Innovation: Understanding the Field

1
InnovationUnderstanding the Field

• Jay Rao
• Associate Professor
• Babson

2
The previous business fad.
3
Is Innovation the New Fad?
4
Most Firms Die!
Source Mastering the Dynamics of Innovation,
Utterback
5
Business Mortality is very high!

• Average life expectancy of all firms, regardless
  of size, measured in Japan and much of Europe, is
  only 12.5 years.
• The average life span of a multinational
  organization - Fortune 500 or equivalent - is
  around 45 years.
• One third of the companies listed in the Fortune
  500 in 1970 for example, had disappeared by 1983
  - acquired, merged or broken to pieces.
• The first SP index of 90 major US firms was
  created in the 1920s. The firms on that original
  list stayed there for an average of 65 years. By
  1998, the average tenure of a firm on the
  expanded SP 500 was 10 years.

Source The Living Company, Arie de Geus
6
The Challenge Creating and Sustaining Growth

• 90 of all firms are unable to sustain an
  above-average growth rate for more than a few
  years
• 80 of venture capital funded start-ups fail
• 75 of new products launched by established firms
  fail

Source Christensen
7
Industry Leadership lasts for only a generation
OR two generations if you are lucky.

• Typewriters
• Manual ? Electric ? Word Processors ? PCs
• Remington ? IBM ? Wang ?
  Microsoft/Intel
• Computers
• Mainframe ? Minicomputers ? PCs
• IBM ? DEC ? Apple ? IBM ? Compaq ? Dell
• Hard Disk Drives
• 14 ? 8 ? 5 ¼ ? 3 ½
• IBM ? IBM ? Seagate ? Quantum / Connor

8
Leadership in Retail Service is also transitory.

• General Purpose
• Woolworth ? Sears ? WalMart
  ? Amazon / eBay
• Bookstores
• Mom Pop ? BDalton ? Borders /
  BN ? Amazon
• Toys
• Mom Pop ? KBToys ? ToysRUs/WalMart
  ? Amazon?
• Electronics
• Mom Pop ? RadioShack ? Circuit City
  ? Best Buy / Amazon?
• Clothes
• Mom Pop ? JCPenny ? ? ? ?

Neighborhood ? Mall ? Warehouse ? Internet
9
Management of Innovation is where the Quality
Movement was 30 years ago.

• Modern quality movement created predictability
  around what was previously an unpredictable
  process
• Similarly, predicting and shaping the success of
  new growth businesses can be accompanied by
  understanding the factors around innovation

VARIABLES UNKNOWN
VARIABLES UNDERSTOOD
Source Christensen
10
Managing Innovation Does Not Have to be Random.

• Traditional thinking
• Managing innovation is risky and unpredictable
• Managers have just not understood the factors
  that need to be controlled
• By understanding these factors and making the
  right choices, innovation becomes much more
  predictable

Source Christensen
11
Critical Questions to Get Right

• How do I beat the competitors?
• Which customers should I focus on?
• Will our targeted customers really buy our
  product?
• How should I structure this business?
• Where should this idea live in our organization?
• How do I prevent commoditization?
• What should we outsource? Keep in-house?
• How do I create the right strategy?
• What kind of money is good? What kind is bad?

Source Christensen
12
Where do we start?
13
Understanding Disruptive Innovation
1. In every market, there is a trajectory of
improvement that customer can use.
MOST DEMANDING CUSTOMERS
MAIN STREAM CUSTOMERS
Performance Measure
LEAST DEMANDING CUSTOMERS
Time
Source Christensen
14
Sustaining Innovations
Incumbents nearly always win the battles of
sustaining innovation.
MOST DEMANDING CUSTOMERS
MAIN STREAM CUSTOMERS
Performance Measure
LEAST DEMANDING CUSTOMERS
Time
Source Christensen
15
Disruptive innovations
Entrants nearly always win the battles of
disruptive innovations.
Digital to Optical
MOST DEMANDING CUSTOMERS
Caller ID
MAIN STREAM CUSTOMERS
Performance Measure
Analog to Digital
LEAST DEMANDING CUSTOMERS
VOIP
Time
Source Christensen
16
Why did Digital Equipment Corp. (DEC) get killed?

• Founded by Ken Olsen in 1967
• First Firm to be funded by venture capital
• DECs PDP-8 is considered the first mini-computer
• 1972 revenues 6.5 billion
• 1989 revenues 14 billion

Source Christensen
17
Unattractive Business Model
60 on 500K
MOST DEMANDING CUSTOMERS
Sustaining Innovations to Microcomputers
MAIN STREAM CUSTOMERS
45 on 250K
Performance Measure
LEAST DEMANDING CUSTOMERS
40 ? 20 on 2K
Time
Digital spent 2 billion developing a PC Entered
the market 4 times and exited it 4 times
Source Christensen
18
Some lessons from the Steel Industry.
INTEGRATED MILLS
MINI MILLS
19
Employment in the U.S. Steel Industry
20
How were the mini-mills able to take more than
50 of the market share?
STEEL QUALITY
SHEET STEEL -- 55
STRUCTURAL STEEL 22
ANGLE, BAR RODS 8
REBAR 4
IN TONS
TIME
1985
1980
1975
1990
Source Christensen
21
What happened when the transistor arrived?
Source Christensen
22
Where were the first transistors used?
Performance
Different Performance Measure
Vacuum tubes
Transistor ? IC chip ? Memory chip ?
Microprocessors
Time
Time
Non-consumers or Non-consuming contexts
Source Christensen
23
By 1968, solid state devices totally outperformed
the vacuum tubes and these giants vaporized
overnight.
Performance
Different Performance Measure
Westinghouse, RCA, Zenith, GE, Raytheon
Intel, Motorola, Toshiba, TI, Samsung
Time
Time
Non-consumers or Non-consuming contexts
1965
Source Christensen
24
Innovation to non-consumers or in non-consuming
contexts.

• Takes root in a new plane of competition
• Cannot compete with exiting, sustaining products
• Leaders Often want to incorporate new
  technologies into existing markets and products
• They compete against consumption
• They will only win if the new technology is
  better both on performance and cost
• Lesson to Leaders Do not cram into existing
  market
• Bring a simpler product to non-consumers

Source Christensen
25
Two Ends of the Disruptive Innovations Continuum

• LOW-END DISRUPTION
• Nucors steel mini-mills
• Wal-Marts discount retail store
• Vanguards index mutual funds
• Dells direct-to-customer business model
• On-line education

• NEW-MARKET DISRUPTION
• Bell telephone
• eBay online marketplace
• Apple personal computer
• Canon photocopier
• On-line education

Source Christensen
26
How and Why do firms fall into this trap?
Intel share of entry level microprocessor dropped
from 90 ? 30 within 18 months
Overshooting
MOST DEMANDING CUSTOMERS
MAIN STREAM CUSTOMERS
Intels microprocessors
Performance Measure
LEAST DEMANDING CUSTOMERS
Not Good Enough
Time
Source Christensen
27
The Building Blocks of Capabilities RPV Theory

• RESOURCES
• Things or assets that firms can buy or sell,
  build or destroy.
• People
• Technology
• Products / Equipment
• Information
• Cash
• Brand
• Distribution Channels

• PROCESSES
• Established ways firms
• turn resources into
• Products Services.
• Hiring Training
• Product Development
• Manufacturing
• Planning Budgeting
• Market Research
• Resource Allocation

• VALUES
• Criteria by which
• prioritization decisions
• are made.
• Cost Structure
• Income Statement
• Customer Demands
• Size of Opportunity
• History of investments
• Ethics

Source Christensen
28
What is Intels RPV?
RESOURCES

• PROCESSES

VALUES
x
x
FLEXIBLE
NOT FLEXIBLE
NOT FLEXIBLE
Source Christensen
29
Intel Avoided Low-End Disruption
In Q1 2005, Intel still maintained nearly 81 of
the microprocessor market
Overshooting
MOST DEMANDING CUSTOMERS
MAIN STREAM CUSTOMERS
Intels microprocessors
Performance Measure
LEAST DEMANDING CUSTOMERS
Not Good Enough
Time
Source Christensen
30
Brokerage Services
Merrill Lynch, Goldman Sachs
Performance
Charles Schwab, Fidelity
Full Service Brokerage
Ameritrade, ETrade
Discount Brokerage
E-Brokerage
Time
1975
1995
Source Christensen
31
Retail Businesses
Performance
40, 3x turns
Hard to Sell goods
Downtown Dept. Stores
Easy to Sell Goods
Time
Early 1900s Mom and Pop retailers earned approx.
60 Gross margins 2x turns per year 120
Return On Capital that was invested in inventory
Source Christensen
32
Health Care
33
Health Care
Source Christensen
34
How to counter the forces of DISRUPTION?

• Disrupt yourself before others do.

35
Intel avoided low-end disruption
Performance
MOST DEMANDING CUSTOMERS
Intels Pentium microprocessors
MAIN STREAM CUSTOMERS
LEAST DEMANDING CUSTOMERS
Time
36
Electronic Filing of Taxes HR Block vs. Intuit
Performance
MOST DEMANDING CUSTOMERS
HR Blocks Brick Mortar Business
MAIN STREAM CUSTOMERS
LEAST DEMANDING CUSTOMERS
Intuits TurboTax
Time
37
Telecoms Co-opted Wireless firms
Performance
Land lines
Cellular
Time
Source Christensen
38
Good LuckandThank You For Your Attention

• Jay Rao
• raoj_at_babson.edu