Meeting the Challenge of Disruptive Change

1. MOT 석사세미나 1 Meeting the Challenge of Disruptive Change

2. TOC • About the authors • At the cover • These are scary times for managers… • Where Capabilities Reside • The Migration of Capabilities • Sustaining vs. Disruptive Innovation • To Cope with Change • In Conclusion

3. Aboutthe authors Clayton M. Christenson Professor of business administration of Harvard Business School. Worked as a missionary for church in Korea (1971~1973). as a management consultant with BCG Cofounder of consulting firm Innosight. Book : The Innovator’s Dilemma: When New Technologies Cause Greate Firms to Fail. The Innovator’s DNA Michael Overdorf Dean’s Research Fellow at Harvard Business School. Worked for Alcoa (managerial positions in operations & product development). Chairman and CEO of Innosight (Consulting & Research Services to Companies) Book : The Digital Enterprise and The HBR on Innovation. After the Gold Rush: Patterns of Success and Failures on the Internet.

4. At the cover

5. These are scary times for managers… • Dealing with major, disruptive change • Not good even before the Internet, globalization • Even harder for now and for the future … Dayton Hudson Corporation (Founded in 1902) Out of Hundreds of Dep’t Store 1902, Dayton Dry Goods Company, Minneapolis. 1962, 1st Target store  2nd largest discount retailer in US. Personal Computers Minicomputer Companies Medical & Business Schools Struggling(change curricula) & Failing

6. These are scary times for managers… • Even in big companies • Not because … • Managers can’t set disruptive changes coming. • Usually they can see it. • They lack resources to confront them • Have talented managers, specialists, strong product portfolios, first-rate technological know-how, and deep pockets. • But because … • Managers lack a habit of thinking about their organization’s capabilities as carefully as they think about individual people’s capabilities.

7. These are scary times for managers… • Great managers are good at • Identify the right people for the right job and to train employees to succeed at the jobs they’ve given. Organizational Success Right People Training Succeed at their job organizations’ capabilities Right Job Organizational Failure

8. These are scary times for managers… • Good managers need to be skilled to … Assessing Organization’s abilities/disabilities Assessing Peoples (Resources) Organizational Success Right People Training Succeed at their job organizations’ capabilities Right Job Organizational Failure

9. These are scary times for managers… • If an organization faces major change • Make drastic adjustment to existing organization  destroy the company’s capability (disruptive innovation!) • Must understand what types of change the existing organization is capable and incapable of handling.

10. Where Capabilities Reside • factors that affect to organization’s capabilities • Resources • Processes • Values

11. Where Capabilities Reside • Resources • What can this company do?  mostly looks for the answers in its resources • people, equipment, technologies, cash, …  tangible • Product designs, information, brands, relationships with suppliers, distributors, and customers  less tangible • But, resource analysis doesn’t come close to telling the whole story.

12. Where Capabilities Reside • Processes • The patterns of interaction, coordination, communication, and decision making employees use to transform resources into products/services. • Formal processes (visible, explicit) • Product development/manufacturing/budgeting process, • Informal processes (less visible) • Routines or ways of working • Processes are meant not to change. • Or change through tightly controlled procedures.

13. Where Capabilities Reside • Processes (cont.) • Develop capability for executing a task  defines disabilities in executing another task. • The most important capabilities and concurrent disabilities are more likely to be embodied in the less visible processes (background processes). • How market research is habitually done, • How such analysis is translated into financial projections, • How plans and budgets are negotiated internally, …

14. Where Capabilities Reside • Values • Narrow meaning: what corporate values. • Johnson & Johnson  ensure patient well-being • Alcoa  employee safety • Broad meaning: the standards by which employees set priorities that enable them to judge whether an order attractive or unattractive, whether a customer is more important or less important, whether an idea for a new product is attractive or marginal, … • Those decisions are made by employees at every level.

15. Where Capabilities Reside • Values (cont.) • The larger and more complex a company becomes, the more important it is. • Clear, consistent value should permeate the organization. • But it also define what an organization cannot do. • Company’s values reflects its cost structure or its business model • 40% of gross profit margin • Would kill ideas that promise gross margins below 40% • Eg) low-margin market such as e-commerce.

16. Where Capabilities Reside • Two evolving values addressing disabilities • 1. Values for company’s acceptable gross margins • Narrow margins  gross margins w/ premium customers Toyota North America 1960’ 1982 1989 1999 Camry Corona Lexus Echo(Yaris) Honda Mazda Nissan … Entry tier Sophisticated cars targets at higher tiers Lower-end market

17. Where Capabilities Reside • Two evolving values addressing disabilities • 2. Values relate to how big a business opportunity has to be before it can be interesting • Maintain a constant rate of growth! • $40 million  (25% growth)  additional $10 million market • $40 billion  (25% growth)  additional $10 billion market • As companies become large, they lose the ability to enter small, emerging markets. • Magnified companies by M&A suffer the same problems.

18. The Migration of Capabilities • As organizations grows • Focus shift: Resources(people)  Processes, values • At early stage founder has a profound impact product  lack of consistent process to develop and manage Avid Technology 1987 digital-editing system 1993 IPO: $16/share 2012 $9/share 1995 $49/share saturated market Hundreds of MBAs people  (managing director for 3yr)  process, value McKinsey & Company 1926 managerial accounting 1935 McKinsey left company 2010 $10 billion revenue 1937 McKinsey die

19. The Migration of Capabilities • As successful company mature … • Employees begin to follow processes and decide priorities by assumption rather than by conscious choice, those processes and values come to constitute the organization’s culture. small Company Size Resources Visible & artriculated processes & values Culture easy difficult Capability to change small large Company Size

20. Sustaining vs. Disruptive Innovation • Evolutionary changes (sustaining innovation) • Innovations that make a product/service perform better in ways that customers in the mainstream market already value. • Compaq early adoption: 16-bit CPU  32-bit CPU • Merril Lynch’s CMA introduction • Sustain the best customers by provide something better than had previously been available • What successful companies are pretty good at

21. Sustaining vs. Disruptive Innovation • Revolutionary changes (disruptive innovation) • Create an entirely new market through the introduction of a new kind of product/service, initially, can be judged as worse value by the performance metrics of mainstream customers. • Charles Schwab’s bare-bones discount brokerage • PC against mainframe & minicomputers • Disruptive • don’t address the next-generation needs of leading customers in existing markets • improved so rapidly that they ultimately could address the needs of customers in the mainstream of the market

22. Sustaining vs. Disruptive Innovation • Disruptive innovations occurs so intermittenly… • No company has a routine process for handling them. • Smaller, disruptive companies are more capable of. • Nearly always promise lower profit margins and not attractive to the company’s best customers • They’re inconsistent with the established company’s value • Larger companies often surrender with huge resources.

23. To Cope with Change • Change management, Reengineering Program • But, process are not as flexible or adaptable as resources are – values are even less so. • Create a new organizational space where those capabilities can be developed • Create a new organizational structures within • Spin out an independent organization • Acquire a different organization

24. To Cope with Change • Creting new capabilities internally • Pull the relevant people out of the existing organization and draw a new boundary around a new group • Heavyweight teams • Team members are physically located together, and each member is charged with assuming personal responsibility for the success of the entire project. Chrysler To accelerate auto development (heavyweight teams) Strong at Components (powertrain, electrical system, …) Focus on automobile platforms Design a process for integrating various subsystems

25. To Cope with Change • Through a Spinout Organization • When the mainstream organization’s values would render it incapable of allocating resources to an innovation project. • Old-line companies to handle the Internet challenge • New project should not be forced to compete for resources with mainstream organization’s project Laser-printer Division Ink-jet Division Spinout Hewlett-Packard ink-jet project

26. To Cope with Change • Through Acquisitions • What created the value that I just paid so dearly for? Did I justify the price because of the acquisition’s resources ? Or was a substantial portion of its worth crated by processes and values? • Process & Values  don’t try to integrate the acquisition into the parent organization. (let them stand alone!) • Resources  integrate it into parent. • Plug acquired people, products, technology, and customers into the parent’s processes as a way of leveraging the parent’s existing capabilities.

27. To Cope with Change • Through Acquisitions (cont.) Daimler Crysler Acquisition, 1998 Pressure to consolidate ? Strong processes/Few resources (design & subsystem integration) Wall Street IBM ROLM Half sold, 1989 Acquisition, 1984 1987 Full Integration (failure) Strong processes, PBX product (develop & find new market) Siemens AG

28. To Cope with Change • Through Acquisitions (cont.) Cisco Systems Acquisition, 1993~1997 (early-stage companies) Absorbed resources StrataCom (Multi-Service Switching Business Unit) Stratacom, 1996 (larger & mature company)

29. In Conclusion • Confronting changes … • First determine whether they have the resources required to succeed • Then ask, • Does the organization have the processes and values it needs to succeed in this new situation? • Are the processes by which work habitually gets done in the organization appropriate for this new problem? • Will the values of the organization cause this initiative to get high priority or to languish?

30. In Conclusion The reason that innovation often seems to be so difficult for established companies is that they employ highly capable people and then set them to work within organizational structures whose processes and values weren’t designed for the task at hand.