A quick deck I threw together on Disruption for a Fortune 500. Creating a shared language around disruption.

1. Disruptive innovation: Opportunity and Barriers
Enabling disruption within existing businesses
July, 2012

2. Who we are…
The Forum for Growth and Innovation
The Forum for Growth and Innovation is a research initiative funded by the Harvard Business School and guided
by Professor Clayton Christensen, the Kim B. Clark Professor of Business Administration and one of the world‟s
top experts on growth and innovation. The goal of the Forum is to discover, develop and disseminate
robust, accessible theory in the areas of innovation and general management. In pursuit of this goal, the Forum
both hosts conferences to bring together academic experts and leading practitioners to develop current ideas
and engages in extensive publishing activities.
Each year, the Forum invites a few highly qualified MBA graduates to engage in a yearlong fellowship program.
The Fellows collaborate with Professor Christensen on theory development intended for publication in The
Harvard Business Review and in other leading business journals.
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3. Part 1: An Overview of Disruptive Innovation
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4. Executive summary
Innovation is well recognized as the key ingredient to driving investor returns
• A 2005 Deloitte and BCG study suggested that 73% of TSR was derived from revenue
growth and expected revenue growth
• Despite its importance, innovation remains a poorly understood phenomenon within
management
In fact, innovation can be best understood when it is re-categorized
• Certain innovations rely on technological change, others business model change
• Certain innovations are systematically rejected by corporations, others are embraced
Today’s discussion will focus on enabling those innovations traditionally rejected by
established corporation
• These „disruptive‟ innovations share similar qualities and can drive transformational growth
• Understanding why these innovations are rejected by most organizations is the key to
developing an organizational structure to enable these sorts of innovation
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5. The Question
How, in a world where large organizations are led by the
best trained managers, are equipped with the most
technologically advanced resources, and maintain
relationships with industry’s most valuable customers, do
startups emerge time and time again?
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6. What is a disruptive innovation?
The three characteristics of a disruptive innovation
Disruptive innovation’s three components:
1) Introduces a product or service into an industry, competing in a fundamentally
1
different manner than previous competitors
• Disruptive innovations reject the standard metrics of industry performance,
often performing far worse than incumbent products when entering markets
2) Maintains a business model or technological advantage that scales over time
2
• In addition to competing differently, disruptive innovations maintain scalable
business model advantages that allow them to compete in ways that could not
be mimicked by incumbent competitors
3) Cannot be integrated with the existing profit model of incumbent firms
3
• In the manner in which they are commercialized, disruptive innovations cannot
be integrated into the profit models of existing firms
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7. The cycle of disruption, illustrated
Product Performance
Incumbents nearly always win
Disruptors nearly always win
Time
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8. Disruptive waves tend to transform industries
Disruptive innovation Description Before After
Personal computing • In the late 1970‟s, companies arose to ~$120-160K1 ~$1.3K2
manufacture computers using
existing, modular, technical
components, thereby decreasing cost of
production
Retail health clinics • Over the past 2 decades, retail health clinics $5603 $1103
have emerged to offer basic healthcare
services w/out expensive overhead of primary
care offices
Mobile digital learning • Educational platforms being developed to 100M w/out N/A
provide access to the more than 100M children access to
that do not attend school across the globe education
Disruption brings services to more customers by
dramatically reducing costs and increasing accessibility
1) DEC VAX 11/780 Computer Specifications. ed-thelen.org/comp-hist/vax-11-750. Accessed 6/15/2012
2) The Encyclopedia of Consoles, Handhelds, & Home Computers, pg. 19 the forum for growth and innovation 7
3) Comparing Costs and Quality of Care at Retail Clinics… Annals of Internal Medicine, Sept 2009, pg. 324

9. Disruption is not equivalent to new technology
Categorization of tech innovation Categorization of competitive innovation
Incremental improvements to existing Innovations that integrate with the profit
technologies models of incumbent firms
Continuous
Sustaining
Integrate seamlessly with legacy formats Can be derived from either continuous or
discontinuous innovation
Example: Example:
• A traditional engine that generates 20% • A solar engine integrated into a Ford
more horsepower than its predecessor coupe and priced at a premium
Technological innovation that bypass the Innovations that do not integrate with profit
existing paradigm; often cited as a step- models of incumbent firms
Discontinuous
change
Disruptive
Often lower quality to existing products, but
Can or cannot integrate with legacy formats cheaper and more accessible
Example: Example:
• An solar engine that generates 20% more • An solar engine used to power a
horsepower than its gasoline predecessor cheap, around-town bicycle for city
commuters
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10. Inherent to every disruption is an “extendable core”
Disruption is not merely price competition
• Disruptive innovation‟s predictability is derived from an advantage that scales over time
• Disruptive businesses advantage will allow them to make tradeoffs unavailable to
incumbent firms
– For example, the use of standard components in the personal computer allowed
manufacturers to maintain price advantages over mini-computers even as they
approached parity on processing power
An illustration –
A lower-priced hotel chain A facilitated network
• To compete with the Four • To compete with the four
Seasons, the Best Western seasons, AirBnB would only
would have to adopt the need to sign up more affluent
competitors cost structure users
Luxury vacation rentals Low-priced vacation rentals Disruptive vacation rentals
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11. Why are disruptive innovation’s interesting?
Maximize personal Maximize return to
utility existing assets
• Inherently a • Leverage
balancing act – customers
budget constrained • Leverage existing
• Incentivized to resources
spend less on • Leverage talent
solutions to free • Secure marginal
capital Customer Value Business Interest price increases
Unconcerned with how Maximize investments
a problem is solved in additional assets
• Parity between Normally these • Devote investment
products and interests are aligned, in dollars to areas
services that solve instances of that will generate
identical problems disruption, they are not largest returns to
necessarily aligned shareholders
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12. Despite opportunity, disruptions don’t
appear appealing to incumbents
Cannibalization
• The fear of revenue cannibalization often deters managers from pursuing disruptive
opportunities
• Xerox PARC saw the opportunity for smaller, cheaper, copiers, but avoided
development to avoid revenue cannibalization – Ultimately Ricoh and Cannon entered
to capture share from Xerox
Reduced Marginal Profitability
• Many disruptive products capture lower profitability due to their reduced performance levels
• In developing the Alto, Xerox management saw a failure in a product that would not
garner the 60% margins of computing competitors such as DEC and Data General
Initially, Small in Market Scope
• Disruptive innovations tend to follow the standard adoption curve – investors must be
patient for revenue and profit growth
A key question: Disruptive to who?
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13. Nor do they appear appealing to existing buyers
Low-end disruptions apply new business models or technologies to aid in the
delivery of products in existing markets
disruption
Low-end
• E.g., Mini-mill steel producers sold commodity steel, for use in existing markets,
with a novel process to allow their entry into the low-end of the market
• Demanding customers with high willingness to pay for products are not
interested in low-end disruptions
New market disruption introduces products and services that make products
and services available to those without existing access
New-market
disruption
• E.g., Smart phones, introduced to provide computing power on the go, initially
appealed to those looking for connectivity where existing solutions didn‟t exist
• These products and services tend to underperform existing industry offerings in
such a way that they are not viewed as competitive threats at all
“If I had asked people what they wanted, they would have
said a faster horse”
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14. But disruption is predictable…
For Incumbent Firms Disruptive Firms
Retreat will look more appealing than Entrants will consider lower margin
direct competition customers appealing
• When opportunity exists to spread fixed • Lowest-end of existing markets will look
costs across higher margin customers, appealing and profitable to start-ups
retreat will look more profitable on the with no existing revenue and flexible
margin business models
&
Over time, improvements in disruptive Once growth becomes limited, profit
technologies will force competition or incentive will lead entrants to invest in
acquisition product improvement
• De-risked businesses will be expensive • If technology can be improved to satisfy
on acquisition additional players, it will be
• Rose Park Advisors studies
suggest disruptive businesses Scalable advantages will allow disruptive
consistently command P/E entrants to steal share by offering by
multiples between 20-30 offering
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15. If you do everything right, everything goes wrong
“The principles of good management – like the principles we teach
here at Harvard Business School – are exactly what lead to
success being so hard to sustain”
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16. Part 2: Overcoming the organizational challenge
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17. Developing disruptive businesses is
unnatural, but possible
Key to developing an organization capable of disruptive innovation is acknowledging the
inherent limitations of legacy businesses
• Good business practices will restrict disruptive opportunity
Leveraging disruption to achieve transformative growth requires…
• Long time horizons
• Willingness to fail
• Desire to serve new customers
• Recognition that the best ways of completing a task today will not be the best ways of
completing that task in the future
“The customer rarely buys what the company thinks it’s selling” – Peter Drucker
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18. As firms mature, they naturally shift focus from
discovery to operational excellence
A simplified product lifecycle
Revenue
Goal of developing
amassing resources
and delivering Goal of creating processes
value to customers and corporate culture
that allow the firm to
maximize profit over time
Goal of developing
an appealing
value proposition
Group Maturity
Discovery Growth Operations
focus
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19. The business model framework
RESOURCES:
THE VALUE PROPOSITION:
People, technology, products, fa
A product that helps customers cilities, equipment, brands, and
do more effectively, conveniently cash that are required to deliver
& affordably fulfill a need this value proposition to the
targeted customers
PROCESSES:
PROFIT FORMULA:
Ways of working together to
Assets & fixed cost address recurrent tasks in a
structure, and the margins & consistent way:
velocity required to cover them training, development, manufact
uring, budgeting, planning, etc.
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20. With unknown value proposition, business
model must be in flux
…must occur prior to
Cycle of entrepreneurial iteration… process codification
Process Codification
Build
Goal
Growth
Learn Measure
Value
Discovery
Entrepreneurial endeavor requires a Once understanding of value proposition is
process of learning to identify value solidified, resources can be scaled and processes
proposition and de-risk scalable product and priorities developed effectively
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21. As firms shift to operational excellence,
resources, processes, and priorities solidify
Reduction in operational risk comes from codifying processes
• Decrease individual control in product creation, leading to product predictability
• Standardization of reporting and accounting systems allows control despite growth
• Adoption of uniform production techniques leads to economies of scale
This shift is perfectly sensible at the level of the business unit
• Maximize profit given an existing product base
• Leverage existing resources most efficiently
• Listen and respond to valuable customers
However, failures to innovate arise when firms allocate resources in the same way at the
corporate level as they would otherwise allocate resources at the business unit level
• Instead, there must be a switch to enable simultaneous disruptive discovery and sustaining
operations
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22. Unfortunately, discovery is vital to renewal & growth
A simplified corporate lifecycle
Revenue
Requires ever-increasing
product development to
achieve continued
growth
Conflicting focus demands
distinct organizational
structure
Group 1 Discovery Growth Operations Maturity
Group 2 Discovery Growth Operations
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23. Resources, processes, and priorities interfere
with the ability to capture disruptive opportunity
Example Problem with… Description
Blockbuster Resources • Blockbuster‟s existing resource base – primarily
stores – made the cannibalization available through
online distribution unacceptable
Xerox PARC Priorities • Xerox‟s role out of its front office products was
ultimately abandoned, in accordance with the
prioroties of the executive team
• After inventing the personal computer, the
mouse, the graphic user interface, the laser
printer, and ethernet ports
Sonosite Processes • Sonosite almost failed under legacy leadership
• The sales processes favored high commission
products, the antithesis of the cheap handheld
sonogram
Any misalignment can cause disruptive businesses to fail
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24. Examples of everyday RPP in the way of disruptive growth
Existing manufacturing facilities
• Existing facilities often change consideration on the marginal value of investment in disruptive
Resources opportunities – decisions tend to inaccurately forecast the pace of technological change
Existing talent
• People familiar with process or technology will systematically overvalue its need in a system
Customer surveys and other feedback mechanisms
• People always want more for equivalent prices – surveys, interviews, call lines, etc. will always
Processes point out opportunities for improvement within service delivery
Scripted sales and marketing interactions
• Often these processes encourage up-selling and draw focus from disruptive products
Poorly structured corporate values systems
• Value systems often direct managers and line employees to define corporate identity based on
Priorities industry or expertise instead of
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25. Developing an organization capable of disruptive
growth requires a solution to this paradox
The Goal:
Take advantage of existing strengths without falling victim to their weaknesses
Best practices in satisfying this goal
Create RPP agnostic disruptive business units Utilize independent sales forces
• Business units must have the freedom to • Once disruptive products have been developed, it is
experiment, fail, pursue new customers, and vital to create independent sales forces with
compete with existing units interests aligned with disruptive
Assume high growth of disruptive entrants within Base product design off of more than customer
financial models requests
• Conservative assumptions often impair predictions • Look to both non-consumption and lowest value
surrounding cannibalization and value of legacy customers as sources of information
assets • Distill job-to-be-done wherever possible
Create a market for resources Implement Activity-Based-Costing
• Legacy business units and internal “start-ups” must • Ensure that all relevant costs are embedded in
have different evaluation metrics within the market financial analysis and that depreciation schedules
to reflect their differing payoff natures are accurate
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26. It’s an uphill battle, but strategic renewal is possible
Recognizing the commoditization of silicon products, Dow Corning
engaged in business model innovation
• Simplifying product line and automating sales of standard products
While exploring sustaining innovations to their floor cleaners,
Proctor & Gamble realized that soap was the wrong product
• Improved upon the „wet paper towel‟ to disrupt floor cleaners
After a decade of subsidizing book sales to build a distribution
network and achieve cost leadership, Amazon turned to digital
• Lower margin dollars, higher volume and market share
In 2010, Apple released the iPad in a direct attempt to cannibalize
market share from the laptop category
• “If someone is going to cannibalize the market, it should be us”
With leadership support and patience, disruptive
innovation can lead to amazing growth businesses
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27. Part 3: Key questions to guide discussion
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28. Key Questions
Disruptive to who?
• How do we define white space?
• How do we define boundaries?
How do we create R.P.P. independence?
• Who needs to be bought in?
• Leadership? Public investors? Board?
• Where do the disruptive organizations sit?
• What resources should they draw upon, what should they avoid?
How can we effectively allocate resources?
• What are the appropriate
• What human capital needs must we satisfy?
• Do we have to go outside of the organization?
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