Creating New Growth Through Disruptive Innovation Rory McDonald Harvard Business School
Lessons from Business History
Across diverse industries, leading companies failed to stay atop their markets Common explanations Managerial incompetence Technological complexity
Steel Quality 25 30% 18% 12% 7% 1975 1980 1985 1990 1995 (Source: Christensen & Raynor, 2003)
Disruptive Innovation (1) Pace of technological progress outstrips markets demand for higher-performing technologies Firms can over-serve the market by producing more advanced, feature-rich products than customers need leaving a gap at lower tiers of the market
Disruptive Innovation (2) Sustaining innovations: improve products and services along dimensions of performance that mainstream customers care about Disruptive innovations: are initially inferior on the historic performance dimensions, but offer a novel mix of attributes that appeal to fringe customers
Disruptive Innovation (3) Existing customers and established profit models constrain firms investments in new innovations Incumbents are typically not motivated to pursue disruptive innovations that promise lower margins and target smaller markets
Performance Disruptive Innovation Model Incumbents nearly always win Disruptive innovations Entrants nearly always win (Source: Christensen, Raynor, McDonald 2015) Time
Types of Disruptions Low-end disruptions come in at the bottom of the market and take hold within an existing value network before moving up-market and attacking incumbents Incumbents retreat
Types of Disruptions New market disruptions take hold in a completely new value network and they compete against non-consumption Incumbents ignore
Example: Godrej: Business group faced a shrinking share of refrigerator market due to foreign appliance makers Decision: 1. Aggressively compete in conventional market 2. Innovation aimed at unserved customer segment Built a low-cost refrigerator for bottom-of-the-market Instead of competing with global powerhouses for the 15% of the market that purchased refrigerators, Godrej decided to go for the 85% that did not.
Example: Looked at drivers of non-consumption an important but unsatisfied problem consumers couldn t address Rural Indian households couldn t store food, so they had to buy daily (time consuming, expensive) Intermittent electricity (rules out normal refrigerator) Godrej developed a good enough solution: chotukool portable fridge, which had a low price, operated on battery power, and used post offices as a sales channel / new distribution chain
Example: Won five global innovation awards At $69, chotukool was 1/3 the price of Godrej's least expensive refrigerator Result of a unique innovation strategy guided by new market disruption
Video Game Industry (Source: Anthony, 2008)
Health Care
Accounting Services
Word Processing
Looking into the future
Looking into the future Finance
Looking into the future Software-based financial advisor New market disruption serving those who can t afford the high minimums of traditional financial advisors Appeals to fringe customers
Looking into the future Hospitality
Looking into the future Sharing service that allows people to rent out lodging Started out offering short-term living quarters for people who couldn t afford a hotel (or couldn t book one) Now has 2M listings in 192 countries
Looking into the future Higher Education
Looking into the future Elite business schools still look like a fair deal. Few expect the luster of an MBA from Harvard, Wharton, or Stanford to fade Schools with names that send a less sexy signal, though, may be in trouble. Is time running out for business schools that aren t quite elite? -The Economist (2011)
Other challenges of innovation
Listen to your customers Understand your customers
Understand your customers If we understand the customer, we can develop better products When can this get us into trouble?
An alternative approach: Jobs-to-be-done In many industries, the products and services are built around customer attributes and characteristics For business customers, it is corporate demographics (i.e. industry verticals, customer size etc.) But what causes us to buy a product is that we have jobs that arise in our lives that we need to get done When customers have a job-to-be-done, they hire a product to do it for them
An alternative approach: Jobs-to-be-done
(Source: Christensen, 2011)
Problem: Increase sales of milkshakes Company had sophisticated demographic profiles of the customers that bought each product Quintessential milkshake customer
A job arises in people s lives on occasion that causes them to hire a milkshake from McDonald s What s the job?
What time did he buy the milkshake? What was he wearing? Did he buy other food with it or just the milkshake? Was he alone or with other people? Did he eat it in the restaurant or get in the car and leave?
Findings Half were sold before 8:30 in the morning Customer was always alone Only thing they bought Always got in the car and drove off
Think about the last time you were in the same situation and needed to get the same job done, but you didn t come here to hire a milkshake. What did you hire instead?
Job Need something to do during a long, boring commute Milkshake Viscous Staves off hunger Convenient (Source: Christensen, 2011)
Implications 1. Competition 2. Product improvement
Implications 1. Competitors are not Burger King milkshakes 2. Must improve product on dimensions of performance that are relevant to the job-to-be-done
Implications 3. One reason why promising technologies often fail Don t help customers do a job they need to get done
Implications Before digital photography People had the best intentions to arrange photos in albums, but most were viewed once and put a shoebox But most people would ask for double prints so they could mail the best photos to a family member
Implications When digital cameras were adopted Consumers changed their behavior but not the fundamental job they wanted from the photos Still share with friends/family, but now through email Despite all the systems for online photo albums Dominant consumer behavior is to share via email/phone Albums didn t do very well tried to perform a job that most consumers weren t trying to do
Example: Bolster sales of new condos Detroit-area builder targeting downsizers Reasonably priced condos with high-end touches ( squeakless floors, triple-waterproof basements, granite counters, stainless steel appliances) Experienced sales team available 6 days per week Generous marketing with elegant, well-placed ads Units got lots of traffic but few visits converted to sales (so try adding a slew of features)
Implications No impact but lots of speculation about reasons: Bad weather Underperforming salespeople Uncertain economic climate Holiday slowdowns Condos location
Implications New approach: For actual buyers, what job were they hiring the condominiums to do? What did not explain which downsizers were most likely to buy: Demographic or psychographic profile (no clear profile) A definitive set of features (none tipped the decision) All prospective buyers wanted a big living room, large 2 nd bedroom for guests, and a breakfast bar to make entertaining easy and casual
Implications One unexpected factor did matter: The dining room table As soon as I figure out what to do with my dining room table, then I m free to move.
Implications Most were well-used and out-of-date (donate, take to local dump) But every birthday and holiday spent around table Homework was spread out on it Table more than a piece of furniture, it represented family What was stopping buyers was not a feature the company had failed to offer but rather crippling anxiety that came with giving up something that had profound meaning
Implications Decision to buy a six-figure condo hinged on a family member s willingness to take custody of clunky piece of used furniture
Implications We re not in new-home construction ; we re in the business of moving lives. 1. Create extra space for dining room table 2. Ease anxiety of move Provide moving services and two years worth of storage Create a sorting room in condo development so new owners could take their time making decisions about what to discard
Trying new things is hard An anthropologist once visited a remote tribe. She observed that each morning, before sunrise, members of the tribe sacrificed a goat in order to make the sun rise. Since the tribe was poor, the anthropologist believed that this was a wasteful practice. As a result, the anthropologist proposed that they should avoid sacrificing a goat for one day, to see if the sun would nevertheless rise.
And there are many barriers to change In response, the locals looked at her and said, gravely, In these matters one cannot afford to experiment.