Disruptive Technologies

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Disruptive Technologies

• Sources
• Christensen, CM, The Innovators Dilemma, Harper
  Business, 2000
• Bower and Christensen, Disruptive Technologies
  Catching the Wave, HBR 1995, Jan-Feb, 43-53
• Christensen and Overdorf, Meeting the Challenge
  of Disruptive Change, HBR 2000, Mar-Apr, 66-76

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Lets Revisit the NPD Process(es) Weve Studied

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Cooper Chapter 3
Revisiting

• The Keys to Victory Seven New Critical Success
  Factors
• Cooper, Robert G., Product Leadership, Perseus,
  2000

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Seven Additional Critical Success Factors

• 1. Resources for NPD in place
• 2. A superior, differentiated product
• 3. Right organizational structure
• 4. An international NPD orientation
• 5. Leverage core competencies
• 6. Market attractiveness
• 7. Speed yes, haste w/o quality no!

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Core Capabilities

• Employee knowledge and skill
• Physical technical systems
• Databases, machinery, and software programs
• Managerial systems
• Employee knowledge is guided and monitored by the
  company's systems of education, rewards, and
  incentives
• Values and norms
• Values serve as knowledge-screening and -control
  mechanisms

Source D. Leonard-Barton, Wellsprings of
Knowledge, HBS Press, 1995
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6. Market attractiveness

• Two dimensions of market attractiveness
• Market need, growth, size
• Large, growing market
• Strong customer need
• In early stages of product life cycle
• Margins earned are higher
• Competitive situation (negatives)
• Intense competition, price-based
• High quality, strongly competitive products there
• Competitors strong sales force, channel system,
  support service

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Cooper Chapter 4
Revisiting

• The Stage-Gate New Product Process
• Cooper, Robert G., Product Leadership, Perseus,
  2000

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The Stages

• (Stage 0 Ideation)
• Stage 1 Preliminary investigation
• Stage 2 Detailed investigation (build the
  business case)
• Stage 3 Development
• Stage 4 Testing and validation
• Stage 5 Full production and market launch

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Stage 2 Detailed Investigation

• Build the business case opens the door to
  product development the critical homework stage
• Key actions
• User needs-and-wants studies
• Value-in-use studies
• Competitive analysis
• Concept testing
• Detailed technical assessment
• A manufacturing (or operations) assessment
• A detailed financial analysis

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Stage 2 Business Case

• What is the product and who will it be sold to?
  (the product definition)
• Target market
• Product concept and benefits delivered
• Positioning strategy
• Products features, attributes, requirements
• Why invest in this project?
• Thorough project justification
• How will it be undertaken, when, by whom, at what
  cost? (the project plan)

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Identifying Customer Needs
Revisiting

• Chapter 4 Ulrich and Eppinger

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Identifying Customer Needs

• Goals
• Ensure product is focused on customer needs
• Identify both explicit and latent/hidden needs
• Provide fact base for justifying product
  specifications
• Create archival record of the needs activity
• Ensure no critical customer need overlooked
• Team understands customer needs

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Identifying Customer Needs

• The process
• Gather raw data from customers
• Interpret raw data in terms of customer needs
• Organize needs into a hierarchy (primary,
  secondary, etc.)
• Establish relative importance of each need
• Reflect on the results and the process

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Quality Function Deployment(QFD)
Revisiting

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Quality Function Deployment

• A technique for identifying customer requirements
  and matching them with engineering design and
  performance parameters
• From the Japanese phrase meaning the strategic
  deployment throughout all aspects of a product of
  appropriate characteristics according to customer
  demands

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And Now, New Questions

• How can great firms do all the right things but
  fail to stay atop their industries?
• How can good management lead to failure?

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Example - Computers

• Digital Equipment Corporation (DEC) created the
  minicomputer market
• 1977 There is no reason anyone would want a
  computer in their home. Ken Olson, Founder and
  CEO, DEC
• 1986 Taking on DEC these days is like standing
  in front of a fast moving train.
• 1994 DEC is a company in need of triage. It
  squandered two years trying halfway measures to
  respond to the low-margin PCs and workstations
  that have transformed the computer industry.

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Example - Steel Mills

• Integrated mills - iron ore, coal, limestone into
  final steel shapes
• high quality plate and structural shapes
• Minimills - melt scrap steel in electric arc
  furnaces, cast into billets, roll in final shape
• originally, marginal quality, good for rebar,
  etc.
• little depreciation, little RD costs, low sales
  expense, minimal managerial overhead

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Example Steel Mills (cont.)

• Integrated mills and minimills
• look the same in continuous casting and rolling
• scale is the only difference
• In competing product categories, average minimill
  can make product of equivalent quality at a 15
  lower cost than the average integrated mill
• No integrated steel company has built a mill
  employing minimill technology

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Example Steel Mills (cont.)

• Integrated mills essentially focused on the sheet
  steel market by mid-80s
• Advent of continuous thin slab casting allowed
  minimill entry by 1990
• By 1995, minimills captured 40 of total market,
  with 50 projected by 2000
• Still, no integrated steel company has built a
  mill employing minimill technology

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Example - Disk Drives

• In late 70s, market for disk drives consisted of
  large mainframe computer makers (with 14-in
  drives)
• Customers demanded aggressive improvement in
  capacity
• gt 20/yr, above minimum capacity of 300 MB
• Leading 14-in drive makers maintained aggressive
  rate of RD investment
• Result dramatic improvements in capacity and cost

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Example - Disk Drives (cont.)

• Concurrently, some startups developed 8-in drives
  with lt 50 MB capacity
• only minicomputer startups could use them
• low profit margins, low sales volumes
• 14-in drive companies Enter the 8-in market now
  or wait until market grows?
• waited didnt want to divert scarce engineering
  and financial resources

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Example - Disk Drives (cont.)

• 8-in drive makers achieved unexpected capacity
  increase of gt 40/year
• took over mainframe market within 4 years
• offered additional advantages (lower vibration)
• Although one-third of 14-in drive makers later
  introduced 8-in drives, all driven out by the
  80s
• (note) 8-in drive makers largely experienced same
  phenomena when others introduced 5¼-in drive
  several years later

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Whats Going On?

• Two types of INNOVATION
• Sustaining
• Disruptive
• Sustaining innovation
• makes a product perform better for mainstream
  customers
• Disruptive innovation
• creates entirely new markets

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Sustaining Technology

• Most new technologies foster improved product
  performance (sustaining technologies)
• All sustaining technological changes improve the
  performance of established products
• Improvements along dimensions of performance
  historically valued by mainstream customers in
  major markets

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Disruptive Technologies

• Occasionally, disruptive technologies emerge
• innovations that result in worse product
  performance (in the near term)
• can have enormous potential for the future, but
  that future is largely unknown
• Its tough to make predictions, especially
  about the future. ---- Yogi Berra

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Sustaining Innovation

• Good managers in established companies excel at
  sustaining innovations but fare less well with
  disruptive ones
• Unique core capabilities define a company and
  shapes its capacity to change
• Resources
• Processes
• Values

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Core Capabilities

• Resources
• people, technologies, cash, product designs,
  customer and supplier relationships
• Processes
• patterns of interaction, coordination, and
  decision-making designed for stability and
  consistency
• Values
• standards for judging one customer or market
  opportunity against another (eg, gross margins,
  size of market, etc.)

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Core Capabilities

• Heres the watch-out
• Core capabilities can become core disabilities!
• Leonard-Barton, Wellsprings of Knowledge, HBS
  Press, 1995

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Disruptive Innovations

• Often sacrifice performance along dimensions
  important to current customers
• Offer a very different package of attributes not
  (yet) valued by those customers
• But the new attributes can open up entirely new
  markets

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Disruptive Innovations
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Managing Disruptive Innovation

• Staying focused on main customers can work so
  well disruptive technologies are overlooked
• consequences can be worse than just missed
  opportunity (e.g., disk drive companies)
• Established firms must learn how to identify and
  nurture innovations on more modest scale
• small orders can be meaningful
• ill-defined markets need time to mature
• keep overhead low to permit early profits

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Principles of Disruptive Technology

• If good management practice drives the failure of
  successful firms facing disruptive technological
  change, the usual answers - plan better, work
  harder, become more customer driven, take a
  longer term perspective - only exacerbate the
  problem!

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Principles of Disruptive Technology(and how to
harness them)

• Companies depend on customers and investors for
  resources
• Small markets dont solve the growth needs of
  large companies
• Markets that dont exist cant be analyzed
• An organizations capabilities define its
  disabilities
• Technology supply may not equal market demand

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Principle 1
Companies depend on customers and investors for
resources

• Managers may think they control the flow of
  resources in the firm, but its really customers
  and investors who dictate how money will be spent
• companies with investment patterns that dont
  satisfy their customers and investors dont
  survive

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Principle 2
Small markets dont solve the growth needs of
large companies

• As a rule, companies entering emerging markets
  early have a significant first-mover advantage
  over later entrants
• As companies succeed and grow larger, it is
  progressively more difficult to enter newer,
  smaller markets destined to become larger
• Large companies waiting until new markets become
  interesting are not usually successful after
  the wait

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Principle 3
Markets that dont exist cant be analyzed

• Market researchers and business planners have
  consistently dismal records in dealing with
  disruptive technologies
• Companies with processes that demand
  quantification of market sizes and financial
  returns before they can enter a market get
  paralyzed or make serious mistakes when faced
  with disruptive technologies

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Principle 4
An organizations capabilities define its
disabilities

• An organizations capabilities reside in its
  processes and values (core capabilities)
• Processes and values are not flexible, rendering
  an organization incapable of successfully
  addressing a new problem
• Core capabilities can become core disabilities!

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Principle 5
Technology supply may not equal market demand

• In effort to stay ahead of developing
  competitively superior products, many companies
• dont realize the speed at which they are moving
  up-market
• over-satisfy the needs of their original
  customers while racing the competition toward
  higher-performance, higher-margin markets

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Market Need versus Technological Improvement
(Technologies can often progress faster than
market demand)
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Dealing with Disruptive Technologies

• Dont try to fight or overcome the Principles of
  Disruptive Technology
• Dont apply the traditional management practices
  to disruptive technologies - they always lead to
  failure
• Try to understand the natural laws of disruptive
  technology and use them to create new markets and
  new products

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Dealing with Disruptive Technologies

• Give responsibility for disruptive technologies
  to units whose customers need them so that
  resources will flow to them
• Set up a separate organization small enough to
  get excited by small gains
• Plan for failure. Dont bet all your resources
  on being right the first time. Make revisions as
  you gather data
• Dont count on breakthroughs. Move ahead early
  and find the market (outside the mainstream).
  Those attributes unattractive to the mainstream
  markets are the attributes on which new markets
  will be built

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Fitting Innovation with Organizations
Capabilities
Response to Questions
Managers Questions
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Summary

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The Questions

• How can great firms do all the right things but
  fail to stay atop their industries?
• How can good management lead to failure?

47
Summary - Whats Going On?

• Two types of INNOVATION
• Sustaining
• Disruptive
• Sustaining innovation
• makes a product perform better for mainstream
  customers
• Disruptive innovation
• creates entirely new markets

48
Summary - Sustaining Technology

• Most new technologies foster improved product
  performance (sustaining technologies)
• All sustaining technological changes improve the
  performance of established products
• Improvements along dimensions of performance
  historically valued by mainstream customers in
  major markets

49
Summary - Disruptive Technologies

• Occasionally, disruptive technologies emerge
• innovations that result in worse product
  performance (in the near term)
• can have enormous potential for the future, but
  that future is largely unknown

50
Summary - Dealing with Disruptive Technologies

• Dont try to fight or overcome the Principles of
  Disruptive Technology
• Dont apply the traditional management practices
  to disruptive technologies - they always lead to
  failure
• Try to understand the natural laws of disruptive
  technology and use them to create new markets and
  new products

51
Summary - Dealing with Disruptive Technologies

• Give responsibility for disruptive technologies
  to units whose customers need them so that
  resources will flow to them
• Set up a separate organization small enough to
  get excited by small gains
• Plan for failure. Dont bet all your resources
  on being right the first time. Make revisions as
  you gather data
• Dont count on breakthroughs. Move ahead early
  and find the market (outside the mainstream).
  Those attributes unattractive to the mainstream
  markets are the attributes on which new markets
  will be built

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The End