Sustaining innovations Disruptive Innovations: A driver of leadership failure and the source of new growth opportunities Pace of Technological Progress Incumbents nearly always win Sustaining innovations Disruptive innovations Performance Performance that customers can utilize or absorb Entrants nearly always win Time

Little boys beat giants by disruption % of tons 25–30% 55% Sheet steel Steel Quality 18% 22% Structural Steel Quality of integrated mills’ steel 12% 8% Angle iron; bars & rods Quality of minimill-produced steel 7% 4% Rebar 1975 1980 1985 1990 4/11/2019 Copyright Clayton M. Christensen

Copyright Clayton M. Christensen The intent and effect of sustaining innovation is to drive prices up. Disrupting innovation drives prices down. ~ 8% inflation 4/11/2019 Copyright Clayton M. Christensen

Copyright Clayton M. Christensen Replication, rather than disruption, characterized higher education in the past. The future might be different. ~ 8% inflation 4/11/2019 Copyright Clayton M. Christensen

The customers are enticed into the new system, not vice versa. The metric of performance changes Performance Time Tabletop Radios, Floor-standing TVs Path taken for transistors by vacuum tube manufacturers Non-consumers or Non-consuming occasions Different measure Of Performance Time The customers are enticed into the new system, not vice versa. Portable TVs Pocket radios Hearing Aids 4/11/2019 Copyright Clayton M. Christensen

Changes in product architecture have profoundly changed the architecture of the computer industry ---------- 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. 1960 - 1980 Equipment Materials Components Product design & assembly Operating system & applications software Sales & distribution Field service IBM Control Data Digital Equipment Apple Computer 4/11/2019 Copyright Clayton M. Christensen

Changes in product architecture have profoundly changed the architecture of the computer industry ---------- 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. 1960 - 1980 Equipment Materials Components Product design & assembly Operating system & applications software Sales & distribution Field service IBM Control Data Digital Equipment Apple Computer Interdependent architecture Modular architecture 4/11/2019 Copyright Clayton M. Christensen

Interdependencies in the teaching infrastructure Conflicting mandates in the way we must teach, vs. the way students must learn Interdependencies in the teaching infrastructure Temporal Lateral Physical Hierarchical Every student is different Multiple styles of learning & types of intelligence Paces of Learning Home & family backgrounds Standardization !! Customization !! 4/11/2019 Copyright Clayton M. Christensen

What is a business model, and how is it built? 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 PROCESSES: Ways of working together to address recurrent tasks in a consistent way: training, development, manufacturing, budgeting, planning, etc. PROFIT FORMULA: Assets & fixed cost structure, and the margins & velocity required to cover them 4/11/2019 Copyright Clayton M. Christensen

A Theory of Hybrid Technologies When framed as a sustaining innovation: Hybrid is required Then it can improve When framed against non-consumption, Pure-play can take root 4/11/2019 Copyright Clayton M. Christensen

Three Types of Business Models Consulting firms High-end law firms R&D organizations Complex medical diagnosis Special Education Solution Shop businesses Manufacturing Food services Medical procedures Instruction Textbooks; ed. Software today Value-adding process businesses Telecomm Insurance EBay D-Life Education software tomorrow Facilitated Network businesses Fee for membership or transaction Fee for service Fee for outcome

Non-consumers or Non-consuming The instructional materials business historically has been a value-adding process business Performance Time Path taken by Educational software developers Non-consumers or Non-consuming occasions Different measure Of Performance Time

Student-centric software will be a facilitated network business Performance Non-consumers or Non-consuming occasions Different measure Of Performance Time Facilitated Network: parents, teachers, students, entrepreneurs Custom classes Modules Tutoring 4/11/2019 Copyright Clayton M. Christensen

Copyright Clayton M. Christensen % of tons Steel Quality Trucks SUVs General Motors Mid-sized Toyota Subcompact 1975 1980 1985 1990 4/11/2019 Copyright Clayton M. Christensen

Faculty qualifications, student learning Student achievement in on-line courses when administered by focused on-line faculty 5.7 Student achievement in on-line courses when administered by faculty in core 4.6 Student achievement in traditional classes taught by faculty in core 5.6 4/11/2019 Copyright Clayton M. Christensen

Copyright Clayton M. Christensen The substitution of one thing substitutes for another always follows an S-curve pattern % new % old .001 .0001 .01 0.1 1.0 10.0 09 11 07 05 03 13 15 % new 4/11/2019 Copyright Clayton M. Christensen

Online learning gaining adoption Enrollments up from 45,000 in 2000 to 1,000,000 in 2007 4/11/2019 Copyright Clayton M. Christensen

Market Understanding that Mirrors how Customers Experience Life SatComs – reliable, secure, dependable 1s and 0s…not that they want a satellite not a copper wire… Robotics – segment in terms of military activities – DUALITIES POINT – Job of Lockheed Martin (mission of the future) vs. segmenting by Army, Navy, etc. or by Gov’t versus Commercial “The customer rarely buys what the company thinks it is selling him” - Peter Drucker 4/11/2019 Copyright Clayton M. Christensen

A Theory of Hybrids Tesla $100,000 Prius Hybrid Competing on cost, design, reliability, and performance on the California Freeway Tesla $100,000 Prius Hybrid Performance Time Sustaining innovations Disruptive Innovations Time Peapod: Are there customers that would love a car that won’t go far, and won’t go fast? 4/11/2019 Copyright Clayton M. Christensen

The right product architecture depends upon the basis of competition IBM Mainframes, Microsoft Windows Proprietary, interdependent architectures Compete by improving functionality & reliability Performance Compete by improving speed, responsiveness and customization Modular open architectures Dell PCs, Linux Time 4/11/2019 Copyright Clayton M. Christensen