C Christensen

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.
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.
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?
Disruptive technologies are a driver of leadership failure and the source of new growth opportunities
Incumbents nearly always win

Performance
s tion va inno ing tain Sus
of al ace ologic P hn Tec ress g Pro
ustomers ormance that c Perf sorb can utilize or ab
Disruptive technologies
Entrants nearly always win
Time
The Innovators Dilemma
Performance
s tion va nno ters gi inin ompu ta Sus minic to

45% on $250,000
60% on $500,000
Disruptive technology: personal computers
40% 20% on $2,000
Time
Most value-creating growth businesses originated in disruption
Yesterday Japan Kodak ZCMI Ford Merrill Lynch AT&T Sears catalog Swift; Armour Black & Decker Xerox
Today Toyota Wal-Mart Intel Southwest Air Microsoft Oracle Cisco Sony Bloomberg Best Buy
Tomorrow: Embraer Veritas U. of Phoenix RIM Blackberry Salesforce.com Linux E-Bay Sonosite Amazon.com Tensilica
Two strategies for asymmetric competition

Performance
Bring a better product into an established market
Different measure Of Performance
wer ss ov ddre with a lo l A de rs tome iness mo cus bus
tion isrup ved d d -ser w-en er o cost
Time
tion: isrup non t ket d -mar e agains ption w Ne pet onsum c Com
or rs e um ming ns co onsu on n -c ons N o si N ca oc
Time
Non-consumers are the ideal initial target

Major Established Electronics Markets:
Performance
Tabletop radios, floor-standing televisions, computers, telecomm.equipment, etc.
Portable TVs
Pocket radios
Hearing Aids
Path taken by established vacuum tube manufacturers Time
Disruptive technology: transistors vs. vacuum tubes

Non-consumers are the ideal initial target

Word Processing
Performance
Wireline e-mail
Wireless e-mail
Chat rooms
Standard phrases
Toy robots
Path taken by IBM
Time
Disruptive Technology: Voice Recognition Technology

Powerful forces cause companies to target market segments that are irrelevant to the reasons why customers buy products
Segmentation based upon attributes of products
Nascent idea
Focus on customer rather than job as the unit of analysis; demands for quantification; economics of communication
Organizational structure, performance measurement systems, channel structure
Job-based segmentation: What are customers trying to get done in their lives?
Segmentation based upon attributes of customers
Facilitate priorities
Never compete against customers manifest priorities. Facilitate them. Digital cameras Electronic learning
Structuring the market in terms defined by data that are easily collected obfuscates the right targets for innovation.
Define the market as a class of products (wireless hand-held)
Define the market in demographic terms (the business traveler) Competition: wireline telecom and notebook computers CRM software E-books, emagazines Stock trading Travelocity E-mail Voice
Define the market in terms of jobs that customers need to get done Competition: Nokia, Wall Street Journal, CNN Airport News, boredom
Competition: Palm, Handspring, Sony, HP, Compaq, Nokia Digital camera Word Excel Handwriting recognition Wireless e-mail Phone
Voice phone News summaries Always on Simple, mindless games
Integrated firms have the advantage when products arent good enough. Focused firms overtake over-served markets.
Performance
Beat competitors with functionality
es tur ec hit rc tA en nd pe es de r tur e c Int ite ch Ar r ula d Mo
Beat competitors with speed, responsiveness and customization
Time
Changes in integrality/modularity have profoundly changed the structure of the computer industry
1960 - 1980
Equipment Materials Components
1980 - 1990
1990 - Present
Teradyne, Nikon, Canon, Applied Materials, Millipore, etc. Monsanto, Sumitomo Metals, Shipley, etc. Intel, Micron, Quantum, Komag, etc.
Digital Equipment
Product design
Compaq, Dell, Gateway, Packard Bell
Control Data
Assembly
Compaq
Contract assemblers
IBM
Operating system Applications software Sales & distribution Field service
Microsoft Microsoft
Word Perfect, Lotus, Borland, etc.
CompUSA
Dell
Independent contractors
Beat competitors with asymmetry of motivation

% of tons
Steel Quality
2530% 55%
Sheet steel
18% 22%
l Structural Stee
el ste d uce d 12% pro l il nim i fm o 7% lity ua Q

1975 1980
8%
& rods le iron; bars Ang

Rebar
4%
1985
1990
Over-shooting precipitates reciprocal processes of commoditization and de-commoditization.

Retail/ distribution that addresses speed and convenience is attractive
Retailing is undifferentiable
$
Performance
$
Design & assembly of proprietary products is highly profitable.
Functionality
Speed & responsiveness

Time
Design & assembly of modular systems is commoditized.
$
Components are undifferentiable commodities
$
Performancedefining subsystems are very profitable
Disruption enables less-skilled people to do more sophisticated things

Disruptive innovations enable a larger population of less-skilled, lesswealthy 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.
Disruption is facilitated by sophisticated technology that makes things foolproof
Complex
Experimentation & problem-solving
Pattern Recognition
Rules-Based
Simple
Ambiguous
Deep
Tertiary hospital
General Hospital Clarity of the rules
Outpatient Clinic
Office
Simple
Little
Skill required to follow the rules
Scientific understanding, built upon the ability to diagnose unambiguously, shifts the method used to diagnose and treat disorders from an unstructured, experimental problem-solving process, towards a rules-based regime.
Home
Simple Little
Clarity of the rules Skill required to follow the rules

Family doctor
Ambiguous Deep
Sick child
Parent
Nurse
Specialist
How can I know what my organization is capable and incapable of accomplishing?
Resources
People
Processes
Hiring & Training Product development Manufacturing Planning & Budgeting Market Research Resource allocation
Values
The criteria by which prioritization decisions are made Ethics Cost structure/ income statement Size of opportunity
Technology Products Equipment Information Cash Brand Distribution
The strategy-making processes that are good at planning sustaining innovations, are bad at guiding disruptive ones.
Intended strategy
Im wh prove at w d u ork nde s an rsta d w ndin hat g doe of sn t
The Organizations values
Resource allocation process
Strategic Actions: New products, services, processes, acquisitions
Actual Strategy
Emergent strategy
ities tun es or opp ccess ted u cipa and s ti n s Una blem pro
J&Js Professional Division has grown much faster than its Consumer Division over the last decade
J&J Annual Sales

($ millions)
12,000 Professional Division
10,000
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.
New disruptive growth businesses account for nearly all of this growth
12,000
CAGR
10.3%
Annual Sales
($ millions)
Total
10,000
8,000
Normalized*(1) 3.7% 2.9% 40.9%
6,000
Absolute* 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.
Disruption amongst healthcare institutions is well underway
Complex
ls pita s Ho l era es n iliti Ge c t Fa n atie p e ut O car e ffic o In are ec m -ho In
Complexity of diagnosis and treatment
Simple
Disruptions amongst healthcare professionals
Complex
Complexity of diagnosis and treatment
st ciali pe b -s u t&s ns lis ecia sicia hy Sp re p ca nal rso / pe ly ami F rs ione tit prac e Nurs re lf -ca Se
s ician s phy
Performance that the marketplace needs or utilizes
Simple
Time

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Disruptive Innovation and Creating New Market Growth | 1

Capturing the Upside While Avoiding the Downside

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 2

The Innovators Solution

Disruptive Innovation and Creating New Market Growth | 3

Ten questions in building new growth businesses

Disruptive Innovation and Creating New Market Growth | 4

Incumbents nearly always win

s tion va inno ing tain Sus

of al ace ologic P hn Tec ress g Pro

ustomers ormance that c Perf sorb can utilize or ab

Entrants nearly always win

Disruptive Innovation and Creating New Market Growth | 5

The Innovators Dilemma

s tion va nno ters gi inin ompu ta Sus minic to

Disruptive technology: personal computers

40% 20% on $2,000

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 6

Most value-creating growth businesses originated in disruption

Disruptive Innovation and Creating New Market Growth | 7

Two strategies for asymmetric competition

Bring a better product into an established market

Different measure Of Performance

wer ss ov ddre with a lo l A de rs tome iness mo cus bus

tion isrup ved d d -ser w-en er o cost

or rs e um ming ns co onsu on n -c ons N o si N ca oc

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 8

Non-consumers are the ideal initial target

Tabletop radios, floor-standing televisions, computers, telecomm.equipment, etc.

Disruptive technology: transistors vs. vacuum tubes

Disruptive Innovation and Creating New Market Growth | 9

Non-consumers are the ideal initial target

Path taken by IBM

Disruptive Technology: Voice Recognition Technology

Disruptive Innovation and Creating New Market Growth | 10

Organizational structure, performance measurement systems, channel structure

Disruptive Innovation and Creating New Market Growth | 11

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 12

Define the market as a class of products (wireless hand-held)

Voice phone News summaries Always on Simple, mindless games

Copyright 2003 Clayton M. Christensen.

Disruptive Innovation and Creating New Market Growth | 13

Beat competitors with functionality

es tur ec hit rc tA en nd pe es de r tur e c Int ite ch Ar r ula d Mo

Beat competitors with speed, responsiveness and customization

Disruptive Innovation and Creating New Market Growth | 14

Compaq, Dell, Gateway, Packard Bell

Operating system Applications software Sales & distribution Field service

Disruptive Innovation and Creating New Market Growth | 15

Beat competitors with asymmetry of motivation

el ste d uce d 12% pro l il nim i fm o 7% lity ua Q

& rods le iron; bars Ang

Disruptive Innovation and Creating New Market Growth | 16

Over-shooting precipitates reciprocal processes of commoditization and de-commoditization.

Speed & responsiveness

Design & assembly of modular systems is commoditized.

Disruptive Innovation and Creating New Market Growth | 17

Disruption enables less-skilled people to do more sophisticated things