Disruption Theory - Primer

1. Disruption Theory - Primer PrimarySource: Christensen & Raynor, The Innovators Solution, Harvard Busines School Press 2003

2. Growth: Perceptions vs. Research Academic Research Growth Misconceptions • The “solve-the-problem-by-finding-a-better-manager” approach might have credence if failures to restart growth were isolated events.1 • Many who have been unable to sustain growth have taken huge risks.1 • In study after study, employees were able to identify new growth opportunities but companies chose to act on the wrong ones.1 • Managers are to blame; more capable people would have succeeded • Managers become risk adverse and avoid uncertain new-growth ventures • New technologies sneak up on companies who are unaware • Employees are unable to identify new growth businesses as they emerge What causes these misconceptions? Why is profitable growth so hard to sustain? 1. The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.

3. The Innovator’s Dilemma Should we invest to protect the least profitable end of our business, so that we can retain our least loyal, most price-sensitive customers? Or should we invest to strengthen our positing in the most profitable tiers of our business, with customers who reward us with premium prices for better products? Desire to Maintain High Margins Threat of Potential Disruptions Moving businesses toward higher-margin products and shedding less-profitable products at the low-end is something that good managers do in order to increase profits; however, this also opens the door to disruption.1 Sustaining innovations are so important and attractive, relative to disruptive ones, that the very best sustaining companies systematically ignore disruptive threats and opportunities until it is too late.1 Innovator’s Dilemma 1. The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.

4. Disruptive Technologies • The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003. The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.

5. Innovation Management Sustaining Innovations: Making better products that can be sold for more money to attractive customer bases Sustaining innovations are required to stay competitive and should be aggressively pursued Industry incumbents almost always prevail • Disruptive Innovations: • New products that are not as good as currently available products, but that are typically simpler, more convenient, and less expensive products that appeal to new or less-demanding customers.1 New-market entrants almost always beat incumbents 1. The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.

6. Up-market Minimill Migration Historically, most steel came from massive integrated mills that molten ore, roll and finish steel Minimills became disruptive to integrated mills by targeting the low-end and migrating upward Minimills melt scrap metal in small electric furnaces; yields ~20% cost advantage Since minimills began by targeting low-end rebar (4% of market, with only 7% margins), integrated mills felt little pain initially Asymmetric Motivations: Steel Industry Source: The Innovator’s Solution 1. Continuous Casting Investments at USX Corporation. Clayton Christensen. HBS No. 9-697-020.

7. The Innovator’s Solution Research Insight: When a company tries to take a higher-cost business model down-market to sell products at lower price points, almost none of the incremental revenue falls to the bottom line. When companies move up-market to make higher-performance products that sell at higher price points, much of the incremental margin falls to the bottom line.1 Innovator’s Solution: Target products and markets that the incumbents are motivated to ignore or run away from. Established firms that hope to capture the growth created by disruption need to do so from within an autonomous business with a cost structure that offers as much headroom as possible for subsequent profitable migration up-market.1 “In the history of the disk-drive industry, every company that has tried to manage mainstream and disruptive businesses within a single organization failed.”2 1. The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003. 2. Disruptive Technologies: Catching the Wave. Joseph Bower & Clayton Christensen. HBR: Jan-Feb 1995.

8. Creating New-Growth Businesses New-Market Disruptions: Create a new value network, where it is non-consumption is targeted, not the incumbent As performance improves, new market disruptors eventually pull customers out of the original value network into the new one Leaders Ignore Because new-market disruptions target non-consumption, market leaders feel little pain until...1 Leaders Flee • Low-End Disruptions: • Low-end disruptions simply use low-cost business models that grow by picking off the least attractive customers • Examples: Steel minimills, discount retailers Low-end disruptions motivate incumbents to flee. It is hard for established firms not to flee from low-end disruptors.1 It is much easier to beat competitors when they are motivated to flee rather than fight1 1. The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.

9. Disruption Theory The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.