives Responses to
unforeseen opportunities and problems
Stream of new products, services,
processes and acquisitions
Actual strategy that is implemented
Processes of Strategy Formulation and Implementation
Priorities embedded in company’s
profit model
Discovery-Driven Planning is a better way to manage the flow of projects through the development funnel
Platform-based planning
1. Make Assumptions
2. Build projections based upon assumptions
3. Make decisions to invest based upon projections
4. Implement the deliberate strategy
Discovery-driven planning
1. Make Projections
2. What assumptions must prove true for the projections
to happen?
3. Implement a plan to learn -- to test whether the critical assumptions are reasonable
4. Move to the next stage when key assumptions prove
valid 6/21/2013 41 Copyright Clayton M. Christensen
The poor performance in many corporate incubators is rooted in the planning and budgeting process.
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Laptops
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The general process of becoming affordable and accessible
Mainframe
Minicomputers
Smartphones
Desktops
Slide rule
Surg
ical
su
ites
High-speed multi-channel
testers
Imaging: MRI, CT, PET Scanners
Specialist physicians
Personal physicians
Nurse practitioners
Pharmacists
Clinics
Offices
Homes
The decentralization that follows centralization is only beginning in healthcare
1. Bring the problem to the solution. 2. Then bring the solution to the problem.
Retail Clinics
Family care
How future universities might be built
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Unit of accreditation: the institution
Unit of accreditation:
the course
A different type of university
Standards: thru course acceptance
How marketing drives innovation off the rails
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Organization around products and components:
Irrelevant innovation
Focus on customer: Commoditization
The same job needs to be done
The job to be done
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The interaction between the ability to improve products, and the ability of customers to use them
Perf
orm
ance
Time
Abi
lity
to u
tiliz
e im
prov
emen
t
Per
form
ance
Time
Pocket radios
Portable TVs
Diff
eren
t mea
sure
O
f Per
form
ance
Time
Hearing Aids
Tabletop Radios, Floor-standing TVs
Path taken for transistors by vacuum tube manufacturers
The customers are enticed into the new system, not vice versa.
The metric of performance changes
6/21/2013 Copyright Clayton M. Christensen 48
Disruption breaks the trade-offs.
Higher quality and lower costs
Trade-offs are binding: Higher quality requires
higher costs
Better care for individuals; better health for
populations; lower per-capita
costs
TPS – IHI system
Standards to unsure that
technologies are not over-used
Empirical / evidence-based medicine (Brent
James) Employed
vs. affiliate; hospital own
vs. tenant
Insurance embedded
into the provision of
care
Disruption of venues of care and
providers of care
Value-adduing process eqpt.
FDA / Regulatory
change
Care of the elderly: nursing homes, hospice,
etc.
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Over time, the organizational structure comes to mirror the established product’s architecture.
Component A
Component B
Component C
Component D
Component
E
F
Component
Group A
Group C
Group
E Group B
Group D
F Group
Product Architecture Organizational Structure & Interaction Patterns
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Proper team structure is crucial in every project
Business model in which product is used
Product architecture: What are the components, and which ones interface with others?
Change the specifications for how components must fit together
Improve performance of each component
Business model in which process is used
Process architecture: What are the steps in the process, and what is their sequence?
How must the steps in the process interface in time and space?
Improve individual steps in the process
Product Process Team Type
Leve
l of c
hang
e
VP VP VP VP Autonomous
VP VP VP VP Heavyweight
VP VP VP VP
Lightweight
VP VP VP VP Functional
We’ll do anything for
anybody.
•Overhead = 85% of total
•Overhead increases 30% for each doubling of complexity
•Variable quality
6/21/2013 Copyright Clayton M. Christensen 52 Po
lishi
ng D
ept.
Annealing furnace
Turning machines
Tapping equipment
De-burring
Cut
-off
saw
s
Shipping Department Office area Storage
Hobbing department
Boring machines
Stamping machines
Assembly