Creating new growth and Managing it more effectively Clayton Christensen Harvard Business School cchristensen@hbs.edu 4/10/2017 Copyright Clayton M. Christensen

Principles we teach that aren’t always true: Focus investments where returns are most attractive Understanding the customer is the key to successful innovation Big markets generate bigger businesses than small markets Outsource low value-adding activities that aren’t your core competence Ignore sunk and fixed costs; make decisions based upon marginal costs and marginal revenues

Decentralization is disruptive, and is hard to catch $500,000 Incumbents dominate sustaining battles DEC Data General Prime Wang Nixdorf Hewlett Packard Honeywell Pace of performance improvement 45% on $250,000 Sustaining innovations Ability to use improvements Performance Disruptive Innovations Time Time 40% 20% on $2,000 Entrants typically win at disruption 4/10/2017 Copyright Clayton M. Christensen

Little boys beat giants by disruption % of tons 25–30% 55% Steel Quality Sheet steel 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 2017/4/10 Copyright Clayton M. Christensen

Disruption generates repeated upside surprise Quality of minimill-produced steel Steel Quality 1980 1975 1985 1990 Rebar Angle iron; bars & rods Structural Steel Sheet steel Index of 30 successful (Ex Post ) disruptors: 46% per year for 10 years post-IPO Performance of Disruptive Innovation Fund (ex ante) 2002-2010: 29% per year Nucor share price (adjusted for splits) $1 $2 $4 $8 $16 $32 27% CAGR 2017/4/10 Copyright Clayton M. Christensen

Expensive failure almost always results when disruption is crammed into direct competition with established technology Path being taken by: Electric vehicles Solar electricity Wind power Biofuels Tabletop Radios, Floor-standing TVs Performance Path taken by vacuum tube manufacturers Different measure Of Performance Non-consumers or Non-consuming occasions Time Portable TVs Pocket radios Hearing Aids Time 4/10/2017 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 4/10/2017 Copyright Clayton M. Christensen

Evaluating investments on marginal rather than full costs biases incumbent leaders to leverage what they have, instead of building what they need $350 340 10 Existing Price Cost Net $350 285 65 Minimill $350 15 335 Marginal % of tons 25–30% 55% Steel Quality Sheet steel 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

Outsourcing often sets in motion disruptive business model liquidation AsusTek Brand Brand Product design Product design Supply chain & logistics Supply chain & logistics Computer assembly Computer assembly Mother boards Mother boards Simple circuit boards

Outsourcing often sets in motion disruptive business model liquidation Customer Supplier IT departments TCS, Infosys, Wipro Auto companies Tier One Suppliers Petroleum Majors Halliburton, Schlumberger Pharmaceutical Cos. CROs. Wall Street Analysts Bloomberg

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 2017/4/10 Copyright Clayton M. Christensen

Changes in product architecture have profoundly changed the architecture of the computer industry 1960 - 1980 1980 - 1990 1990 - Present Teradyne, Nikon, Canon, Applied Materials, Millipore, etc. Equipment Monsanto, Sumitomo Metals, Shipley, etc. Materials Intel, Komag, etc. Components IBM Compaq, Dell, Gateway Product design & assembly Operating system & applications software Control Data Digital Equipment Microsoft Apple Computer Sales & distribution Best Buy Field service Geek Squad

Integrated companies with proprietary products typically commoditize their suppliers Commoditizer Commoditizee IBM Applied Magnetics General Motors Dana Corp. P&G Dow Corning Performance Modular Architectures Interdependent Architectures Time

The law of conservation of attractive profits De-Commoditization: services & products that make use of the product more effective Add features Commoditization thru modularity, over-shooting Copy features De-Commoditization: sub-systems that drive the performance of the modular product

So what should the Harvard Business School Do? 2017/4/10 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

Three levels in the architecture of a job What and how must we integrate in order to provide these experiences? What are the experiences in purchasing, using and living with the product that we need to provide in order to get the job done perfectly? What’s the job-to-be-done – the basic problem the customer is facing, and the result that she needs? (Each job has functional, emotional & social dimensions) 4/10/2017 Copyright Clayton M. Christensen

Targeting the job enables precision in product development Product category Too many features; wrong features Job to be done Proper integration of all needed experiences Customer category One-size-fits-none product 4/10/2017 Copyright Clayton M. Christensen

Companies that segment markets by job find: The market is much larger Their share is smaller Their real competitors aren’t in their product category Growth potential is greater, because non-consumption is usually a major competitor They can integrate properly Building a valuable brand is straightforward

Copyright Clayton M. Christensen Integrating correctly to provide the experiences that get the job done is the essence of defensible differentiation Ikea vs. Levitz SAS vs. (_____) Zara vs. H&M Federal Express vs. Emery Air Freight, UPS Disney vs. Six Flags OnStar vs. Toyota, Volvo Hilti power tools 4/10/2017 Copyright Clayton M. Christensen

Principles we teach that aren’t always true: Focus investments where returns are most attractive Understanding the customer is the key to successful innovation Big markets generate bigger businesses than small markets Outsource low value-adding activities that aren’t your core competence Ignore sunk and fixed costs; make decisions based upon marginal costs and marginal revenues